Cleartronic, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. THE FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH THE INFORMATION CONTAINED IN THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. MANAGEMENT DISCUSSION The following discussion reflects the Company’s plan of operation. This discussion should be read in conjunction with the financial statements which are attached to this report. This discussion contains forward-looking statements, including statements regarding our expected financial position, business and financing plans. These statements involve risks and uncertainties. The actual results could differ materially from the results described in or implied by these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly under the headings “Special Note Regarding Forward-Looking Statements.” Unless the context otherwise suggests, “we,” “our,” “us,” and similar terms, as well as references to “Cleartronic”, all refer to Cleartronic, Inc. and our subsidiaries as of the date of this report. Results of Operations YEAR ENDED SEPTEMBER 30, 2024 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 2023 Revenue Revenues increased 46.63% to $3,126,148 for the year ended September 30, 2024 as compared to $2,131,955 for the year ended September 30, 2023. The primary reason for the increase was an increase in revenue from the ReadyOp platform from $2,022,550 in 2023 to $2,414,949 in 2024. There was also an increase in sales of ReadyOp hardware products from $49,674 in 2023 to $671,999 in 2024. Consulting fees and related income decreased from $59,731 in 2023 to $39,200 in 2024 due to a decrease in training activity. Cost of Revenue Cost of revenues increased to $866,402 for the year ended September 30, 2024 as compared to $435,529 for the year ended September 30, 2023. Gross profits were $2,259,746 and $1,696,426 for the years ended September 30, 2024 and September 30, 2023, respectively. Gross profit margins decreased to 72.29% for the year ended September 30, 2024 from 79.57% for the year ended September 30, 2023. - 8 - Operating Expenses Operating expenses increased 55.88% to $2,560,333 for the year ended September 30, 2024 compared to $1,642,477 for the year ended September 30, 2023. The increase was primarily due to administrative expenses, research and development expenses, and selling expenses. General and administrative expenses increased by $770,159 or 59.06% as a result of the increase in general business expenses, impairment loss, an increase in headcount and personnel related costs associated with the addition of new employees. There were also charitable contributions and employee holiday bonuses paid during the year. For the year ended September 30, 2024, selling expenses were $287,676 compared to $306,132 for the year ended September 30, 2023. This decrease was primarily due to bad debt expense, and slight offset by an increase in advertising and travel expenses as the Company increased its sales and marketing efforts. Research and development expenses were $189,022 for the year ended September 30, 2024, as compared to $27,314 for the year ended September 30, 2023. This increase was primarily due to research and development expenses and Company’s fees paid to outside consulting services that are assisting us in obtaining FedRAMP certification. For the year ended September 30, 2024, $166,419 was paid in connection with FedRamp certification. Other Income/(Expenses) The Company’s other income increased by $25,855 from other income of $28,462 during the year ended September 30, 2024 as compared to $2,607 in other income for the year ended September 30, 2023. This increase was an increase in interest income on treasury bill investments and related party interest - receivable of $44,412 and extinguishment of liabilities of $42,941 and offset by a write off of note and interest receivable - related party of $58,891 Income before Income Taxes The Company’s loss before income taxes was $272,125, during the year ended September 30, 2024, as compared to income of $56,556 income before income taxes for the year ended September 30, 2023. The increased costs were partially offset by an increase in subscriptions of ReadyOp licenses. Net (Loss) Income Attributable to Common Stockholders Net loss attributable to common stockholders was $313,273 for the year ended September 30, 2024 as compared to a net income of $15,518 for the year ended September 30, 2023. The decrease was primarily due to an increase in administrative expenses and research and development expenses and offset by an increase in sales of ReadyOp licenses and a prior period adjustment, see Note 2. The increased costs were partially due to addition of new employees associated and costs associated FedRAMP certification . The preferred stock dividends remained consistent. Liquidity and Capital Resources For the year ended September 30, 2024, net cash provided in operations of $414,901 was the result of a net loss of $272,125, depreciation and amortization expense of $9,496, amortization of operating lease of $23,931, gain on extinguishment of liabilities of $ 42,941, provision of bad debt of $20,000, impairment of intangible assets of $44,373, note and interest receivable - related party write off of $58,891, an increase in accounts payable of $78,972, an increase in inventory of $19,619. These were offset by a decrease in accounts receivable of $359,404, an increase in prepaid expenses of $16,539 and an increase in deferred revenue of $195,645. For the year ended September 30, 2023, net cash provided in operations of $99,595 was the result of a net income of $56,556, depreciation and amortization expense of $5,051, amortization of operating lease of $17,949, provision of bad debt of $97,994, an increase in accounts payable of $10,640, and a decrease in inventory of $816. These were offset by an increase in accounts receivable of $105,537, an increase in prepaid expenses of $17,635 and an increase in deferred revenue of $52,169. - 9 - Net cash used in investing activities was $482,135 for the year ended September 30, 2024 which was for the purchase of fixed assets of $32,135, and intangible asset - client list of $50,000. Net cash used in investing activities was $50,807 for the year ended September 30, 2023 which was for the purchase of fixed assets of $6,434, and intangible assets of $44,373. Critical Accounting Policies and Estimates We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, and the related disclosures of contingent liabilities. We base our estimates on historical experience and other assumptions that we believe are reasonable in the circumstances. Actual results may differ from these estimates. The following critical accounting policies affect our more significant estimates and assumptions used in preparing our consolidated financial statements. Accounts Receivable and Allowance for Credit Losses The Company maintains current receivable amounts with most of its customers. The Company regularly monitors and assesses its risk of not collecting amounts owed by customers. This evaluation is based upon an analysis of current and past due amounts, along with relevant history and facts particular to the customer. The Company records its allowance for credit losses based on the results of this analysis. The analysis requires the Company to make significant estimates and as such, changes in facts and circumstances could result in material changes in the allowance for credit losses. The Company considers as past due any receivable balance not collected within its contractual terms. The Company provided $60,665 and $63,665 allowances for doubtful accounts as of September 30, 2024, and September 30, 2023, respectively. Inventory Inventory consists of components held for assembly and finished goods held for resale or to be utilized for installation in projects. Inventory is valued at lower of cost or net realizable value on a first-in, first-out basis. The Company’s policy is to record a reserve for technological obsolescence or slow-moving inventory items. The Company only carries finished goods to be shipped along with completed circuit boards and parts necessary for final assembly of finished product. All existing inventory is considered current and usable. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and depreciated or amortized using the straight-line method over the estimated useful life of the asset or the underlying lease term for leasehold improvements, whichever is shorter or when the property and equipment is put into service. IMPAIREMENT OF LONG-LIVED ASSETS Management evaluates the recoverability of the Company’s identifiable intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists, in accordance with the provisions of ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets.” If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. INTANGIBLE ASSETS We account for our goodwill and other indefinite-lived intangible assets as required by FASB ASC Topic 350, Intangibles - Goodwill and Other (“ASC 350”). We test goodwill for impairment at the reporting unit level and have concluded that our reporting units are generally the same as our reportable segments. We evaluate the determination of our reporting units periodically or whenever events or substantive changes in circumstances occur. ASC 350 requires that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques on an annual basis and when events occur that may suggest that the fair value of such assets cannot support the carrying value. ASC 350 gives an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit or intangible asset is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of a reporting unit or intangible asset is less than its carrying amount, then performing the quantitative impairment test is unnecessary. However, if an entity concludes otherwise, then the quantitative impairment test shall be used to identify the impairment and measure the amount of an impairment loss to be recognized (if applicable). In 2024, the Company conducted an impairment assessment in accordance with ASC 350-30-35 and determined that all previously capitalized amounts related to costs that are no longer deemed recoverable. As a result, the Company recognized an impairment loss of $44,373. - 10 - REVENUE RECOGNITION AND DEFERRED REVENUES The Company revenue recognition policy follows guidance from Accounting Standards Codification (“ASC”) 606, Revenue from contract with customers. Revenue is recognized when the Company has transferred promised goods and services to the customer and in the amount that reflects the consideration to which the company expects to be entitled to in exchange for those goods and services. The Company applies the following five-step model in order to determine this amount: i. Establishment of a contract with the customer; ii. Identify the performance obligation of the contract; iii. Determine transaction price iv. Allocation of the transaction price to the performance obligations; and v. Recognition of revenue when (or as) the Company satisfies each performance obligation. The Company generates revenue primarily through the sale of software licenses and integrated hardware. The portion of the contract that is associated with ongoing hosting and related customer service is amortized monthly over the license period. The Company incurs certain incremental contract costs (referred to as deferred subscriber acquisition costs, net) including selling expenses (primarily commissions) related to acquiring customers. Deferred subscriber acquisition costs, net are included in prepaid and expenses and other current assets on the consolidated balance sheet. Commissions paid in connection with acquiring new customers are determined based on the value of the contractual fees. Deferred subscriber acquisition costs will be expensed as incurred on the date the revenue associated with the cost is recognized. In transactions in which hardware is sold to a customer, the Company recognizes the revenue when the hardware has been shipped to the customer. The hardware supplied by the Company does not require a related software license and can be operated and fully functional without the Company’s software. From time to time clients request special training meetings. We send employees to these meetings and charge our clients on a per diem basis. These charges are recorded as consulting fees on our income statement. Customer billings for services not yet rendered and hardware not yet installed are deferred and recognized as revenue as services are provided. These fees are recorded as current deferred revenue on the consolidated balance sheet as the Company expects to satisfy any remaining performance obligations as well as recognize the related revenue within the next twelve months. Accordingly, the Company has applied the practical expedient regarding deferred revenue to exclude the value of remaining performance obligations if (i) the contract has an original expected term of one year or less or (ii) the Company recognizes revenue in proportion to the amount it has the right to invoice for services performed. As of September 30, 2024 and September 30, 2023, respectively, the Company recorded $1,373,325 and $1,177,680, respectively, in deferred revenue. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company measures the fair value of its assets and liabilities under ASC topic 820, “Fair Value Measurements and Disclosures”. ASC 820 defines “fair value” as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There was no impact relating to the adoption of ASC 820 to the Company’s consolidated financial statements. ASC 820 also describes three levels of inputs that may be used to measure fair value: - Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets. - Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. - Level 3: Inputs that are generally observable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. - 11 - Financial instruments consist principally of cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and deferred revenue. The carrying amounts of such financial instruments in the accompanying consolidated balance sheet approximate their fair values due to their relatively short-term nature. The carrying amounts approximate fair value. It is management’s opinion that the Company is not exposed to any significant currency or credit risks arising from these financial instruments. As of September 30, 2024 and September 30, 2023, we held no assets that were required to be measured at fair value on a recurring basis. There were no transfers between levels in the fair value hierarchy during the years ended September 30, 2024 and September 30, 2023, respectively. RECENT ADOPTED ACCOUNTING PRONOUNCEMENTS Troubled Debt Restructurings and Vintage Disclosures In March 2022, the Financial Accounting Standards Board (the “FASB”) issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), which eliminates the accounting guidance on troubled debt restructurings (“TDRs”) for creditors in ASC 310, Receivables (Topic 310), and requires entities to provide disclosures about current period gross write-offs by year of origination. Also, ASU 2022-02 updates the requirements related to accounting for credit losses under ASC 326, Financial Instruments – Credit Losses (Topic 326), and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. ASU 2022-02 was effective for the Company October 1, 2022. The adoption of ASU 2022-02 did not have a material impact on the Company’s consolidated financial statements. RECENT ISSUED ACCOUNTING PRONOUNCEMENTS The Company continues to monitor new accounting pronouncements issued by the FASB and does not believe any accounting pronouncements issued through the date of this report will have a material impact on the Company’s Financial Statements. In the current year, the Company adjusted its classification of selling and administrative expenses in the Statement of Operations. For comparative purposes, amounts in the prior years have been reclassified to conform to current year presentations. These reclassifications had no effect on previously reported results of operations or retained earnings. LEASE ACCOUNTING We determine if an arrangement is a lease, or contains a lease, at inception and record the leases in our financial statements upon lease commencement, which is the date when the underlying asset is made available for use by the lessor. We have a lease agreement with lease and non-lease components and have elected to utilize the practical expedient to account for lease and non-lease components together as a single combined lease component, from both a lessee and lessor perspective with the exception of direct sales-type leases and production equipment classes embedded in supply agreements. From a lessor perspective, the timing and pattern of transfer are the same for the non-lease components and associated lease component and, the lease component, if accounted for separately, would be classified as an operating lease. We have elected not to present short-term leases on the balance sheet as these leases have a lease term of 12 months or less at lease inception and do not contain purchase options or renewal terms that we are reasonably certain to exercise. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because our lease does not provide an implicit rate of return, we used our incremental borrowing rate based on the information available at lease commencement date in determining the present value of lease payments. In general, leases, where we are the lessee, may include options to extend the lease term. These leases may include options to terminate the lease prior to the end of the agreed upon lease term. For purposes of calculating lease liabilities, lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. - 12 - Lease expense for operating leases is recognized on a straight-line basis over the lease term as cost of revenues or operating expenses depending on the nature of the leased asset. Certain operating leases provide for annual increases to lease payments based on an index or rate. We calculate the present value of future lease payments based on the index or rate at the lease commencement date. Differences between the calculated lease payment and actual payment are expensed as incurred. Amortization of finance lease assets is recognized over the lease term as cost of revenues or operating expenses depending on the nature of the leased asset. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. Item 8. Financial Statements and Supplementary Data. The financial statements and related notes are included as part of this report as indexed in the appendix on page F-1, et seq . Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None