Annual Report for Fiscal Year Ending 09-30, 2025 (Form 10-K)

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Section 27A of the Securities Act of 1933, as amended (the "Securities Act"). All statements contained in this Annual Report on Form 10-K (this "Annual Report") other than statements of historical fact are forward-looking statements. When used in this Annual Report or elsewhere by management from time to time, the words "believe", "anticipate", "intend", "plan", "estimate", "expect", "may", "will", "should", "seeks" and similar expressions are forward-looking statements. Such forward-looking statements are based on current expectations, but the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors. For a more detailed discussion of such forward-looking statements and the potential risks and uncertainties that may impact upon their accuracy, see Item 1A entitled "Risk Factors" in Part I of this Annual Report and the "Overview" and "Liquidity and Capital Resources" sections of this Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations". These forward-looking statements reflect our view only as of the date of this Annual Report. Except as required by law, we undertake no obligations to update any forward-looking statements. Accordingly, you should also carefully consider the factors set forth in other reports or documents that we file from time to time with the Securities and Exchange Commission ("SEC").

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (this "MD&A") is intended to help the reader better understand Track Group, our operations and our present business environment. Our fiscal year ends on September 30 of each year. Reference to "Fiscal 2025" refers to the year ended September 30, 2025, and reference to "Fiscal 2024" refers to the year ended September 30, 2024 (Fiscal 2025 and Fiscal 2024 are collectively "Fiscal Years 2025 and 2024"). This MD&A is provided as a supplement to and should be read in conjunction with our consolidated financial statements for Fiscal Years 2025 and 2024, and the accompanying notes thereto contained in this Annual Report. This introduction summarizes MD&A, which includes the following sections:

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Overview - a general description of our business and the markets in which we operate; our objectives; our areas of focus; and challenges and risks of our business.

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Results of Operations - an analysis of our consolidated results of operations for the last two fiscal years presented in our consolidated financial statements.

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Liquidity and Capital Resources - an analysis of cash flows; off-balance sheet arrangements and aggregate contractual obligations; and the impact of inflation and changing prices.

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Off-Balance Sheet Arrangements

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Critical Accounting Policies - a discussion of accounting policies that require critical judgments and estimates.

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.

Overview

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.

Results of Operations

Fiscal 2025 Compared to Fiscal 2024

Revenue

During Fiscal 2025, we had revenue of $35,215,454 compared to revenue of $36,886,500 for Fiscal 2024, a decrease of $1,671,046, or approximately 5%. Of this revenue, $32,866,082 and $35,712,211 were from monitoring and other related services revenue during Fiscal 2025 and Fiscal 2024, respectively, representing a decrease of $2,846,129 or approximately 8%. The decrease in monitoring revenues is driven principally by a decrease in people assigned to monitoring for clients in Virginia and Washington D.C., and due to our recently sold Chilean subsidiary. This decrease was partially offset by revenue increases for clients in Illinois and the Bahamas who experienced increases in the number of people assigned to monitoring. These increases and reductions from all of these locations represent typical fluctuations which occur daily.

Product and other revenue for Fiscal 2025 increased to $2,349,372 from $1,174,289 in the same period in 2024, an increase of $1,175,083 or approximately 100%. The increase in product sales and other revenue was largely due to increased international product sales, principally to customers in Chile and Saudi Arabia, partially offset by a decrease in product sales to a customer in Brazil. We continue to largely focus on recurring subscription-based opportunities as opposed to equipment sales.

The industry in which the Company operates, as well as many other industries (automotive, consumer products and medical devices), have been impacted by the global semiconductor shortage. The availability of semiconductor parts has improved in Fiscal 2025 to within industry acceptable lead times.

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 tariffs percentages remain. As with most technology companies this guidance is fluid, difficult to predict, and changes month-over-month due to US 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 Fiscal 2025, cost of revenue totaled $17,715,806 compared to cost of revenue during Fiscal 2024 of $19,677,456, a decrease of $1,961,650, or approximately 10%. The decrease in cost of revenue was largely the result of lower device repair costs of $378,410, lower communication costs of $428,603 and lower monitoring center costs of $1,430,595, partially offset by increased hardware purchases of $163,192 and increased freight costs of $210,018. The decrease in monitoring center costs was primarily due to Chile monitoring center assets being fully expensed in Fiscal 2024 and the sale of our Chilean subsidiary. The decrease in device repair costs was primarily due to handling some of the device repairs internally, which began in January of Fiscal 2025.

Depreciation and amortization included in cost of revenue for Fiscal Years 2025 and 2024, totaled $2,956,526 and $3,061,520, respectively, a decrease of $104,994, or approximately 3%. These costs represent the depreciation of ReliAlert^® and other monitoring devices, the amortization of monitoring software and certain royalty agreements, and amortization of a patent related to GPS and satellite tracking. The decrease in depreciation and amortization costs is largely due to a decrease in amortization of $187,500 for fully amortized device royalties, partially offset by an increase in device depreciation of $116,101. 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 Fiscal 2025, gross profit totaled $17,499,648, resulting in a 50% gross margin, compared to $17,209,044, or a 47% gross margin, during Fiscal 2024. The increase in absolute gross profit of $290,604 is due to a decrease in monitoring center costs and communication costs, partially offset by a decrease in revenue.

General and Administrative Expense

During Fiscal 2025, our general and administrative expense totaled $8,780,869, compared to $11,521,826 for Fiscal 2024. The decrease of $2,740,957 or approximately 24% is due to a decrease in payroll, benefits, and payroll taxes of $1,183,728 primarily due to the sale of our Chilean subsidiary on November 1, 2024 and a settlement expense related to a contract dispute of $1,003,543 in Fiscal 2024.

Selling and Marketing Expense

For Fiscal 2025, our selling and marketing expense was $3,697,980 compared to $3,121,239 for Fiscal 2024. The increase of $576,741 or approximately 18% resulted largely from higher bad debt expense of $476,206 due to this previously being recorded in general and administrative expense and higher payroll, benefits, and payroll taxes of $149,804 due to open sales and marketing positions in Fiscal 2024 as well as an increase in bonus accrual for Fiscal 2025.

Research and Development Expense

During Fiscal 2025, we incurred research and development expense of $2,799,720 compared to those costs recognized during Fiscal 2024 totaling $2,749,218, an increase of $50,502 or approximately 2%. The increase was largely due to increased training and recruiting expense, partially offset by a decrease in outside services.

Depreciation and Amortization Expense

We maintain a significant portion of our tangible and intangible assets that are amortized or depreciated. During Fiscal 2025, depreciation and amortization included in operating expense totaled $910,259 compared to $944,115 for Fiscal 2024. This decrease of $33,856 or approximately 4% was largely due to fully amortized intangible assets and fully depreciated fixed assets.

Impairment on Assets Held for Sale/Loss on Sale of Subsidiary

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. See Note 14 to Consolidated Financial Statements for additional information.

Total Operating Expenses

During Fiscal 2025, total operating expenses decreased to $16,255,311 compared to $19,093,528 for Fiscal 2024, a decrease of $2,838,217, or approximately 15%. The decrease is primarily due to the factors disclosed above.

Operating Income (Loss)

During Fiscal 2025, operating income was $1,244,337 compared to operating loss of ($1,884,484) for Fiscal 2024. The increase of $3,128,821 in operating income was principally due to a decrease in cost of revenue and a decrease in operating expense, partially offset by a decrease in revenue.

Other Income (Expense)

During Fiscal 2025, total other expense was $3,023,996 compared to $1,786,383 during Fiscal 2024, an increase of $1,237,613 or approximately 69%. The increase in other expense is largely due to negative currency exchange rate movements of $803,988 and an increase in interest expense of $313,707 due to the escalating interest rate on the Amended Facility Agreement with Conrent.

Income taxes

During Fiscal 2025, income tax expense totaled $104,094 compared to income tax benefit of $589,453 during Fiscal 2024. Tax benefit/expense in both fiscal years are income taxes largely related to a foreign jurisdiction.

Net Income (Loss) Attributable to Common Stockholders

We had a net loss attributable to common stockholders for Fiscal 2025 totaling $1,883,753, compared to net loss of $3,081,414 for Fiscal 2024, a decrease of $1,197,661. This decrease in net loss is largely due to an increase in operating income, partially offset by increases in interest expense and income tax expense.

Liquidity and Capital Resources

The company 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.

Liquidity, Working Capital and Management's Plan

As of September 30, 2025, the Company had unrestricted cash of $4,098,114, compared to unrestricted cash of $3,574,215 as of September 30, 2024. As of September 30, 2025, we had working capital of $2,784,551, compared to working capital of $3,739,192 as of September 30, 2024. This decrease in working capital of $954,641 is principally due to an increase in accrued liabilities, partially offset by an increase in cash and accounts receivable.

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 September 30, 2025, $42,864,000 of principal and $2,775,444 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 years ended September 30, 2025 or 2024.

Net Cash Flows Provided by Operating Activities.

During Fiscal 2025, we had cash flows from operating activities of $4,317,469, compared to cash flows from operating activities of $4,911,208 for Fiscal 2024, representing a $593,739 decrease, or approximately 12%. The decrease in cash from operations was largely the result of a decrease in collections from customers, partially offset by a decrease in payments to vendors.

Net Cash Flows used in Investing Activities.

The Company used $4,380,722 of cash for investing activities during Fiscal 2025, compared to $3,840,812 of cash used during Fiscal 2024. The increase of $539,910 or 14% was largely the result of increased purchasing of monitoring equipment and parts of $1,132,031, partially offset by proceeds from the sale of our Chilean subsidiary, net of cash included in the sale of $748,715.

Net Cash Flows used in Financing Activities.

The Company used $63,839 of cash for financing activities during Fiscal 2025, which was the result of principal payments on long-term debt and payment of deferred financing fees, compared to $365,070 of cash used in financing activities during Fiscal 2024.

Inflation

Any rise in inflation could impact the Company's cost of labor, materials and other operating expense, but we would anticipate operational efficiencies to mitigate some or all of the inflationary pressures.

Off-Balance Sheet Financial Arrangements

The Company has not entered into 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, except as described below.

Bond Guarantees

Prior to September 30, 2024, the Company had one performance bond in connection with a foreign customer totaling $1,654,134 ("Performance Bonds") of which $1,157,867 was held in an interest-bearing account on behalf of the bank and was recorded in Other Assets on the Consolidated Balance Sheets. On June 27, 2024 (the "Effective Date"), Track Chile entered into a settlement agreement (the "Agreement") with the Customer (together, the "Parties"), whereby the Parties dismissed further legal and equitable issues between or among the Parties, including all asserted and existing claims asserted against Track Chile and the Company, and any related claims, and any potential claims related to the Parties' disputes arising on or before the date hereof. In connection with the Agreement, Track Chile agreed to pay 950,600,000 CLP ($1,003,543 USD) ("Settlement Payment") to Customer in full satisfaction of the Dispute, and in consideration, Customer returned to Track Chile its performance bond in the amount of 1,328,279,704 CLP (approximately $1,397,762 USD based on the exchange rate as of the Effective Date). The Company has recorded the Settlement Payment in operating expense on the Condensed Consolidated Statements of Operations.

The Company paid interest on the full amount of the Performance Bond to the financial institution providing the guarantee at 2.8% interest per annum for the Performance Bond. The Company recorded interest expense of $0 and $34,792 for the years ended September 30, 2025 and September 30, 2024, respectively.

The Company had no performance bonds as of September 30, 2025.

Critical Accounting Estimates

In Note 2, "Summary of Significant Accounting Policies" to the audited Consolidated Financial Statements included in this Annual Report, we discuss those accounting policies we consider to be significant in determining the results of operations and our financial position.

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 estimates and judgments are subject to an inherent degree of uncertainty. Critical accounting estimates are estimates for which the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and the impact of the estimate on financial condition or operating performance is material. The Company's critical accounting estimates and assumptions affecting the financial statements were as follows:

Assets and Liabilities Held for Sale

The Company presents the assets and liabilities of a disposal group as held for sale upon meeting all of the following criteria:

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Management, having the authority to approve the action, commits to a plan to sell the asset (disposal group).

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The asset (disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (disposal groups).

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An active program to locate a buyer and other actions required to complete the plan to sell the asset (disposal group) have been initiated.

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The sale of the asset (disposal group) is probable, and transfer of the asset (disposal group) is expected to qualify for recognition as a completed sale, within one year.

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The asset (disposal group) is being actively marketed for sale at a price that is reasonable in relation to its current fair value.

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Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

The determination as to whether the sale of the disposal group is probable may include significant judgments from management related to the estimated timing of the closing of a future sales transaction. For information regarding significant judgments related to fair value estimates of the disposal group held for sale, refer to the Impairment subheading within the Critical Accounting Estimates.

Assets held for sale are measured at the lower of their carrying amount or fair value less cost to sell. See Note 14 of our Financial Statements for impairments of our assets held for sale.

As of September 30, 2024, the Company concluded that Track Group Chile met all of the criteria listed above for classification as held for sale. On November 1, 2024, the Company completed the sale.

Impairment

We review our long-lived assets including goodwill and intangibles for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable, and in the case of goodwill, at least annually. We evaluate whether events and circumstances have occurred which indicate possible impairment as of each balance sheet date. We use an equity method of the related asset or group of assets in measuring whether the assets are recoverable. If the carrying amount of an asset exceeds its market value, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there is an identifiable fair market value that is independent of other groups of assets. See Note 13 to the Consolidated Financial Statements.

Assets held for sale are carried at the lower of their carrying values or estimated fair values less costs to sell. The fair value of a disposal group, less any costs to sell, is assessed each reporting period it remains classified as held for sale and any remeasurement to the lower of carrying value or fair value less costs to sell is reported as an adjustment to the carrying value. The estimates of fair value consider matters such as contracts, the results of negotiations with prospective purchasers, broker quotes, or recent comparable sales. These estimates are subject to revision as market conditions, and our assessment of such conditions, change.

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 Track Group Chile as held for sale at its fair value and accordingly recorded an impairment of $757,130. See Note 14 to the Consolidated Financial Statements.

Allowance for Credit Losses and Credit Memos

We make estimates of the expected credit and collectability trends for the allowance for credit losses based on our assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, and other factors that may affect our ability to collect from our customers.

The Company also maintains an allowance for estimated credit memos to be issued against current sales. Estimates of allowance for credit memos are based upon the application of a historical issuance lag period to the average credit memos issued each month.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other standard setting bodies, which are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.

Accounting for Stock-Based Compensation

We recognize compensation expense for stock-based awards expected to vest on a straight-line basis over the requisite service period of the award based on their grant date fair value. We estimate the fair value of stock options using a Black-Scholes option pricing model which requires us to make estimates for certain assumptions regarding risk-free interest rate, expected life of options, expected volatility of stock, and expected dividend yield of stock.

Government Regulation

Our operations are subject to various federal, state, local and international laws and regulations. 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.