Quarterly Report for Quarter Ending December 31, 2025 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q (this "Quarterly Report", or this "Report") contains information that constitutes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Generally, the statements contained in this Report that are not purely historical can be "forward-looking statements". These statements represent our expectations, hopes, beliefs, anticipations, commitments, intentions, and strategies regarding the future. They may be identified using words or phrases such as "believes", "expects", "intends", "anticipates", "should", "plans", "estimates", "projects", "potential", and "will" among others. Forward-looking statements include, but are not limited to, statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations regarding our financial performance, revenue, and expense levels in the future and the sufficiency of our existing assets to fund future operations and capital spending needs. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in "Risk Factors" in our most recent Annual Report on Form 10-K, and those described from time to time in our reports filed with the Securities and Exchange Commission ("SEC").

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto that are contained in this Report, as well as Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended September 30, 2025, and Current Reports on Form 8-K that have been filed with the SEC through the date of this Report. Except as otherwise indicated, as used in this Report, the terms the "Company", "Track Group", "we", "our", and "us" refer to Track Group, Inc., a Delaware corporation.

General

Our core business is based on the leasing of patented tracking and monitoring solutions to federal, state and local law enforcement agencies, both in the U.S. and abroad, for the electronic monitoring of offenders and offering unique data analytics services on a platform-as-a-service ("PaaS") business model. Currently, we deploy offender-based management services that combine patented GPS tracking technologies, full-time 24/7/365 global monitoring capabilities, case management, and proprietary data analytics. We offer customizable tracking solutions that leverage real-time tracking data, best practices monitoring, and analytics capabilities to create complete, end-to-end tracking solutions.

Devices- Our devices consist principally of the ReliAlert® product line. These devices are generally leased on a daily rate basis and may be combined with our monitoring center services, proprietary software and data analytics subscription to provide an end-to-end PaaS.

ReliAlert®XC4 is our flagship GPS device, which is among the safest and most reliable monitoring devices ever made. It is the only one-piece GPS device with patented 3-way voice communication to assist intervention efforts, now on the LTE network with increased battery life. This device includes on-board processing, secondary location technology, a 95db siren, embedded RF technology, anti-tampering capabilities, increased battery life and sleep mode.

ReliAlert®XC3 - Advanced features enable agencies to effectively track offender movements and communicate directly with offenders in real-time, through a patented, on-board two/three-way voice communication technology. This device includes an enhanced GPS antenna and GPS module for higher sensitivity GPS, enhanced voice audio quality, increased battery performance of 50+ hours, 3G cellular capabilities, improved tamper sensory and durability enhancements.

Monitoring Center Services- Our monitoring centers provide live 24/7/365 monitoring of all alarms generated from our devices, as well as customer and technical support. Our monitoring center operators play a vital role, and as such, are staffed with highly trained, bilingual individuals. These operators act as an extension of agency resources receiving alarms, communicating and intervening with offenders regarding violations and interacting with supervision staff, all pursuant to agency-established protocols. The facilities have redundant power sources, battery backup and triple redundancy in voice, data and IP. We have assisted in the establishment of monitoring centers for customers and local partners in the United States, Chile and other global locations.

Data Analytics Services- Our IntelliTrack, TrackerPAL® software, IntelliTrack Mobile, TrackerPAL® Mobile, combined with our Data Analytic analysis tools, provide an integrated platform allowing case managers and law enforcement officers quick access views of an offender's travel behavior, mapping, and inference on patterns. Our data analytics services help facilitate the discovery and communication of meaningful patterns in diverse locations and behavioral data that helps agencies reduce risks and improve decision making. Our analytics applications use various combinations of statistical analysis procedures, data and text mining and predictive modeling to proactively analyze information on community-released offenders to discover hidden relationships and patterns in their behaviors and to predict future outcomes.

Other Services- The Company offers smartphone applications specifically designed for the criminal justice market, including a domestic violence app that creates a mobile geo-zone around a survivor and an alcohol monitoring app linked to a police-grade breathalyzer.

Business Strategy

We are committed to helping our customers improve offender rehabilitation and re-socialization outcomes through our innovative hardware, software and services. We treat our business as a service business. Although we still manufacture patented tracking technology, we see the physical goods as only a small part of the integrated offender monitoring solutions we provide. Accordingly, rather than receiving a payment just for a piece of manufactured equipment, the Company receives a recurring stream of revenue for ongoing device agnostic subscription contracts. As part of our strategy, we continue to expand our device-agnostic platform to not only collect, but also store, analyze, assess and correlate location data for both accountability and auditing reasons, as well as to use for predictive analytics and assessment of effective and emerging techniques in criminal behavior and rehabilitation. We believe a high-quality customer experience along with knowledgeable salespeople who can convey the value of our products and services greatly enhances our ability to attract and retain customers. Therefore, our strategy also includes building and expanding our own direct sales force and our third-party distribution network to effectively reach more customers and provide them with a world-class sales and post-sales support experience. In addition, we are developing related-service offerings to address adjacent market opportunities in both the public and private sectors. We believe continual investment in research and development ("R&D"), including smartphone applications and other monitoring services is critical to the development and sale of innovative technologies and integrated solutions today and in the future.

Critical Accounting Policies

From time to time, management reviews and evaluates certain accounting policies that are considered to be significant in determining the results of operations and financial position.

A description of the Company's critical accounting policies that affect the preparation of the Company's financial statements is set forth in the Company's Annual Report on Form 10-K for the year ended September 30, 2025, filed with the SEC on December 19, 2025. During the three months ended December 31, 2025, there have been no changes to the Company's critical accounting policies.

The preparation of financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense. By their nature, these judgments are subject to an inherent degree of uncertainty. We assess the reasonableness of our estimates, including those related to credit losses, inventories, right of use assets, estimated useful lives, intangible assets, warranty obligations, product liability, revenue, legal matters and income taxes. We base our estimates on historical experience as well as available current information on a regular basis. Management uses this information to form the basis for making judgments about the carrying value of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

Government Regulation

Our operations are subject to various federal, state, local and international laws and regulations. Currently, we are not involved in any pending or, to our knowledge, threatened governmental proceedings, which would require curtailment of our operations because of such laws and regulations.

Results of Operations

Three Months Ended December 31, 2025 compared to Three Months Ended December 31, 2024

Revenue

For the three months ended December 31, 2025, the Company recognized total revenue from operations of $9,117,208 compared to $8,668,328 for the three months ended December 31, 2024, an increase of $448,880 or approximately 5%. The increase in monitoring revenues is driven principally by an increase in people assigned to monitoring for clients in Florida and Illinois. This increase was partially offset by a revenue decrease for our Chilean subsidiary, which was sold in November 2025. These increases represent typical fluctuations which occur daily.

Product sales and other revenue for the three months ended December 31, 2025 increased to $409,450 from $227,021 in the same period in 2024, an increase of $182,429 or approximately 80%. The increase in product and other revenue was largely due to increased international product sales, principally to customers in Chile, partially offset by a decrease in product sales to customers in Brazil. We continue to largely focus on recurring subscription-based opportunities as opposed to equipment sales.

The Company's supply chain will see spot increases in certain areas of operations in Fiscal 2026. Increases are expected from duties levied on some accessories that are custom designs to components sourced out of China. We also see some tariff normalization in other countries we source from. General guidance is that these will increase supply chain operations by less than 10% if current tariff percentages remain. As with most technology companies this guidance is fluid, difficult to predict, and changes month-to-month due to U.S. and international governments changing positions. The Company is monitoring the global situation and looks for opportunities to mitigate the impact of tariff increases.

Cost of Revenue

During the three months ended December 31, 2025, cost of revenue totaled $4,849,501 compared to cost of revenue during the three months ended December 31, 2024 of $4,243,986, an increase of $605,515 or 14%. The increase in cost of revenue was largely the result of higher device repair costs of $161,085 (due to an increase in volume and component costs of routine repairs and maintenance on devices). Higher server costs of $150,407, higher alcohol monitoring costs of $95,848, and higher freight costs of $85,456 were due to increased volume and expansion of services offered to new and existing customers.

Depreciation and amortization included in cost of revenue for the three months ended December 31, 2025 and 2024 totaled $777,887 and $735,224, respectively, an increase of $42,663. These costs represent the depreciation of ReliAlert® and other monitoring devices, the amortization of monitoring software and certain royalty agreements. Devices are depreciated over a five-year useful life. Monitoring software is amortized over a seven-year life. Royalty agreements are being amortized over a ten-year useful life. The Company believes these lives are appropriate due to changes in electronic monitoring technology and the corresponding potential for obsolescence. Management periodically assesses the useful life of the devices for appropriateness.

Gross Profit and Margin

During the three months ended December 31, 2025, gross profit totaled $4,267,707, resulting in a gross margin of approximately 47%. During the three months ended December 31, 2024, gross profit totaled $4,424,342, resulting in a gross margin of approximately 51%. The decrease in absolute gross profit of $156,635 is due to an increase in cost of revenue, partially offset by an increase in revenue.

General and Administrative Expense

During the three months ended December 31, 2025, general and administrative expense totaled $2,229,896 compared to $2,431,118 for the three months ended December 31, 2024. The decrease of $201,222 or approximately 8% is due to a decrease in legal and professional fees of $101,048 primarily due to the sale of our Chilean subsidiary on November 1, 2024.

Selling and Marketing Expense

During the three months ended December 31, 2025, selling and marketing expense totaled $958,953 compared to $901,189 for the three months ended December 31, 2024. The increase of $57,764 or approximately 6% resulted largely from higher bad debt expense of $50,176.

Research and Development Expense

During the three months ended December 31, 2025, research and development expense totaled $694,143 compared to $669,391 for the three months ended December 31, 2024. The increase of $24,752 or approximately 4% was largely due to increased training and recruiting expense, partially offset by a decrease in payroll, benefits, and payroll taxes.

Depreciation and Amortization Expense

During the three months ended December 31, 2025, depreciation and amortization expense totaled $228,034 compared to $227,553 for the three months ended December 31, 2024, an increase of $481, largely due to new fixed assets.

(Gain) Loss on Sale/Dissolution of Subsidiary

On November 7, 2025, Track Group International Ltd. was dissolved. The Company wrote-off the associated assets and liabilities of this entity as of the date of dissolution and reported a pre-tax gain of $630,472.

As of September 30, 2024 the Company concluded that Track Group Chile met all of the criteria for classification as held for sale. As a result, the Company measured the property as held for sale at its fair value and accordingly recorded an impairment of $757,130. On November 1, 2024, we completed the sale and recognized a loss of $66,483.

Total Operating Expense

During the three months ended December 31, 2025, total operating expense decreased to $3,480,554 compared to $4,295,734 for the three months ended December 31, 2024, a decrease of $815,180 or approximately 19%. The decrease is principally due to the factors disclosed above.

Operating Income

During the three months ended December 31, 2025, operating income was $787,153 compared to $128,608 for the three months ended December 31, 2024. The increase of $658,545 in operating income was principally due to an increase in revenue and a decrease in operating expense, partially offset by an increase in cost of revenue.

Other Income (Expense)

For the three months ended December 31, 2025, other expense totaled $204,679 compared to $2,068,221 for the three months ended December 31, 2024, a decrease of $1,863,542. The decrease in other expense is largely due to positive currency exchange rate movements of $1,922,117.

Net Income (Loss) Attributable to Common Stockholders

The Company had income attributable to common stockholders of $514,659 for the three months ended December 31, 2025, compared to net loss attributable to common stockholders of $2,010,849 for the three months ended December 31, 2024, an increase in net income of $2,525,508. This increase in net income is largely due to an increase in operating income and positive currency exchange rate movements.

Liquidity and Capital Resources

Management believes that its existing cash and its future cash flow from operations will be sufficient to meet the cash requirements of its existing business for the foreseeable future. Management's belief assumes that the Company and Conrent can negotiate a further extension regarding the payment of interest on the Company's debt owed to Conrent. See "Risk Factors" below.

Liquidity, Working Capital and Management's Plan

As of December 31, 2025, the Company had unrestricted cash of $3,558,464, compared to unrestricted cash of $4,098,114 as of September 30, 2025. As of December 31, 2025, we had working capital of $2,160,201, compared to working capital of $2,784,551 as of September 30, 2025. This decrease in working capital of $624,350 is principally due to a decrease in cash.

On December 21, 2020, Conrent and the Company signed an amendment to the Amended Facility Agreement which extended the maturity date of the Amended Facility Agreement to July 1, 2024 ("Amended Facility"), capitalized the accrued and unpaid interest, increasing the outstanding principal amount and reduced the interest rate of the Amended Facility from 8% to 4%. On April 26, 2023, the Company and Conrent entered into another amendment to the Amended Facility (the "Amendment"). The Amendment: (i) extended the maturity date from July 1, 2024, to July 1, 2027 (the "Maturity Date"); (ii) amended the applicable interest rate resulting in an escalating interest rate as follows: 4% through June 30, 2024, 5% through June 30, 2025, 5.5% through June 30, 2026, and 6% through the Maturity Date; and (iii) removed section 7.3 "Change of Control" of the Amended Facility Agreement. In return, the Company agreed to pay total fees of EUR 225,000 ($238,000USD at conversion rate at time of signing new agreement in April 2023) in five annual installments to Conrent.

As of December 31, 2025, $42,864,000 of principal and $3,377,921 of interest was owed to Conrent; however, on June 30, 2025, the Company requested an extension of the July 1, 2025 interest payment required by the Amendment, until September 30, 2025, which Conrent accepted. On September 24, 2025, Conrent extended the interest payment due date until further notice.

No borrowings or sales of equity securities occurred during the three months ended December 31, 2025 year ended September 30, 2025.

Net Cash Flows Provided by (Used in) Operating Activities.

During the three months ended December 31, 2025, we had cash flows from operating activities of $1,036,865, compared to cash used in operating activities of $217,292 for the three months ended December 31, 2024, representing a $1,254,157 increase. The increase in cash from operations was largely the result of an increase in net income and an increase in collections from customers.

Net Cash Flows Used in Investing Activities.

The Company used $1,518,248 of cash from investing activities during the three months ended December 31, 2025, compared to $204,273 during the three months ended December 31, 2024. The increase of $1,313,975 or 643% was largely the result of increased capitalized software costs of $607,418 and proceeds from the sale of our Chilean subsidiary, net of cash included in the sale of $748,715 in November 2024.

Net Cash Flows Used in Financing Activities.

The Company used $58,696 of cash for financing activities during three months ended December 31, 2025, which was the payment of deferred financing fees, compared to $63,839 of cash used in financing activities during the three months ended December 31, 2024.

Off-Balance Sheet Financial Arrangements

The Company has not entered any transactions with unconsolidated entities whereby the Company has financial guarantees, derivative instruments, or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities, or any other obligation that provides financing, liquidity, market risk, or credit risk support to the Company.