| Summary of Significant Accounting Policies | (2) Summary
of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial
statements include the accounts of Track Group, Inc. and its subsidiaries. The Company acquired two subsidiaries during the year
ended September 30, 2014, and one subsidiary during the year ended September 30, 2015 (see Note 3 “ Acquisitions Use of Estimates in the Preparation
of Financial Statements The preparation of consolidated financial
statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue
and expenses during the period presented. Actual results could differ from those estimates. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined
to be necessary. Significant estimates made in the accompanying consolidated financial statements include, but are not limited
to, allowances for doubtful accounts, certain assumptions related to the recoverability of intangible and long-lived assets, and
fair market values of certain assets and liabilities. Business Combinations Business combinations are accounted
for under the provisions of ASC 805-10, Business Combinations Goodwill represents costs in excess
of purchase price over the fair value of the assets of businesses acquired, including other identifiable intangible assets. Reclassifications Certain prior year
amounts have been reclassified to conform
with the current period presentation. Foreign Currency Translation The Chilean Peso, New Israeli Shekel
and the Canadian Dollar are used as functional currencies of the operating subsidiaries: (i) Track Group Chile SpA; (ii) Track
Group International Ltd.; and (iii) Track Group Analytics Limited, respectively. The balance sheets of all subsidiaries have been
converted into United States Dollars (USD) at the exchange rate prevailing at September 30, 2015. Their respective statements of
operations have been translated into USD using the average exchange rates prevailing during the periods of each statement. The
corresponding translation adjustments are part of accumulated other comprehensive income and are shown as part of shareholdersÂ’
equity. Other Intangible Assets Other intangible assets principally consist
of patents, royalty purchase agreements, developed technology acquired, customer relationships, trade name, capitalized software
development costs, and capitalized website development costs. The Company accounts for other intangible assets
in accordance with generally accepted accounting principles and does not amortize intangible assets with indefinite lives. The
CompanyÂ’s intangible assets with finite useful lives are amortized over their respective estimated useful lives which range
from two to ten years. The CompanyÂ’s intangible assets are reviewed for impairment annually or more frequently
whenever events or changes in circumstances indicate possible impairment. Fair Value of Financial Statements The carrying amounts reported in the
accompanying consolidated financial statements for accrued liabilities and debt obligations approximate fair values because of
the immediate or short-term maturities of these financial instruments. The carrying amounts of the CompanyÂ’s debt
obligations approximate fair value as the interest rates approximate market interest rates. Concentration of Credit Risk In the normal course of business, the
Company provides credit terms to its customers and requires no collateral. Accordingly, the Company performs credit evaluations
of its customers' financial condition. We had sales to entities which represent
more than ten percent of gross revenues as follows for the years ended September 30, 2015 and 2014. Except as indicated below,
no other customer represented more than ten percent of total revenues for fiscal 2015 or fiscal 2014.
2015 % 2014 %
Customer A $ 3,930,167 19 % $ - 0 %
Customer B $ 1,437,033 7 % $ 1,501,940 12 %
Customer C $ 1,535,203 7 % $ 1,431,854 12 % No other customer represented more than
10 percent of the CompanyÂ’s total revenues for the fiscal years ended September 30, 2015 or 2014. Concentration of credit risk associated
with the CompanyÂ’s total and outstanding accounts receivable as of September 30, 2015 and 2014, respectively, are shown in
the table below:
2015 % 2014 %
Customer A $ 1,127,044 5 % $ - 0 %
Customer B $ 900,834 4 % $ 499,040 13 %
Customer C $ 498,944 2 % $ 419,523 11 % Based upon the expected collectability
of its accounts receivable, the Company maintains an allowance for doubtful accounts. Cash Equivalents Cash equivalents consist of investments
with original maturities to the Company of three months or less. The Company has cash in bank accounts that, at times,
may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company had $3,812,911
and $10,572,702 of cash deposits in excess of federally insured limits as of September 30, 2015 and 2014, respectively. Accounts Receivable Accounts receivable are carried at original
invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis.
The allowance is estimated by management based on certain assumptions and variables, including the customerÂ’s financial condition,
age of the customerÂ’s receivables and changes in payment histories. Trade receivables are written off when deemed
uncollectible. Recoveries of trade receivables previously written off are recorded when cash is received. A
trade receivable is considered to be past due if any portion of the receivable balance has not been received by the Company within
its normal terms. Interest income is not recorded on trade receivables that are past due, unless that interest is collected. Note Receivable Notes receivable are carried at the face amount
of each note plus respective accrued interest receivable, less received payments. The Company does not typically carry
notes receivable in the course of its regular business, but had entered into an agreement with one of its customers during the
fiscal year ended September 30, 2012. Payments under the note are recorded as they are received and are immediately
offset against any outstanding accrued interest before they are applied against the outstanding principal balance on the respective
note. The note requires monthly payments of $15,000 and matured in May 2014. The note is currently in default
and accrues interest at a rate of 17% per annum. As of September 30, 2015, the outstanding balance of the note was $120,824 and
$85,610 of accrued interest. Inventory Inventory is valued at the lower of
the cost or market. Cost is determined using the first-in, first-out (“ FIFO Inventory consists of finished goods
that are sold to customers and used for minor repairs of ReliAlert™, Shadow, and other tracking devices. Completed
ReliAlert™ and other tracking devices are reflected in Monitoring Equipment. As of September 30, 2015 and 2014,
respectively, inventory consisted of the following:
2015 2014
Finished goods inventory $ 967,414 $ 1,471,764
Reserve for damaged or obsolete inventory (225,900) (223,500 )
Total inventory, net of reserves $ 741,526 $ 1,248,264 During the year ended September 30, 2015, the Company began
using a third-party fulfillment service provider. As a result of this service, the CompanyÂ’s employees no longer assemble,
repair or process inventory or monitoring equipment being shipped directly from suppliers. Purchases of monitoring equipment are
now recognized directly, rather than being transferred from inventory to monitoring equipment after their purchase. Management
believes that this process will reduce maintenance and fulfillment costs associated with inventory and monitoring equipment in
future periods. Property and Equipment Property and equipment are stated at
cost, less accumulated depreciation and amortization. Depreciation and amortization are determined using the straight-line
method over the estimated useful lives of the assets, typically three to seven years. Leasehold improvements are amortized
over the shorter of the estimated useful life of the asset or the term of the lease. Expenditures for maintenance and repairs are
expensed while renewals and improvements are capitalized. Property and equipment consisted of the following as of September 30,
2015 and 2014, respectively:
2015 2014
Equipment, software and tooling $ 2,823,685 $ 2,571,450
Automobiles 33,466 33,466
Leasehold improvements 1,351,017 1,294,386
Furniture and fixtures 311,628 253,466
Total property and equipment before accumulated depreciation 4,519,796 4,152,768
Accumulated depreciation (2,822,166 ) (2,292,521 )
Property and equipment, net of accumulated depreciation $ 1,697,630 $ 1,860,247 Property and equipment to be disposed
of is reported at the lower of the carrying amount or fair value, less the estimated costs to sell and any gains or losses are
included in the results of operations. During the fiscal years ended September 30, 2015 and 2014, the Company recognized losses
on the disposal of property and equipment of zero and $3,710, respectively. Depreciation expense recognized for
property and equipment for the fiscal years ended September 30, 2015 and 2014 was $693,635 and $276,355, respectively. Monitoring Equipment The Company began leasing monitoring
equipment to agencies for offender tracking in April 2006 under operating lease arrangements. The monitoring equipment
is depreciated using the straight-line method over an estimated useful life of three years. Monitoring equipment as of September
30, 2015 and 2014 is as follows:
2015 2014
Monitoring equipment $ 5,010,075 $ 3,166,217
Less: accumulated amortization (2,225,480 ) (1,251,551 )
Monitoring equipment, net of accumulated depreciation $ 2,784,595 $ 1,914,666 Amortization expense for the fiscal
years ended September 30, 2015 and 2014 was $1,017,409 and $844,172, respectively. These expenses were classified as
a cost of revenues. Monitoring equipment to be disposed
of is reported at the lower of the carrying amount or fair value, less the estimated costs to sell. During the fiscal
years ended September 30, 2015 and 2014, the Company disposed of leased monitoring equipment and parts of $112,177 and $209,757,
respectively. Impairment of Long-Lived Assets and Goodwill The Company reviews its long-lived
assets 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. The Company evaluates whether events and circumstances have occurred which indicate
possible impairment as of each balance sheet date. If the carrying amount of an asset exceeds its fair 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 value that is independent of other
groups of assets. Revenue Recognition The CompanyÂ’s revenue has historically been from two sources:
(i) monitoring services, and (ii) product sales. Monitoring Services Monitoring services include two components: (a) lease contracts
in which the Company provides monitoring services and leases devices to distributors or end users and the Company retains ownership
of the leased device; and (b) monitoring services purchased by distributors or end users who have previously purchased monitoring
devices and opt to use the CompanyÂ’s monitoring services. The Company typically leases its devices under multi-year contracts
with customers that opt to use the CompanyÂ’s monitoring services. However, some of these contracts may be cancelled
by either party at any time with 30 daysÂ’ notice. Under the CompanyÂ’s standard leasing contract, the leased
device becomes billable on the date of activation or 7 to 21 days from the date the device is assigned to the lessee, and remains
billable until the device is returned to the Company. The Company recognizes revenue on leased devices at the end of
each month that monitoring services have been provided. In those circumstances in which the Company receives payment
in advance, the Company records these payments as deferred revenue. Product Sales The Company may sell its monitoring devices in certain situations
to its customers. In addition, the Company may sell equipment in connection with the building out and setting up a monitoring center
on behalf of its customers. The Company recognizes product sales revenue when persuasive evidence of an arrangement with the customer
exists, title passes to the customer and the customer cannot return the devices or equipment, prices are fixed or determinable
(including sales not being made outside the normal payment terms) and collection is reasonably assured. When purchasing products
(such as TrackerPAL® and ReliAlert™ devices) from the Company, customers may, but are not required to, enter into monitoring
service contracts with the Company. The Company recognizes revenue on monitoring services for customers that have previously
purchased devices at the end of each month that monitoring services have been provided. The Company sells and installs standalone tracking systems that
do not require ongoing monitoring by the Company. The Company has experience in component installation costs and direct
labor hours related to this type of sale and can typically reasonably estimate costs, therefore the Company recognizes revenue
over the period in which the installation services are performed using the percentage-of-completion method of accounting for material
installations. The Company typically uses labor hours or costs incurred to date as a percentage of the total estimated
labor hours or costs to fulfill the contract as the most reliable and meaningful measure that is available for determining a projectÂ’s
progress toward completion. The Company evaluates its estimated labor hours and costs and determines the estimated gross
profit or loss on each installation for each reporting period. If it is determined that total cost estimates are likely
to exceed revenues, the Company accrues the estimated losses immediately. All amounts billed have been earned. Multiple Element Arrangements The majority of the CompanyÂ’s revenue transactions do not
have multiple elements. However, on occasion, the Company enters into revenue transactions that have multiple elements. These may
include different combinations of products or monitoring services that are included in a single billable rate. These products or
monitoring services are delivered over time as the customer utilizes the Company's services. For revenue arrangements that have
multiple elements, the Company considers whether the delivered devices have standalone value to the customer, there is objective
and reliable evidence of the fair value of the undelivered monitoring services, which is generally determined by surveying the
price of competitorsÂ’ comparable monitoring services, and the customer does not have a general right of return. Based on
these criteria, the Company recognizes revenue from the sale of devices separately from the monitoring services provided to the
customer as the products or monitoring services are delivered. Other Matters The Company considers an arrangement
with payment terms longer than the CompanyÂ’s normal terms not to be fixed or determinable, and revenue is recognized when
the fee becomes due. Normal payment terms for the sale of monitoring services and products are due upon receipt to 30
days. The Company sells its devices and services directly to end users and to distributors. Distributors
do not have general rights of return. Also, distributors have no price protection or stock protection rights with respect
to devices sold to them by the Company. Generally, title and risk of loss pass to the buyer upon delivery of the devices. The Company estimates its product returns
based on historical experience and maintains an allowance for estimated returns, which is recorded as a reduction to accounts receivable
and revenue. Shipping and handling fees charged to
customers are included as part of net revenues. The related freight costs and supplies directly associated with shipping
products to customers are included as a component of cost of revenues. Geographical Information The Company recognized revenues from
international sources from its products and monitoring services. Revenues are attributed to the geographic areas based
on the location of the customers purchasing and leasing the products. The revenues recognized by geographic area for
the fiscal years ended September 30, 2015 and 2014, are as follows:
Fiscal Years Ended
September 30,
Country 2015 2014
United States of America $ 13,700,218 $ 9,268,430
Latin American countries 3,930,167 -
Caribbean countries and commonwealths 2,972,236 2,933,794
Other foreign countries 190,095 59,974
Total $ 20,792,715 $ 12,262,198 The long-lived assets, net of accumulated
depreciation and amortization, used in the generation of revenues by geographic area as of September 30, 2015 and 2014, were as
follows:
Net Property and Equipment
Net Monitoring Equipment
2015 2014 2015 2014
United States of America $ 501,543 $ 611,095 $ 1,747,174 $ 1,645,137
Latin American countries 1,087,629 1,168,406 1,032,804 237,667
Caribbean countries and commonwealths - - - -
Other foreign countries 108,458 80,746 4,617 31,862
Total $ 1,697,630 $ 1,860,247 $ 2,784,595 $ 1,914,666 Research and Development Costs During the fiscal year ended September
30, 2015, we incurred research and development expense of $1,562,566 compared to those costs recognized during fiscal year 2014
totaling $1,605,662. The $43,096 reduction in research and development cost reflect those projects that commenced in
2014 that were completed in 2015. Advertising Costs The Company expenses advertising costs
as incurred. Advertising expense for the fiscal years ended September 30, 2015 and 2014 was $103,506 and $60,505, respectively. Stock-Based Compensation The Company recognizes 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. The Company estimates the fair value of stock options using a Black-Scholes option pricing
model which requires management 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. Income Taxes The Company recognizes deferred income
tax assets or liabilities for the expected future tax consequences of events that have been recognized in the financial statements
or income tax returns. Deferred income tax assets or liabilities are determined based upon the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates expected to apply when the differences are expected to
be settled or realized. Deferred income tax assets are reviewed periodically for recoverability and valuation allowances
are provided as necessary. The tax effects from uncertain tax positions
can be recognized in the financial statements, provided the position is more likely than not to be sustained on audit, based on
the technical merits of the position. The Company recognizes the financial statement benefit of a tax position only after determining
that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than
50 percent likelihood of being realized, upon ultimate settlement with the relevant tax authority. The Company applied the foregoing
accounting standard to all of its tax positions for which the statute of limitations remained open as of the date of the accompanying
consolidated financial statements. The CompanyÂ’s policy is to recognize interest and penalties
related to income tax issues as components of other noninterest expense. As of September 30, 2015 and September 30, 2014, the Company
did not record a liability for uncertain tax positions. Net Loss Per Common Share Basic net loss per common share (“ Basic EPS Diluted net loss per common share (“ Diluted EPS Common share equivalents consist of shares issuable upon the exercise
of options and warrants to purchase shares of the Company's Common Stock, par value $0.0001 per share (“ Common Stock
2015 2014
Exercise of outstanding Common Stock options and warrants 381,656 305,251
Exercise and conversion of outstanding Series D Preferred stock warrants - 42,000
Total Common Stock equivalents 381,656 347,251 Recent Accounting Pronouncements In August 2015, the FASB issued ASU
No. 2015-15, "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements"
(Subtopic 835-30). ASU 2015-15 provides guidance on the treatment of debt issuance cost related to line-of-credit arrangements
based on comments provided by the SEC staff. The SEC staff stated that it would not object to an entity deferring and presenting
debt issuance costs as an asset and subsequently amortizing the deferred debt issuance cost ratably over the term of the line-of-credit
arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-15 will
be effective for us beginning October 1, 2016, but early adoption is permitted. We are currently evaluating the impact of
implementation of this standard on our financial statements. In April 2015, the Financial Accounting
Standards Board (the “FASB”) issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, (“ASU 2015-03”).
ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct
deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 will be effective for the
fiscal year beginning January 1, 2016 and subsequent interim periods, with earlier adoption permitted. ASU 2015-03 will be effective
for the CompanyÂ’s fiscal year beginning January 1, 2016 and subsequent interim periods. We are currently evaluating the impact
of this implementation of this standard on our financial statements. In August 2014, the FASB issued ASU
No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an EntityÂ’s
Ability to Continue as a Going Concern In May 2014, the Financial Accounting
Standards Board (“ FASB Revenue from Contracts with Customers |
