Quarterly Report for Quarter Ending March 31, 2026 (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 six months ended March 31, 2026, 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 March 31, 2026 compared to Three Months Ended March 31, 2025

Revenue

For the three months ended March 31, 2026, the Company recognized total revenue from operations of $8,944,415 compared to $8,352,320 for the three months ended March 31, 2025, an increase of $592,095 or approximately 7%. 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 revenue decreases for clients in Pennsylvania and Puerto Rico who experienced decreases in people assigned to monitoring. These increases and reductions from all of these locations represent typical fluctuations which occur daily.

Product sales and other revenue for the three months ended March 31, 2026 increased to $577,666 from $484,345 in the same period in 2025, an increase of $93,321 or approximately 19%. 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 and Saudi Arabia. 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 March 31, 2026, cost of revenue totaled $4,453,280 compared to cost of revenue during the three months ended March 31, 2025 of $4,238,354, an increase of $214,926 or 5%. The increase in cost of revenue was largely the result of higher device repair costs of $113,773 (due to an increase in volume and component costs of routine repairs and maintenance on devices). Higher server costs of $61,722 and higher alcohol monitoring costs of $128,085 were due to increased volume and expansion of services offered to new and existing customers. These increases were partially offset by a decrease in communication costs of $88,965 and a decrease in monitoring center costs of $72,978.

Depreciation and amortization included in cost of revenue for the three months ended March 31, 2026 and 2025 totaled $737,953 and $723,331, respectively, an increase of $14,622. 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 March 31, 2026, gross profit totaled $4,491,135, resulting in a gross margin of approximately 50%. During the three months ended March 31, 2025, gross profit totaled $4,113,966, resulting in a gross margin of approximately 49%. The increase in absolute gross profit of $377,169 is due to an increase in revenue, partially offset by an increase in cost of revenue.

General and Administrative Expense

During the three months ended March 31, 2026, general and administrative expense totaled $2,244,284 compared to $2,127,145 for the three months ended March 31, 2025. The increase of $117,139 or approximately 6% is due to an increase in legal and professional fees of $81,525, an increase in outside services of $79,305, an increase in payroll, benefits, and payroll taxes of $78,302 due to increased staffing, and an increase in fees and licenses of $51,111. These increases were partially offset by a decrease in legal settlements of $180,000 due to a settlement with Commonwealth of Puerto Rico in Fiscal 2025.

Selling and Marketing Expense

During the three months ended March 31, 2026, selling and marketing expense totaled $909,981 compared to $964,743 for the three months ended March 31, 2025. The decrease of $54,762 or approximately 6% resulted largely from lower bad debt expense of $103,667, partially offset by an increase in travel and entertainment of $21,723.

Research and Development Expense

During the three months ended March 31, 2026, research and development expense totaled $699,310 compared to $750,650 for the three months ended March 31, 2025. The decrease of $51,340 or approximately 7% resulted largely from a decrease in payroll, benefits, and payroll taxes of $46,211.

Depreciation and Amortization Expense

During the three months ended March 31, 2026, depreciation and amortization expense totaled $228,039 compared to $227,385 for the three months ended March 31, 2025, an increase of $654.

Total Operating Expense

During the three months ended March 31, 2026, total operating expense increased to $4,081,614 compared to $4,069,923 for the three months ended March 31, 2025, an increase of $11,691. The increase is principally due to the factors disclosed above.

Operating Income

During the three months ended March 31, 2026, operating income was $409,521 compared to $44,043 for the three months ended March 31, 2025. The increase of $365,478 in operating income was principally due to an increase in revenue, partially offset by an increase in cost of revenue and an increase in operating expense.

Other Income (Expense)

For the three months ended March 31, 2026, other expense totaled $1,120,909 compared to $531,014 for the three months ended March 31, 2025, an increase of $589,895. The increase in other expense is largely due to negative currency exchange rate movements of $543,613.

Net Income (Loss) Attributable to Common Stockholders

The Company had net loss attributable to common stockholders of $711,388 for the three months ended March 31, 2026, compared to $517,116 for the three months ended March 31, 2025, an increase in net loss of $194,272. This increase in net loss is largely due to negative currency exchange rate movements, partially offset by an increase in operating income.

Six Months Ended March 31, 2026 compared to Six Months Ended March 31, 2025

Revenue

For the six months ended March 31, 2026, the Company recognized total revenue from operations of $18,061,623 compared to $17,020,648 for the six months ended March 31, 2025, an increase of $1,040,975 or approximately 6%. The increase in monitoring revenues is driven principally by an increase in people assigned to monitoring for clients in Florida, Illinois, and Canada. 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 six months ended March 31, 2026 increased to $987,116 from $711,366 in the same period in 2025, an increase of $275,750 or approximately 39%. 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 six months ended March 31, 2026, cost of revenue totaled $9,302,781 compared to cost of revenue during the six months ended March 31, 2025 of $8,482,340, an increase of $820,441 or 10%. The increase in cost of revenue was largely the result of higher device repair costs of $274,858 (due to an increase in volume and component costs of routine repairs and maintenance on devices). Higher server costs of $212,129 and higher alcohol monitoring costs of $223,933 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 six months ended March 31, 2026 and 2025 totaled $1,515,840 and $1,458,556, respectively, an increase of $57,284. 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 six months ended March 31, 2026, gross profit totaled $8,758,842, resulting in a gross margin of approximately 48%. During the six months ended March 31, 2025, gross profit totaled $8,538,308, resulting in a gross margin of approximately 50%. The increase in absolute gross profit of $220,534 is due to an increase in revenue, partially offset by an increase in cost of revenue.

General and Administrative Expense

During the six months ended March 31, 2026, general and administrative expense totaled $4,474,179 compared to $4,558,263 for the six months ended March 31, 2025. The decrease of $84,084 or approximately 2% is due to a decrease in legal settlements of $180,000 due to a settlement with Commonwealth of Puerto Rico in Fiscal 2025, partially offset by an increase in outside services of $65,239.

Selling and Marketing Expense

During the six months ended March 31, 2026, selling and marketing expense totaled $1,868,934 compared to $1,865,932 for the six months ended March 31, 2025. The increase of $3,002 resulted largely from higher payroll, benefits and payroll taxes and higher travel and entertainment expenses, partially offset by a decrease in bad debt expense and trade show costs.

Research and Development Expense

During the six months ended March 31, 2026, research and development expense totaled $1,393,454 compared to $1,420,040 for the six months ended March 31, 2025. The decrease of $26,586 or approximately 2% was largely due to decreased payroll, benefits, and payroll taxes of $71,702, partially offset by an increase in training and recruiting expense of $23,787.

Depreciation and Amortization Expense

During the six months ended March 31, 2026, depreciation and amortization expense totaled $456,073 compared to $454,938 for the six months ended March 31, 2025, an increase of $1,135.

(Gain) Loss on Sale/Dissolution 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 during the six months ended March 31, 2025.

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 during the six months ended March 31, 2026.

Total Operating Expense

During the six months ended March 31, 2026, total operating expense decreased to $7,562,168 compared to $8,365,656 for the six months ended March 31, 2025, a decrease of $803,488 or approximately 10%. The decrease is principally due to the factors disclosed above.

Operating Income

During the six months ended March 31, 2026, operating income was $1,196,674 compared to $172,652 for the six months ended March 31, 2025. The increase of $1,024,022 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 six months ended March 31, 2026, other expense totaled $1,325,588 compared to $2,599,236 for the six months ended March 31, 2025, a decrease of $1,273,648. The decrease in other expense is largely due to a decrease in currency exchange rate loss of $1,378,505, partially offset by an increase in interest expense of $105,934.

Net Income (Loss) Attributable to Common Stockholders

The Company had net loss attributable to common stockholders of $196,729 for the six months ended March 31, 2026, compared to $2,527,965 for the six months ended March 31, 2025, a decrease in net loss of $2,331,236. This decrease in net loss is largely due to an increase in operating income and decrease in currency exchange rate loss.

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 March 31, 2026, the Company had unrestricted cash of $5,099,610, compared to unrestricted cash of $4,098,114 as of September 30, 2025. As of March 31, 2026, we had working capital of $2,102,379, compared to working capital of $2,784,551 as of September 30, 2025. This decrease in working capital of $682,172 is principally due to a decrease in accounts receivable and an increase in accrued liabilities, partially offset by an increase in cash and a decrease in accounts payable.

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 March 31, 2026, $42,864,000 of principal and $3,967,301 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 six months ended March 31, 2026 or during the year ended September 30, 2025.

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

During the six months ended March 31, 2026, we had cash flows from operating activities of $3,497,018, compared to cash flows from operating activities of $271,134 during the six months ended March 31, 2025, representing a $3,225,884 increase. The increase in cash from operations was largely the result of a decrease in net loss and an increase in collections from customers.

Net Cash Flows Used in Investing Activities.

The Company used $2,430,041 of cash from investing activities during the six months ended March 31, 2026, compared to $1,013,132 used during the six months ended March 31, 2025. The increase of $1,416,909 or 140% was largely the result of increased capitalized software costs of $904,633 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 $58,969 of cash for financing activities during six months ended March 31, 2026, which was the payment of deferred financing fees, compared to $63,839 of cash used in financing activities during the six months ended March 31, 2025.

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.