| Summary of Significant Accounting Policies | Principles of Consolidation The consolidated financial statements include
the accounts of Track Group, Inc. and its wholly-owned subsidiaries, Track Group Analytics Limited, Track Group Americas, Inc.,
Track Group International LTD., and Track Group - Chile SpA. All significant inter-company transactions have been eliminated in
consolidation. 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 expense
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. 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 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. Intangible assets with
finite useful lives are amortized over their respective estimated useful lives, which range from three to twenty years. Intangible
assets are reviewed for impairment annually or more frequently whenever events or changes in circumstances indicate possible impairment. Fair Value of Financial Investments The carrying amounts reported in the accompanying
consolidated financial statements for accounts receivable, accounts payable, accrued liabilities and debt obligations approximate
fair values because of the immediate or short-term maturities of these financial instruments. The carrying amounts of our
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 our
customers' financial condition. The Company had sales to entities, two of which
each represent 10% or more of our gross revenue, as follows for the years ended September 30, 2020 and 2019.
2020 % 2019 %
Customer A $ 6,374,742 19 % $ 8,570,404 25 %
Customer B $ 3,710,759 11 % $ 3,549,273 10 % No other customer represented more than 10%
of the Company’s total revenue for the fiscal years ended September 30, 2020 or 2019. Concentration of credit risk associated with
the Company’s total and outstanding accounts receivable as of September 30, 2020 and 2019, respectively, are shown in the
table below:
2020 % 2019 %
Customer A $ 536,587 10 % $ 1,538,775 23 %
Customer B $ 374,809 7 % $ 844,241 12 % Based upon the expected collectability of our
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 $5,075,274 and $5,688,493
of cash deposits in excess of federally insured limits as of September 30, 2020 and 2019, respectively. Accounts Receivable Accounts receivable, which is made up of trade
receivables for monitoring and other related services, 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. Prepaid Expense and Other Prepaid assets and other is comprised largely
of performance bond deposits, tax deposits, vendor deposits and other prepaid supplier expenses. We generally expect deposits to
be returned to the Company as cash within 12 months and prepaid expenses to be allocated over the commitment. Inventory Inventory is valued at the lower of the cost
or net realizable value. Cost is determined using the standard costing method. Net realizable value is determined based on
the item selling price. Inventory is periodically reviewed in order to identify obsolete or damaged items or impaired values. Inventory consists of finished goods that
are to be shipped to customers and parts used for minor repairs of ReliAlert™, Shadow, and other tracking devices. Completed
and shipped ReliAlert™ and other tracking devices are reflected in Monitoring Equipment. As of September 30, 2020 and
September 30, 2019, inventory consisted of the following:
2020 2019
Finished goods inventory $ 131,089 $ 301,435
Reserve for damaged or obsolete inventory (6,483 ) (26,934 )
Total inventory, net of reserves $ 124,606 $ 274,501 The Company uses a third-party fulfillment service
provider. As a result of this service, the Company’s employees do not actively assemble new product or repair damaged inventory
or monitoring equipment shipped directly from suppliers. Purchases of monitoring equipment are recognized directly. Management
believes this process reduces maintenance and fulfillment costs associated with inventory and monitoring equipment. Management
reviews inventory regularly to identify damaged or obsolete inventory and reserves for potential losses. The Company recorded charges
of $67,926 and $0 during the years ended September 30, 2020 and 2019, respectively, for inventory that was obsolete, lost or damaged.
Obsolete, lost and damaged inventory items are included in Monitoring, products & other related services in the Consolidated
Statement of Operations. 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, 2020 and 2019, respectively:
2020 2019
Equipment, software and tooling $ 1,272,635 $ 1,210,583
Automobiles 5,156 5,574
Leasehold improvements 1,290,708 1,393,976
Furniture and fixtures 341,896 313,817
Total property and equipment before accumulated depreciation 2,910,395 2,923,950
Accumulated depreciation (2,531,631 ) (2,248,913 )
Property and equipment, net of accumulated depreciation $ 378,764 $ 675,037 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, 2020 and 2019, the Company recognized a $0 and $10,563
gain, respectively on the disposal of property and equipment. Internally developed software costs related to the Company’s
monitoring platform are recorded as intangible assets on the Consolidated Balance Sheet. See Note 13. Depreciation expense recognized for property
and equipment for the fiscal years ended September 30, 2020 and 2019 was $336,666 and $315,380, respectively. Monitoring Equipment The Company leases monitoring equipment to agencies
for offender tracking under contractual service agreements. The monitoring equipment is depreciated using the straight-line
method over an estimated useful life of between one and five years. Monitoring equipment as of September 30, 2020 and 2019 is as
follows:
2020 2019
Monitoring equipment $ 8,705,830 $ 8,947,668
Less: accumulated depreciation (6,639,883 ) (6,322,768 )
Monitoring equipment, net of accumulated depreciation $ 2,065,947 $ 2,624,900 Depreciation expense for the fiscal years ended
September 30, 2020 and 2019 was $1,409,220 and $1,509,166, respectively. This expense was classified as a cost of revenue. 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,
2020 and 2019, the Company disposed of leased monitoring equipment and parts of $488,378 and $355,117, respectively. Impairment of Long-Lived Assets and Goodwill The Company reviews 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. See Note 13. Revenue Recognition In May 2014, the FASB issued Accounting
Standards Update (“ ASU Revenue from Contracts with Customers (Topic
606) Our revenue is predominantly derived from
two sources: (i) monitoring services, and (ii) product sales. Monitoring and Other Related Services Monitoring services include two components:
(i) lease contracts pursuant to which the Company provides monitoring services and lease devices to distributors or end users and
the Company retains ownership of the leased device; and (ii) monitoring services purchased by distributors or end users who have
previously purchased monitoring devices and opt to use the Company’s monitoring services. Sales of devices and leased GPS
devices are required to use the Company’s monitoring service and both the GPS leased devices and monitoring services are
accounted for as a single performance obligation. The rates for leased devices and monitoring services are considered to be stated
at their individual stand-alone selling prices. The Company recognizes revenue on leased devices and monitoring services at the
end of each month the services have been provided and payment terms are 30 days from invoice date. In those circumstances in which
the Company receives payment in advance, the Company records these payments as deferred revenue. Product Sales and Other The Company sells devices and replacement parts
to customers under certain contracts, as well as law enforcement software licenses and maintenance, and analytical software. Revenue
transactions associated to the sale of devices and replacement parts comprise a single performance obligation. We satisfy the performance
obligation when the Company has transferred control of the product to the customer and they receive substantially all of the benefits.
Transfer of control passes to customers upon shipment or upon receipt depending on the country
of the sale and the agreement with the customer. The transaction price is determined based upon the invoiced sales price and payment
terms for the transaction depends on the agreement with the customer and payment is generally required within 60 days or less of
shipment. Multiple Element Arrangements The majority of our revenue transactions do
not have multiple elements. However, on occasion, the Company may enter into revenue transactions that have multiple elements. These
may include different combinations of products or services that are included in a single billable rate. These products or
services are delivered over time as the customer utilizes our services. In cases where obligations in a contract are distinct and
thus require separation into multiple performance obligations, revenue recognition guidance requires that contract consideration
be allocated to each distinct performance obligation based on its relative standalone selling price. The value allocated to each
performance obligation is then recognized as revenue when the revenue recognition criteria for each distinct promise or bundle
of promises has been met. 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
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 us. Generally, title
and risk of loss pass to the buyer upon delivery of the devices. The Company estimates 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 total revenue. The related freight costs and supplies directly associated with shipping products to
customers are included as a component of cost of revenue. Research and Development Costs During the fiscal year ended September 30, 2020
and September 30, 2019, the Company incurred research and development expense of $1,182,542 and $1,313,499, respectively. Advertising Costs The Company expenses advertising costs as incurred. Advertising
expense for the fiscal years ended September 30, 2020 and 2019 was $16,445 and $19,642, 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 fair value of stock options is estimated 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. We recognize the financial statement benefits 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 our 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, 2020 and September 30,
2019, we did not record a liability for uncertain tax positions. Net Income (Loss) Per Common Share Basic net income (loss) per common share (“ Basic
EPS Diluted net income (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
2020 2019
Issuable Common Stock options and warrants 685,259 685,259
Total Common Stock equivalents 685,259 685,259 At September 30, 2020 and September 30, 2019,
all stock option and warrant exercise prices were above the market price of $0.3733 and $0.51, respectively, and thus have not
been included in the basic earnings per share calculation. Recent Accounting Pronouncements Recently Adopted Accounting Standards In May 2014, the Financial Accounting Standards
Board (“ FASB Revenue from Contracts with Customers
(Topic 606) In February 2016, FASB issued ASU No. 2016-02,
“ Leases (Topic 842) In August 2016, the FASB issued ASU 2016-15,
“ Statement of Cash Flows (Topic 230) ( Recently Issued Accounting Standards In January 2017, the FASB issued ASU 2017-04,
“ Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment In June 2016, the FASB issued ASU 2016-13, “ Measurement
of Credit Losses on Financial Instruments CECL |
