| 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 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. 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, 2016. 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 shareholders’ 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 Company’s
intangible assets with finite useful lives are amortized over their respective estimated useful lives, which range from three to
ten years. The Company’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 Company’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, one of which
represent more than ten percent of gross revenues as follows for the years ended September 30, 2016 and 2015.
2016 % 2015 %
Customer A $ 7,543,116 28 % $ 3,930,167 19 %
Customer B $ 2,013,929 7 % $ - 0 %
Customer C $ 1,449,500 5 % $ 1,437,033 7 %
Customer D $ 1,178,439 4 % $ 1,535,203 7 % No other customer represented more than 10 percent
of the Company’s total revenues for the fiscal years ended September 30, 2016 or 2015. In October 2016, one of these customers,
which accounted for 5% our 2016 revenue, gave notice of non-renewal effective on November 19, 2016 (See Note 13). Concentration of credit risk associated with
the Company’s total and outstanding accounts receivable as of September 30, 2016 and 2015, respectively, are shown in the
table below:
2016 % 2015 %
Customer A $ 2,476,168 36 % $ 1,127,044 19 %
Customer B $ 899,428 13 % $ - 0 %
Customer C $ 1,151,859 17 % $ 900,834 15 %
Customer D $ 512,800 7 % $ 498,944 8 % 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 $1,336,787 and $3,812,911
of cash deposits in excess of federally insured limits as of September 30, 2016 and 2015, 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 customer’s financial condition,
age of the customer’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, 2016, the outstanding balance of the note was $120,824 and $113,908 of accrued interest.
As of June 30, 2016, the Company no longer accrues interest on the note. 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, 2016 and 2015, respectively, inventory
consisted of the following:
2016 2015
Finished goods inventory $ 620,001 $ 967,414
Reserve for damaged or obsolete inventory (98,150 ) (225,900 )
Total inventory, net of reserves $ 521,851 $ 741,514 During the year ended September 30, 2015, the
Company began using a third-party fulfillment service provider. As a result of this service, the Company’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,
2016 and 2015, respectively:
2016 2015
Equipment, software and tooling $ 1,028,173 $ 2,823,685
Automobiles 87,313 33,466
Leasehold improvements 1,279,500 1,351,017
Furniture and fixtures 252,864 311,628
Total property and equipment before accumulated depreciation 2,647,850 4,519,796
Accumulated depreciation (1,421,389 ) (2,822,166 )
Property and equipment, net of accumulated depreciation $ 1,226,461 $ 1,697,630 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. In 2016, we evaluated property and equipment that has become fully depreciated and wrote-off $1,842,321
of fully depreciated assets that were no longer in service. During the fiscal years ended September 30, 2016 and 2015, the Company
recognized no losses on the disposal of property and equipment. Depreciation expense recognized for property
and equipment for the fiscal years ended September 30, 2016 and 2015 was $609,036 and $693,635, 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, 2016 and
2015 is as follows:
2016 2015
Monitoring equipment $ 7,796,191 $ 5,010,075
Less: accumulated amortization (3,438,074 ) (2,225,480 )
Monitoring equipment, net of accumulated depreciation $ 4,358,117 $ 2,784,595 Amortization expense for the fiscal years ended
September 30, 2016 and 2015 was $1,559,437 and $1,017,409, 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, 2016 and 2015, the Company disposed of leased monitoring equipment and parts of $90,838 and $112,177, 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 Company’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 Company’s monitoring services. The Company typically leases its devices under
multi-year contracts with customers that opt to use the Company’s monitoring services. However, some of these contracts
may be cancelled by either party at any time with 30 days’ notice. Under the Company’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 project’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 Company’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 competitors’ 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 Company’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, 2016 and 2015, are as follows:
Fiscal Years Ended
September 30,
Country 2016 2015
United States of America $ 17,663,567 $ 13,700,218
Latin American countries 7,717,399 3,930,167
Caribbean countries and commonwealths 1,546,359 2,972,235
Other foreign countries 266,482 190,095
Total $ 27,193,807 $ 20,792,715 The long-lived assets, net of accumulated depreciation
and amortization, used in the generation of revenues by geographic area as of September 30, 2016 and 2015, were as follows:
Net Property and Equipment
Net Monitoring Equipment
2016 2015 2016 2015
United States of America $ 284,768 $ 501,543 $ 2,912,328 $ 1,747,174
Latin American countries 925,039 1,087,629 1,445,789 1,032,804
Other foreign countries 16,654 108,458 - 4,617
Total $ 1,226,461 $ 1,697,630 $ 4,358,117 $ 2,784,595 Research and Development Costs During the fiscal year ended September 30, 2016,
we incurred research and development expense of $2,627,228 compared to those costs recognized during fiscal year 2015 totaling
$1,562,566. The $1,064,662 increase in research and development cost reflect increased
research and development costs to streamline our device hardware and enhance both the firmware and software of our devices. The Advertising Costs The Company expenses advertising costs as incurred. Advertising
expense for the fiscal years ended September 30, 2016 and 2015 was $19,440 and $103,506, 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 Company’s policy is to recognize interest
and penalties related to income tax issues as components of other noninterest expense. As of September 30, 2016 and September 30,
2015, 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
2016 2015
Exercise of outstanding Common Stock options and warrants 504,991 381,656
Exercise and conversion of outstanding Series D preferred stock warrants - -
Total Common Stock equivalents 504,991 381,656 Recent Accounting Pronouncements In August 2016, the Financial Accounting Standards
Board (" FASB In May 2016, the FASB issued ASU 2016-12. The
amendments in this update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic
606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same
as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards
Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of
Update 2014-09 by one year. Management is currently evaluating the impact that this amendment will have on its consolidated financial
statements. In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, (“ ASU 2016-10 In March 2016, FASB issued ASU 2016-08, Revenue
from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This
update was intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations.
The amendments in this update have the same effective date as ASC 606 as discussed above. Management is currently evaluating the
impact of the pending adoption of ASU 2016-08 on the Company’s consolidated financial statements. In March 2016, FASB issued ASU 2016-09, Compensation
- Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this update
change the accounting for certain stock-based compensation transactions, including the income tax consequences and cash flow classification
for applicable transactions. The amendments in this update are effective for annual periods beginning after December 31, 2016 and
interim periods within those annual periods. Management is currently evaluating the impact that this amendment will have on its
consolidated financial statements. In February 2016, FASB issued ASU No. 2016-02,
Leases (Topic 841). For lessees, the amendments in this update require that for all leases not considered to be short term, a
company recognize both a lease liability and right-of-use asset on its balance sheet, representing the obligation to make payments
and the right to use or control the use of a specified asset for the lease term. The amendments in this update are effective for
annual periods beginning after December 15, 2018 and interim periods within those annual periods. Management is currently evaluating
the impact that this amendment will have on its consolidated financial statements. In November 2015, the FASB issued Accounting
Standards Update No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ ASU 2015-17 In September 2015, the FASB issued ASU 2015-16,
Simplifying the Accounting for Measurement-Period Adjustments (“ ASU 2015-16 In July 2015, the FASB issued ASU 2015-11, Simplifying
the Measurement of Inventory, (“ ASU 2015-11 In April 2015, the FASB issued ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs, (“ ASU 2015-03 |
