Attached files
file | filename |
---|---|
EX-32 - ISECURETRAC CORP | v192703_ex32.htm |
EX-31.1 - ISECURETRAC CORP | v192703_ex31-1.htm |
EX-31.2 - ISECURETRAC CORP | v192703_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549-1004
Form
10-Q
(Mark
One)
x Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act
of 1934
FOR
THE QUARTERLY PERIOD ENDED June 30, 2010
or
¨ Transition
report pursuant to Section 13 or 15(d) of the Securities
Exchange
Act of 1934
For
the transition period from _______________ to _______________
Commission
File Number 000-26455
ISECURETRAC
CORP.
(Exact
name of registrant as specified in its charter)
DELAWARE
|
87-0347787
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
|
incorporation
or organization)
|
5078
S. 111th
Street
OMAHA,
NEBRASKA 68137
(Address
of principal executive offices, Zip Code)
(402)
537-0022
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes ¨ No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company in Rule 12b-2 of the Exchange
Act. (Check one)
Large
accelerated filer ¨ Accelerated
filer ¨
Non-accelerated
filer ¨ (Do not check if a
smaller reporting company) Smaller reporting
company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No
x
The
number of shares of issuer’s common stock outstanding as of July 19, 2010 was
10,867,183.
iSecureTrac
Corp.
Table
of Contents
Item
|
Page
|
|
PART
I
|
||
1
|
Financial
Statements
|
01
|
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
12
|
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
21
|
4.
|
Controls
and Procedures
|
22
|
PART
II
|
||
1.
|
Legal
Proceedings
|
22
|
1A.
|
Risk
Factors (Not Required for SRC)
|
22
|
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
22
|
3.
|
Defaults
Upon Senior Securities
|
22
|
4.
|
Reserved
|
22
|
5.
|
Other
Information
|
22
|
6.
|
Exhibits
|
23
|
PART
I. FINANCIAL INFORMATION
Item 1. Financial
Statements
iSECUREtrac
Corp. and SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
||||||||
June 30, 2010
|
December 31, 2009
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 335,304 | $ | 719,662 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $473,396 in 2010 and
$666,630 in 2009
|
1,879,756 | 1,877,330 | ||||||
Inventories
|
219,833 | 284,838 | ||||||
Prepaid
expenses and other
|
107,697 | 115,004 | ||||||
Total
current assets
|
2,542,590 | 2,996,834 | ||||||
Leasehold
improvements and equipment, net of accumulated depreciation of $11,907,487
in 2010 and $11,228,684 in 2009
|
3,962,809 | 4,461,466 | ||||||
Goodwill
|
2,302,179 | 2,302,179 | ||||||
Other
assets
|
77,778 | 69,889 | ||||||
Total
assets
|
$ | 8,885,356 | $ | 9,830,368 | ||||
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$ | 505,660 | $ | 554,592 | ||||
Accrued
expenses
|
492,124 | 1,177,666 | ||||||
Revolving
Line of Credit
|
500,000 | 350,000 | ||||||
Equipment
Term Loan
|
898,805 | 280,000 | ||||||
Current
maturities of long-term debt
|
1,478,774 | 1,674,221 | ||||||
Deferred
revenues
|
72,952 | 96,937 | ||||||
Accrued
interest payable
|
1,848,503 | 1,428,778 | ||||||
Total
current liabilities
|
5,796,818 | 5,562,194 | ||||||
Long-term
debt, less current maturities
|
12,467,548 | 13,126,786 | ||||||
Total
liabilities
|
18,264,366 | 18,688,980 | ||||||
Redeemable
convertible Series C preferred stock
|
15,145,150 | 14,453,227 | ||||||
Commitments
and contingency
|
||||||||
Stockholders' deficit
|
||||||||
Common
stock
|
10,867 | 10,816 | ||||||
Additional
paid-in capital
|
55,518,952 | 55,516,568 | ||||||
Accumulated
deficit
|
(80,053,979 | ) | (78,839,223 | ) | ||||
Total
stockholders' deficit
|
(24,524,160 | ) | (23,311,839 | ) | ||||
Total
liabilities and stockholders' deficit
|
$ | 8,885,356 | $ | 9,830,368 |
See Notes
to Consolidated Financial Statements (unaudited).
Page |
1
iSECUREtrac
Corp. and SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
June
30
|
June
30
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues:
|
||||||||||||||||
Equipment
leasing
|
$ | 2,436,362 | $ | 2,947,849 | $ | 4,876,376 | $ | 5,518,732 | ||||||||
Administrative,
field & support service revenues
|
127,130 | 116,065 | 241,777 | 247,866 | ||||||||||||
Equipment
sales
|
46,105 | 25,807 | 54,290 | 79,918 | ||||||||||||
Royalty
revenue
|
157,532 | 101,834 | 282,815 | 448,755 | ||||||||||||
Total
revenues
|
2,767,129 | 3,191,555 | 5,455,258 | 6,295,271 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Cost
of revenues
|
803,030 | 1,172,618 | 1,757,083 | 2,338,748 | ||||||||||||
Research
and development
|
295,083 | 250,963 | 609,319 | 569,438 | ||||||||||||
Sales,
general and administrative
|
1,515,225 | 1,861,908 | 3,057,053 | 3,777,952 | ||||||||||||
Total
operating expenses
|
2,613,338 | 3,285,489 | 5,423,455 | 6,686,138 | ||||||||||||
Operating
income (loss)
|
153,791 | (93,934 | ) | 31,803 | (390,867 | ) | ||||||||||
Interest
income (expense):
|
||||||||||||||||
Interest
income
|
1 | 314 | 5 | 600 | ||||||||||||
Interest
expense
|
(328,015 | ) | (306,155 | ) | (652,387 | ) | (594,356 | ) | ||||||||
Total
interest income (expense)
|
(328,014 | ) | (305,841 | ) | (652,382 | ) | (593,756 | ) | ||||||||
Loss
before provision for income taxes
|
(174,223 | ) | (399,775 | ) | (620,579 | ) | (984,623 | ) | ||||||||
Provision
for income taxes
|
- | - | - | - | ||||||||||||
Net
loss
|
$ | (174,223 | ) | $ | (399,775 | ) | $ | (620,579 | ) | $ | (984,623 | ) | ||||
Preferred
stock dividends and accretion
|
(347,723 | ) | (324,641 | ) | (691,923 | ) | (646,006 | ) | ||||||||
Net
loss available to common stockholders
|
$ | (521,946 | ) | $ | (724,416 | ) | $ | (1,312,502 | ) | $ | (1,630,629 | ) | ||||
Basic
and diluted loss per common share
|
$ | (0.05 | ) | $ | (0.07 | ) | $ | (0.12 | ) | $ | (0.15 | ) | ||||
Weighted
average shares of common stock outstanding
|
10,844,906 | 10,806,399 | 10,830,919 | 10,803,963 |
See Notes
to Consolidated Financial Statements (unaudited).
Page |
2
STATEMENT
OF STOCKHOLDERS' DEFICIT
For
the Six Months Ended June 30 2010
(Unaudited)
Additional
|
||||||||||||||||||||
Common Stock
|
Paid
-in
|
Accumulated
|
||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||
Balance,
December 31, 2009
|
10,816,100 | $ | 10,816 | $ | 55,516,568 | $ | (78,839,223 | ) | $ | (23,311,839 | ) | |||||||||
Shares
issued for directors' fees
|
5,000 | 5 | 1,995 | - | 2,000 | |||||||||||||||
Shares
issued upon exercise of Options
|
46,083 | 46 | 18,693 | - | 18,739 | |||||||||||||||
Stock
based compensation
|
- | - | 79,442 | - | 79,442 | |||||||||||||||
Series
C preferred stock dividends
|
- | - | - | (594,177 | ) | (594,177 | ) | |||||||||||||
Accretion
to redemption value of preferred stock
|
- | - | (97,746 | ) | - | (97,746 | ) | |||||||||||||
Net
loss
|
- | - | - | (620,579 | ) | (620,579 | ) | |||||||||||||
Balance,
June 30, 2010
|
10,867,183 | $ | 10,867 | $ | 55,518,952 | $ | (80,053,979 | ) | $ | (24,524,160 | ) |
See Notes
to Consolidated Financial Statements (unaudited).
Page |
3
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Six
Months Ended June 30, 2010 and 2009
(Unaudited)
2010
|
2009
|
|||||||
Cash
Flows From Operating Activities
|
||||||||
Net
loss
|
$ | (620,579 | ) | $ | (984,623 | ) | ||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||
Depreciation
and amortization
|
678,803 | 1,096,958 | ||||||
Stock
based compensation
|
81,442 | 208,251 | ||||||
Provision
for Doubtful Accounts
|
- | 160,781 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(2,426 | ) | 256,307 | |||||
Inventories
|
65,005 | (62,799 | ) | |||||
Prepaid
expenses and other assets
|
(582 | ) | (41,512 | ) | ||||
Accounts
payable
|
(48,932 | ) | (146,515 | ) | ||||
Accrued
expenses
|
(685,542 | ) | 613,725 | |||||
Deferred
revenues
|
(23,985 | ) | (157,304 | ) | ||||
Accrued
interest payable
|
419,725 | 310,629 | ||||||
Net
cash provided by (used in) operating activities
|
(137,071 | ) | 1,253,898 | |||||
Cash
Flows From Investing Activities
|
||||||||
Purchases
of leasehold improvements and equipment
|
(180,146 | ) | (1,658,992 | ) | ||||
Net
cash used in investing activities
|
(180,146 | ) | (1,658,992 | ) | ||||
Cash
Flows From Financing Activities
|
||||||||
Principal
proceeds from long-term debt
|
- | 1,700,000 | ||||||
Proceeds
from revolving line of credit
|
150,000 | 250,000 | ||||||
Proceeds
from equipment term loan
|
618,805 | - | ||||||
Principal
payments on long-term debt
|
(854,685 | ) | (949,686 | ) | ||||
Proceeds
from the exercise of options and warrants
|
18,739 | 162 | ||||||
Net
cash provided by (used in) financing activities
|
(67,141 | ) | 1,000,476 | |||||
Increase
(Decrease) in cash
|
(384,358 | ) | 595,382 | |||||
Cash
at beginning of period
|
719,662 | 423,361 | ||||||
Cash
at end of period
|
$ | 335,304 | $ | 1,018,743 | ||||
Supplemental
Disclosure of Cash Payments for
|
||||||||
Interest
|
232,662 | 283,727 | ||||||
Supplemental
Disclosure of Noncash Transactions
|
||||||||
Purchase
of leasehold improvements and equipment included in Accounts
Payable
|
- | 82,686 |
See Notes
to Consolidated Financial Statements (unaudited).
Page |
4
iSECUREtrac
CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three
and six months ended June 30, 2010 and 2009
(Unaudited)
Note
1. General
The
unaudited interim condensed consolidated financial statements as of June 30,
2010 and for the three and six month periods ended June 30, 2010 and 2009,
included herein, have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions for Form 10-Q and Article 10 of Regulation
S-X.
The
consolidated balance sheet of iSECUREtrac Corp. (“iSECUREtrac”, or the
“Company”) and its wholly-owned subsidiary, iSt Services, Inc., at December 31,
2009, has been taken from the audited consolidated financial statements at that
date. The condensed consolidated financial statements for the three
and six months ended June 30, 2010 and June 30, 2009 are unaudited and reflect
all normal and recurring accruals and adjustments which are, in the opinion of
management, necessary for a fair presentation of the financial position,
operating results and cash flows for the interim periods presented in this
quarterly report. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with management’s discussion and analysis
of financial condition and results of operations, contained in our Annual Report
on Form 10-K for the year ended December 31, 2009. The results of
operations and cash flows for the three months and six months ended June 30,
2010 are not necessarily indicative of the results for the entire fiscal year
ending December 31, 2010. Where appropriate, items of an
insignificant nature within the condensed consolidated financial statements have
been reclassified from the previous periods’ presentation.
The
Company believes that its current working capital and the undrawn amounts
available under the Company’s Revolving Line of Credit Agreement, which was
recently amended as described in Notes 5 and 8, combined with the amounts
available to it through the capital lease financing arrangements described in
Note 6 are sufficient to meet its liquidity needs through 2010.
Note
2. Common Stock Options and Warrants
The
Company may issue stock options and other types of equity-based compensation
under its 2006 Omnibus Equity Incentive Plan (the “2006 Plan”) which was
implemented on May 31, 2006. This is the only plan under which the
Company may now issue additional equity-based compensation. The
Company also has outstanding stock options that were issued under its 2001
Omnibus Equity Incentive Plan (the “2001 Plan”) and which were issued under
employment agreements with executive officers.
During
the three months and six months ended June 30, 2010, the Company granted options
to purchase a total of 32,000 and 35,000 shares of common stock to 6 and 7
employees, respectively, pursuant to the 2006 Plan. During the three
and six months ended June 30, 2010, 51,103 and 121,749 options issued under the
2006 Plan were forfeited, 2,650 and 2,800 options issued under the 2001 Plan
were forfeited and 0 and 15,000 options issued under employment agreements
outside the 2006 Plan and the 2001 Plan, respectively, were
forfeited. During the three and six months ended June 30, 2010,
45,791 options were exercised. The following table shows stock option
activity during the six month period ended June 30, 2010:
Page |
5
Options
|
Number of
Shares
|
Weighted Average
Exercise Price Per
Share
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
Aggregate Intrinsic
Value
|
||||||||||||
Outstanding
at December 31, 2009
|
3,054,320 | $ | 1.32 | $ | 30,268 | |||||||||||
Granted
|
35,000 | 0.79 | ||||||||||||||
Exercised
|
(45,791 | ) | 0.41 | |||||||||||||
Forfeited
|
(139,549 | ) | 0.72 | |||||||||||||
Outstanding
at June 30, 2010
|
2,903,980 | $ | 1.36 | 5.90 | $ | 590,511 | ||||||||||
Exercisable
at June 30, 2010
|
2,389,767 | $ | 1.56 | 5.21 | $ | 374,428 |
At June
30, 2010, the Company had 2,903,980 outstanding stock options, 6,287,045 shares
issuable upon exercise of warrants to be issued upon exchange of Preferred
Stock, and 679,568 shares issuable upon the exercise of outstanding warrants
that were not included in the computation of diluted EPS because to do so would
have been anti-dilutive for the periods presented.
During
the three and six months ended June 30, 2010, 0 and 1,547,519 warrants expired,
respectively, and no warrants were granted or exercised by warrant
holders.
The
Company accounts for its stock-based compensation by recognizing compensation
cost relating to share-based compensation awards, including grants of employee
stock options, as these awards become vested, based on the grant date fair value
of the equity instruments issued.
The
Company estimated the grant date fair value of each option granted during the
periods set forth below using the Black-Scholes option pricing model with the
following weighted average assumptions:
Six Months Ended
June 30, 2010
|
Year Ended
December 31, 2009
|
|||||||
Risk
free interest rate
|
3.65 | % | 3.60 | % | ||||
Expected
volatility factor
|
80.93 | % | 81.50 | % | ||||
Expected
option term in years
|
3.5
to 6.5
|
3.5
to 6.5
|
||||||
Dividends
|
$ | 0.00 | $ | 0.00 | ||||
Forfeitures
for senior executives and non-senior executives
|
35% and 24%
|
35% and 24%
|
The
risk-free interest rate is determined on the date the grant is
issued. This rate is equal to the rates based on yields from U.S.
Treasury zero-coupon issues with maturity of 3.5 years to 6.5
years. Expected volatilities are based upon looking back at
historical stock prices since the date of adoption of the plan.
The
Company is required to estimate forfeitures of stock options. The forfeiture
rate is the rate at which options are expected to be forfeited prior to full
vesting. The forfeiture rate is determined based on actual forfeiture
rate experience as follows: for each historical year of option
issuance, the total options issued for the year is compared to the options
forfeited prior to having vested. For option years in which the two
year vesting period has not passed, past experience is used to project future
forfeitures. The total of pro forma forfeitures is then compared to
total options awarded and the resultant percentage is used as the forfeiture
rate. This rate is recalculated on an annual basis.
Page |
6
The
annual rate of quarterly dividends is 0% since iSECUREtrac has historically not
paid dividends on its common stock.
The
Company recorded compensation expense of $33,792 and $79,442 for the three and
six months ended June 30, 2010, respectively, compared to $101,281 and $204,251
for the same periods in 2009 related to stock-based compensation
awards.
As of
June 30, 2010, there was approximately $149,005 of total unrecognized
compensation costs related to non-vested stock option agreements granted to the
Company’s executives and employees. The future compensation expense
the Company will recognize if and as these options vest according to their
contractual terms is as follows:
2010
|
$ | 65,000 | ||
2011
|
80,634 | |||
2012
|
3,371 | |||
Total
|
$ | 149,005 |
Note
3. Leasehold Improvements and Equipment
The cost
and accumulated depreciation of our leasehold improvements and equipment as of
June 30, 2010 and December 31, 2009 are as follows:
June 30, 2010
|
December 31, 2009
|
|||||||||||||||||||||||
Cost
|
Accumulated Depreciation
|
Net Book
Value
|
Cost
|
Accumulated Depreciation
|
Net Book
Value
|
|||||||||||||||||||
Equipment
|
$ | 1,063,980 | $ | 792,492 | $ | 271,488 | $ | 1,055,794 | $ | 719,639 | $ | 336,155 | ||||||||||||
Leasehold
improvements
|
171,281 | 88,696 | 82,585 | 249,081 | 176,522 | 72,559 | ||||||||||||||||||
Components
held for future monitoring equipment builds
|
210,000 | - | 210,000 | 210,000 | - | 210,000 | ||||||||||||||||||
Software
development costs
|
410,755 | 34,935 | 375,820 | 259,977 | - | 259,977 | ||||||||||||||||||
Monitoring
equipment
|
14,014,280 | 10,991,364 | 3,022,916 | 13,915,298 | 10,332,523 | 3,582,775 | ||||||||||||||||||
Total
leasehold improvements and equipment
|
$ | 15,870,296 | $ | 11,907,487 | $ | 3,962,809 | $ | 15,690,150 | $ | 11,228,684 | $ | 4,461,466 |
During
the three month period ended June 30, 2010 management increased the estimated
useful life of certain monitoring equipment from three years to five years to
more accurately reflect the expected life of the related assets. The
effect of the increase in estimated useful life was to decrease depreciation for
the three months ended June 30, 2010 by $222,000, an earnings per share impact
of approximately $0.02.
Note
4. Goodwill
Goodwill
is the excess of the cash paid over the fair value of the net assets acquired
and liabilities assumed in an acquisition, less the amount of identifiable
intangible assets. Goodwill is not amortized, but is tested for impairment
on an annual basis at the end of each calendar year or if certain events or
circumstances occur. The Company determined that there was no impairment
of goodwill as of December 31, 2009. No events transpired in the six
months ended June 30, 2010 that required a reevaluation of this
conclusion.
Note
5. Credit Agreements
On
November 10, 2008, the Company entered into a loan agreement (the “Loan
Agreement”) with Crestpark LP, Inc. (“Crestpark”) and in connection with the
Loan Agreement executed two separate promissory notes. The first note
for $750,000 for working capital via a Revolving Credit Commitment and the
second note for $1,750,000 for equipment financing via an Equipment
Term Loan. The Loan Agreement had a maturity date of July 1,
2010. On November 4, 2009, the parties executed an amendment to the
Loan Agreement extending the maturity date to January1, 2012.
Page |
7
Accrued
interest on the promissory notes at June 30, 2010 and 2009 was $39,025 and $0,
respectively.
Revolving Credit
Commitment - The proceeds of the Revolving Credit Commitment
of $750,000 are to be used for working capital needs and are anticipated to be
repaid from cash flow generated by the operations of the Company. The
Revolving Credit Commitment has a term ending on January 1, 2012, is unsecured
and bears interest at a fixed noncompounded rate of 12% per
annum. The Company is also required to pay Crestpark an unused fee of
0.25% per annum on the average daily unused amount of the Revolving Credit
Commitment. Interest expense, including the unused commitment fee, to
Crestpark was $11,686 and $22,289 for the three and six months ended June 30,
2010, respectively, as compared to $22,438 and $40,365 for the same periods of
2009. As of June 30, 2010, the Company had $500,000 outstanding under
the Revolving Credit Commitment and $250,000 available, compared with $350,000
outstanding and $400,000 available as of December 31, 2009. Amounts
borrowed and repaid remain available under the Revolving Credit
Commitment.
Equipment Term
Loan - The proceeds of the $1,750,000 Equipment Term Loan are
to be used to purchase GPS-based offender tracking and monitoring equipment that
is leased or sold by the Company to its clients. It is anticipated
that borrowings under the Equipment Term Loan will be repaid from permanent
equipment financing secured by the Company from time to time. At
Crestpark’s discretion, any borrowings under the Equipment Term Loan that remain
outstanding more than 30 days can be converted into separate 36 Month Notes,
which are notes payable over 36 month terms. The Equipment Term Loan
has a term ending January 1, 2012, bears interest at a fixed rate of 12% per
annum and is secured by the monitoring equipment purchased with the proceeds of
the Equipment Term Loan. The Company is also required to pay
Crestpark an unused fee of 0.25% per annum on the average daily unused amount of
the Equipment Term Loan. Interest expense, including the unused
commitment fee, to Crestpark for the three and six months ended June 30, 2010
was $27,338 and $42,618, respectively, as compared to $1,060 and $3,040 for the
same periods of 2009. As of June 30, 2010, the Company had $898,805
outstanding under the Equipment Term Loan and $718,788 available, compared with
$280,000 outstanding and $1,337,593 available as of December 31,
2009. Amounts borrowed and repaid are no longer available under the
Equipment Term Loan.
Subsequent
to June 30, 2010, Crestpark has amended the Loan Agreement
to increase the Revolving Credit Commitment by $350,000 with a
corresponding decrease in the amount available under the Equipment Term
Loan. This change increases the Revolving Credit Commitment line from
$750,000 to $1,100,000, of which $600,000 is available, and reduces the amount
available on the Equipment Term Loan from $718,788 to $368,788. All
other terms of the Loan Agreement, as described above, remain
unchanged.
Crestpark
is an affiliate of Mykonos 6420 LP (“Mykonos”). As the sole holder of
the Company’s Series C Preferred Stock, Mykonos has the right to elect a
majority of the Company’s Board of Directors. The terms of the Loan
Agreement were approved by a Special Committee of the Board of Directors
consisting solely of disinterested directors.
Page |
8
Note
6. Long-Term Debt
The
Company had the following long-term debt at June 30, 2010 and December 31,
2009:
June 30, 2010
|
December 31, 2009
|
|||||||
Long
Term Debt
|
||||||||
Crestpark
LP, Inc
|
||||||||
One
secured note payable in the amount of $11,877,475 maturing on January 1,
2012
|
||||||||
Fixed
Tranche ~ with an interest rate of 9% effective November 4, 2009 and 7%
prior to that date
|
$ | 6,455,250 | $ | 6,455,250 | ||||
Floating
Tranche ~ with an interest rate of 2% over prime (5.25% at June 30,
2010)
|
5,422,225 | 5,422,225 | ||||||
Crestpark
LP, Inc Total
|
$ | 11,877,475 | $ | 11,877,475 | ||||
AHK
Leasing, LLC
|
||||||||
Twelve
separate capital leases with related parties that are carrying interest
rates at 10.00% to 12.50% and maturing September 2010 to December
2012
|
2,068,847 | 2,923,532 | ||||||
Total
long term debt
|
$ | 13,946,322 | $ | 14,801,007 | ||||
Less
current maturities
|
(1,478,774 | ) | (1,674,221 | ) | ||||
Total
long term debt less current maturities
|
$ | 12,467,548 | $ | 13,126,786 |
Crestpark
LP, Inc.
The
Company has outstanding a Note Payable (“Note”) with Crestpark LP, Inc
(“Crestpark”), for $11,877,475 under a Credit and Security
Agreement originally dated December 18, 2007. Outstanding borrowings
are due and payable on the earlier of (i) January 1, 2012 or (ii) the first
date on which the Company either issues equity securities or arranges for
additional indebtedness (other than trade indebtedness incurred in the ordinary
course of its business) in a transaction or series of transactions which
generates aggregate net proceeds to the Company of not less than the then
current principal amount outstanding under this Note, plus all accrued but
unpaid interest. The Company may prepay the Note at any time without
premium or penalty. The Note provides, among other things, that
$6,455,250 (the “Fixed Tranche”) of the borrowings thereunder shall bear
interest at 9.0% per annum and that such interest will be due and payable at
maturity of the Note. The remaining $5,422,225 of borrowings (the
“Floating Tranche”) under the Note will bear interest at a floating rate equal
to 2% over the prime rate (the “Base Rate”). The portion of the
interest on the Floating Tranche determined by the Base Rate will be payable at
maturity, but the remaining portion of the interest representing the 2% premium
over the Base Rate will be payable monthly.
The
Credit and Security Agreement, when originally executed had a maturity date of
July 1, 2010. On November 4, 2009, the parties executed an amendment
to the Credit and Security Agreement extending the maturity date to January 1,
2012. All other terms of the Credit and Security Agreement remain
unchanged except the interest rate on the Fixed Tranche which was increased from
7% to 9%.
Accrued
interest on the secured note payable was $1,809,478 and $1,428,778 at June 30,
2010 and December 31, 2009, respectively.
The
borrowings under the Note are secured by a first priority security interest in
all of the assets of the Company except that Crestpark’s security interest in
certain monitoring equipment is subordinate to the interest of AHK Leasing LLC
under its sale leaseback arrangements.
Page |
9
Capital
Leases - AHK Leasing, LLC.
AHK
Leasing, LLC (“AHK”) is a company controlled by three stockholders, one of which
is a current director. These loans were in the form of capital leases
with 36 month terms and bearing interest at a rate of 10.00% to 12.50% per annum
and mature between September 2010 and December 2012. There was
no accrued interest payable to AHK at June 30, 2010.
Total
interest expense, including unused commitment fees, for the three and six months
ended June 30, 2010 and June 30, 2009 is as follows:
Three Months
Ended
June 30, 2010
|
Three Months
Ended
June 30, 2009
|
Six Months
Ended
June 30, 2010
|
Six Months
Ended
June 30, 2009
|
|||||||||||||
AHK
interest on long term debt
|
65,196 | 91,422 | 142,414 | 168,567 | ||||||||||||
Crestpark
LP interest on long term debt
|
218,814 | 184,485 | 435,224 | 368,618 | ||||||||||||
Crestpark
LP credit agreements
|
39,025 | 23,498 | 64,907 | 43,405 | ||||||||||||
Other
|
4,980 | 6,750 | 9,841 | 13,766 | ||||||||||||
Total
interest expense
|
328,015 | 306,155 | 652,387 | 594,356 |
Note
7. Redeemable Exchangeable Series C Preferred Stock
On June
27, 2005, the Company issued 1,000,000 shares of its $0.01 par value Series C 8%
Cumulative, Compounding Exchangeable Preferred Stock (the “Series C Preferred
Stock”). The Series C Preferred Stock is exchangeable for 4,782,609 shares
of common stock and warrants to acquire 6,287,045 shares of common stock at an
exercise price of $2.30 per share at anytime at the discretion of the preferred
stockholder.
If, after
June 27, 2010, the closing price of the common stock exceeds $20.00 per share
for at least 120 consecutive trading days, the Company can require the
conversion of the Series C Preferred Stock into common stock in accordance with
the above exchange provisions.
The
Series C Preferred Stock is redeemable on the tenth anniversary of the original
issue date. The redemption price per share of the Series C Preferred Stock will
equal the per share original issue price ($11.00 per share) plus an amount equal
to all accrued but unpaid dividends thereon (and any interest payable thereon).
The interest method will be utilized to accrete the carrying amount of the
Series C Preferred Stock over the ten year period to the earliest redemption
date so that the carrying amount will equal the redemption amount at the
earliest possible redemption date. Due to the accumulated deficit position
of the Company, the periodic accretion will be charged to Additional Paid-In
Capital. As of June 30, 2010, the Company had accrued Series C
Preferred Stock dividends totaling $5,175,732 and accretion to redemption value
of the Series C Preferred Stock totaling $950,338. Of these amounts,
$298,730 and $48,993, respectively, were accrued during the three months ended
June 30, 2010.
Upon any
liquidation of the Company, no distribution can be made to the holders of shares
of common stock or other stock ranking junior to the Series C Preferred Stock
unless, prior thereto, the holders of shares of Series C Preferred Stock have
received an amount per share equal to the per share original issue price plus an
amount equal to accrued and unpaid dividends and distributions thereon, whether
or not declared, to the date of such payment, multiplied by a factor of
105%.
Page |
10
Except as
otherwise required by law, the holders of shares of Series C Preferred Stock
vote together with the holders of shares of the common stock of the Company on
all matters submitted to the stockholders of the Company and not as a separate
class, and each share of Series C Preferred Stock entitles the holder thereof to
11 votes or the equivalent amount of voting power thereof as determined by the
Board of Directors. In addition, until such time that less than
500,000 shares of Series C Preferred Stock are outstanding, the Series C
Preferred Stockholders have the ability to appoint a majority of the Company’s
directors.
Note
8. Subsequent Events.
Subsequent
to June 30, 2010, Crestpark agreed to increase the Revolving Credit Commitment
by $350,000 with a corresponding decrease in the amount available under the
Equipment Term Loan. This change increases the Revolving Credit
Commitment line from $750,000 to $1,100,000, of which $600,000 is available, and
reduces the amount available on the Equipment Term Loan from $718,788 to
$368,788. All other terms of the Loan Agreement, as described in Note
5, remain unchanged.
Note
9. Recent Accounting Pronouncements
In
October 2009, the FASB issued ASU No. 2009-13, Revenue
Recognition (ASC
605): Multiple-Deliverable Revenue
Arrangements (a
consensus of the FASB Emerging Issues Task Force); effective for years
beginning after June 15, 2010. Vendors often provide multiple products and/or
services to their customers as part of a single arrangement. These
deliverables may be provided at different points in time or over different time
periods. The existing guidance regarding how and whether to separate these
deliverables and how to allocate the overall arrangement consideration to each
was originally captured in EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables, which is now codified at ASC 605-25, Revenue Recognition -
Multiple-Element Arrangements. The issuance of ASU 2009-13 amends
ASC 605-25 and represents a significant shift from the existing guidance that
was considered abuse-preventative and heavily geared toward ensuring that
revenue recognition was not accelerated. The application of this new
guidance is expected to result in accounting for multiple-deliverable revenue
arrangements that better reflects their economics as more arrangements will be
separated into individual units of accounting. The Company is currently
evaluating the impact of adopting ASU No. 2009-13.
In
October 2009, the FASB issued ASU No. 2009-14, Software (ASC 985): Certain Revenue
Arrangements That Include Software Elements (a consensus of the FASB Emerging
Issues Task Force); effective for years beginning after June 15,
2010. ASU 2009-14 modifies the existing scope guidance in ASC
985-605, Software Revenue
Recognition, for revenue arrangements with tangible products that include
software elements. This modification was made primarily due to the changes
in ASC 605-25 noted previously, which further differentiated the separation and
allocation guidance applicable to non-software arrangements as compared to
software arrangements. Prior to the modification of ASC 605-25, the
separation and allocation guidance for software and non-software arrangements
was more similar. Under ASC 985-605, which was originally issued as AICPA
Statement of Position 97-2, Software Revenue Recognition,
an arrangement to sell a tangible product along with software was considered to
be in its scope if the software was more than incidental to the product as a
whole. The Company is currently evaluating the impact of adopting ASU
No. 2009-14.
Note
10. Fair Value of Financial Instruments
The
following methods and assumptions were used to estimate fair value of each class
of financial instruments for which it is practicable to estimate that
value;
Accounts
receivable: The carrying amount approximates fair
value.
Page |
11
Long-term
debt: Based on the borrowing rates available to the Company for bank
loans with similar terms and maturities, the carrying value approximates fair
value due to the short term nature of the outstanding debt.
Accounts
payable and accrued expenses: The carrying amount approximates fair
value.
Redeemable
Exchangeable Series C Preferred Stock: The Company estimates the fair
value of this instrument to be approximately $19,050,000 at June 30, 2010 using
a discount rate of 5%.
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Forward-Looking
Statements
This
Quarterly Report on Form 10-Q includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. All statements
other than statements of historical fact, including statements regarding
guidance, industry prospects and future results of operations or financial
position, made in this Quarterly Report on Form 10-Q are forward-looking. We use
words such as anticipates, believes, expects, future, intends, and similar
expressions to identify forward-looking statements. Forward-looking statements
reflect management’s current expectations and are inherently uncertain. Actual
results could differ materially for a variety of reasons, including , among
others without limitation the risks set forth in Item 1A of Part I,
“Risk Factors” contained in the Company’s 2010 Annual Report on Form
10-K.
General
The
following discussion is intended to provide a better understanding of the
significant changes in trends relating to the Company’s financial condition and
results of operations. Management’s Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction with
the accompanying Consolidated Financial Statements and Notes
thereto.
Overview
iSECUREtrac
develops, markets, leases and services products that assist in “monitoring
compliance and modifying behavior” of individuals who are under the supervision
of the criminal justice system and social service agencies, primarily
in the United States.
The
Company’s principal sources of revenue are daily leasing of electronic
monitoring equipment including access to the corresponding web-based monitoring
software, and providing administrative, field and support services, generally
charged on a per offender basis.
The
Company’s Other Revenue consists primarily of royalties earned by the Company
under the terms of a Patent License Agreement dated May 2006 (the “Patent
License Agreement”).
General
Outlook for Remainder of 2010
As
discussed in the Company’s 2009 Annual Report on Form 10-K and the Quarterly
Report on Form 10-Q for the three
months ended March 31, 2010, we expected the ongoing difficult economic
situation to cause many corrections agencies and other target customers to be
slow to approve new electronic monitoring programs and that has proven to be the
case thus far during 2010. However, July 1, 2010 represents the
beginning of the new fiscal year for many of our target customers and we have
recently observed signs that indicate that the corrections market appears to be
responding to the reality that electronic monitoring, and specifically Active
GPS tracking, represents a way to increase public safety and at the same time
their reduce costs when compared with incarceration. We continue to
believe that the value proposition of the Company’s products and services
remains compelling as the costs of incarceration continue to
escalate.
Page |
12
During
the latter portion of the three months ended June 30, 2010, the Company signed a
number of contracts that either have deployed units or which we expect to deploy
units in the near future. In addition, subsequent to June 30, 2010,
the Company received notification of awards which we expect to formalize into
contracts.
In
addition, the Company signed an agreement with Bob Barker Company on July 6th, 2010.
In terms of the electronic monitoring industry – this relationship is
unprecedented in both nature and scope. This agreement provides for a
nationwide sales and marketing relationship. Management believes the
Bob Barker Company relationship will have a positive impact on the Company’s
name recognition and market position as well as future revenue growth and
related profitability.
While it
is too early to predict when or how much revenue will be generated from these
recent awards or the relationship with Bob Barker Company, management continues
to expect that the Company’s revenue will begin to grow again during the latter
half of this calendar year with cash flow positive operations to
follow.
Results
of Operations
Highlights
of Operations for the three months ended June 30, 2010
Operating
Income. For the three month period ended June 30, 2010 the
Company reported operating income for the first time in the Company’s
history. As described under Cost of Revenues later in
Item 2, during the three month period ended June 30, 2010, the Company increased
the estimated useful life of certain monitoring equipment, the impact of such
was a lower amount of depreciation for this period. Without this
change in estimated useful life, the Company would have reported an operating
loss of $68,000 during the quarter, which would have been the lowest quarterly
operating loss in the Company’s history.
Decline
in Revenue. Equipment leasing revenue declined during the
three months ended June 30, 2010 compared to the second quarter of 2009 largely
as a result of a decrease in the average daily lease rate on multi-year
contracts that were extended or renewed during the previous twelve
months. For the three months ended June 30, 2010, the Company had
approximately the same number of GPS units deployed in comparison to the same
period in the prior year. While the impact of the lower average daily
lease rate has a material impact on current revenue and cash flow, it is
important to understand that the related contract extensions are expected to
result in continued cash inflows after the related equipment has been paid
for. We do not expect to continue to see significant declines in the
daily lease rates.
Decline
in Selling General & Administrative Expenses
(“SG&A”). SG&A expenses for the three months ended
June 30, 2010, declined approximately 18.6% over the same period a year
ago. SG&A expenses have now declined six consecutive quarters as
a result of the continuing cost reductions and cost control strategies
implemented since 2008. The Company continues to be deliberate about
managing and controlling expenditures and filling open positions.
System
Infrastructure and Service Delivery. We are committed
to delivering products and services to customers in the most efficient and
profitable means possible, for both iSECUREtrac and our
customers. The ability of the Company to do so with existing products
and services, but also new products and services as technology evolves is
critical to ensure that the Company continues to attract new customers, retain
existing customers and become profitable. To that end, the Company
continues to invest in its core proprietary infrastructure – tracNet24 as well
as the development of an additional service delivery platform via Salesforce.com
(“SFDC”). In addition to continued improvements in the speed,
reliability and capacity of tracNet24, the Company previously highlighted the
successful transition of its Solution Center to the SFDC platform and rolled out
a new SFDC-Inventory Management module to certain customers. During
the three months ended June 30, 2010 the Company expanded the use of SFDC to
tracking customer activity and new sales opportunities. The Company
will continue to invest in and leverage both its core proprietary infrastructure
and the service delivery capabilities of SFDC through 2010 and into
2011.
Page |
13
Summary
of Financial Information
The
following table provides a comparison of selected financial highlights, in
thousands, for the three months ended June 30, 2010 and 2009:
Three
Months Ended June 30, 2010 and 2009
(In
thousands)
Fav / (Unvfav)
|
||||||||||||
2010
|
2009
|
Change
|
||||||||||
Revenues:
|
||||||||||||
Equipment
revenue
|
$ | 2,482 | $ | 2,974 | $ | (492 | ) | |||||
Services
revenue
|
127 | 116 | 11 | |||||||||
Royalty
revenue
|
158 | 102 | 56 | |||||||||
Total
revenues
|
2,767 | 3,192 | (425 | ) | ||||||||
Costs
of revenue
|
803 | 1,173 | 370 | |||||||||
Gross
profit margin
|
1,964 | 2,019 | (55 | ) | ||||||||
Gross
profit margin %
|
71.0 | % | 63.3 | % | ||||||||
Research
and development expenses (R&D)
|
295 | 251 | (44 | ) | ||||||||
Sales,
general and administrative expenses (SG&A)
|
1,515 | 1,862 | 347 | |||||||||
Total
R&D and SG&A
|
1,810 | 2,113 | 303 | |||||||||
Operating
income (loss)
|
154 | (94 | ) | 248 | ||||||||
Interest
expense, net
|
(328 | ) | (306 | ) | (22 | ) | ||||||
Net
loss
|
$ | (174 | ) | $ | (400 | ) | $ | 226 | ||||
Preferred
stock dividends and accretion
|
(348 | ) | (325 | ) | (23 | ) | ||||||
Net
loss available to common stockholders
|
$ | (522 | ) | $ | (725 | ) | $ | 203 |
Page |
14
Quarterly
Highlights
In
addition to the selected financial highlights above, the following selected
quarterly financial and non-financial data over the past 5 quarters is important
in understanding the trend in the Company’s results of operations:
CONDENSED
CONSOLIDATED QUARTERLY FINANCIAL HIGHLIGHTS
Rolling
5 Quarter Trend
(In
Thousands)
Jun
30 2009
|
Sept
30 2009
|
Dec
31 2009
|
Mar
31 2010
|
Jun
30 2010
|
||||||||||||||||
Revenue:
|
||||||||||||||||||||
Equipment
leasing
|
$ | 2,974 | $ | 2,924 | $ | 2,601 | $ | 2,448 | $ | 2,482 | ||||||||||
Service
Revenue
|
116 | 107 | 106 | 115 | 127 | |||||||||||||||
Royalty
Revenue
|
102 | 180 | 125 | 125 | 158 | |||||||||||||||
Total
Revenue
|
3,192 | 3,211 | 2,832 | 2,688 | 2,767 | |||||||||||||||
Costs
of Revenue
|
1,173 | 1,172 | 1,014 | 954 | 803 | |||||||||||||||
Gross
profit margin
|
2,019 | 2,039 | 1,818 | 1,734 | 1,964 | |||||||||||||||
Gross
profit margin %
|
63.3 | % | 63.5 | % | 64.2 | % | 64.5 | % | 71.0 | % | ||||||||||
Research
& Development (R&D)
|
251 | 316 | 377 | 314 | 295 | |||||||||||||||
Selling
General & Admin (SG&A)
|
1,862 | 1,796 | 1,688 | 1,542 | 1,515 | |||||||||||||||
Subtotal
R&D and SG&A
|
2,113 | 2,112 | 2,065 | 1,856 | 1,810 | |||||||||||||||
Operating
Income (Loss)
|
$ | (94 | ) | $ | (73 | ) | $ | (247 | ) | $ | (122 | ) | $ | 154 |
Page |
15
CONDENSED
CONSOLIDATED QUARTERLY FINANCIAL HIGHLIGHTS
Rolling
5 Quarter Trend
(In
Thousands)
|
Jun 30
2009
|
Sept 30
2009
|
Dec 31
2009
|
Mar 31
2010
|
Jun 30
2010
|
|||||||||||||||
Cash Flows From Operating Activities
|
||||||||||||||||||||
Net
loss
|
$ | (400 | ) | $ | (378 | ) | $ | (560 | ) | $ | (446 | ) | $ | (174 | ) | |||||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||||||||||||||
Depreciation
and amortization
|
593 | 556 | 470 | 494 | 185 | |||||||||||||||
Stock
based compensation
|
103 | 81 | 50 | 48 | 34 | |||||||||||||||
Provision
for Doubtful Accounts
|
70 | 33 | 10 | - | - | |||||||||||||||
Changes
in operating assets and liabilities:
|
||||||||||||||||||||
Accounts
receivable
|
298 | 71 | 37 | 192 | (195 | ) | ||||||||||||||
Inventories
|
(108 | ) | (31 | ) | 3 | 8 | 57 | |||||||||||||
Prepaid
expenses
|
(33 | ) | 13 | 3 | (28 | ) | 27 | |||||||||||||
Accounts
payable
|
(295 | ) | 190 | 108 | (31 | ) | (17 | ) | ||||||||||||
Accrued
expenses
|
274 | 47 | (8 | ) | (397 | ) | (288 | ) | ||||||||||||
Deferred
revenue
|
(31 | ) | (11 | ) | (35 | ) | (9 | ) | (15 | ) | ||||||||||
Accrued
interest payable
|
158 | 161 | 181 | 215 | 205 | |||||||||||||||
Net
cash provided by (used in) operating activities
|
629 | 732 | 259 | 46 | (181 | ) | ||||||||||||||
Adjustment
for payment of royalty expenses for comparative purposes
(1)
|
508 | |||||||||||||||||||
Adjusted
Net cash provided by (used in) operating activities
|
629 | 732 | 259 | 554 | (181 | ) | ||||||||||||||
Principal
payments on long-term debt
|
(459 | ) | (344 | ) | (408 | ) | (421 | ) | (433 | ) | ||||||||||
Adjusted
Net cash provided by (used in) operating activities
less principal payments on long-term debt
|
$ | 170 | $ | 388 | $ | (149 | ) | $ | 133 | $ | (614 | ) |
(1)
|
As outlined in the Company’s 2009
Annual Report on Form 10-K, on March 4, 2010, the Company paid Pro Tech
Monitoring, Inc $507,790 for a limited license to provide
certain technology to specific customers and the settlement of all
royalties due under the November 27, 2007 Confidential Settlement
Agreement (“Agreement”). The decrease in Accrued Expenses
in the cash flow statement above is reflective of this payment. Royalty
expenses were estimated and accrued on a monthly basis throughout 2008 and
2009 and all royalties due under the Agreement were fully accrued at
September 30, 2009. Management views the payment of these
expenses during the three months ended March 31, 2010 as unrelated to
operations which distorts the evaluation of cash provided by the operating
activities for that same period. Management believes that removing the
effect of this payment on Net cash
provided by operating activities provides a more
accurate picture of the cash flow trends of the Company which
is consistent with the other periods presented
above.
|
Because
the Company finances the majority of all equipment purchases through long-term
leases, the investing activities (e.g. purchase of leasehold improvements and
equipment) of the Company are generally offset by the proceeds of long-term debt
reported in financing activities. Accordingly in evaluating the cash
flow of operations, management looks at the net cash provided by operating
activities (as per the Consolidated Statement of Cash Flows) and subtracts the
principal payments on long-term debt. For the three months ended June
30, 2010, the Company reported net cash used in operating activities
of $181,000. During that period, the Company made annual
payments of expenses accrued in prior periods of $242,000. Without
these payments, the Company would have reported net cash provided by operating
activities of $61,000.
For the
three months ended March 31, 2010 the Company generated sufficient cash flow
from operations to cover the principal payments on long-term debt as illustrated
below. For the three period ended June 30, 2010, the Company’s
operations did not generate sufficient cash flow to cover principal payments on
long-term debt.
Page |
16
For
the three and six months ended June 30, 2010 compared to the three and six
months ended June 30, 2009
Revenue
Equipment
Revenue
Equipment
revenue consists of the daily leasing of electronic monitoring equipment and
periodic charges for lost or damaged equipment. For the three and six
month periods ended June 30, 2010 the Company had equipment revenue of
$2,482,000 and $4,930,000 compared with $2,974,000 and $5,599,000 for the same
periods in 2009 which represents a decrease of 16.5% and 11.9%,
respectively.
For the
three months ended June 30, 2010, the decline in equipment revenue is
approximately 76% attributable to a decline in daily lease rates, the remainder
is due to a decline in the number of GPS units sold and the number of visual
breath alcohol units deployed during that period. The number of GPS
units deployed during the three months ended June 30, 2010 is approximately the
same in comparison to the same period of the prior year.
For the
six months ended June 30, 2010, the decline in equipment revenue is fully
attributable to a decline in daily lease rates. In addition, during
this same period, the Company experienced a decline in revenue as a result of
fewer GPS units sold and fewer visual breath alcohol units
deployed. This reduction in revenue has been offset by an increase in
the number of GPS units deployed.
Equipment
Revenue Seasonality
The
Company has historically experienced a slight seasonal dip in equipment revenue
during the three months ended September 30th. Management
believes the cause of the seasonality is the result of several of the Company’s
multi-year contracts re-pricing to a lower daily price as well as agencies
delaying the award of new contracts or rolling out or increasing programs in the
preceding quarter due to the state or local agency being out of funds until the
new budget year begins on July 1st. The
result is that equipment revenue for the three months ending September 30th has
historically been flat or below the equipment revenue for the preceding three
month period. Accordingly, management recognizes it is possible
that the equipment revenue for the three months ending September 30, 2010, could
be flat in relation to the equipment revenue for the three months ended June 30,
2010.
Service Revenues
Service
revenues consist of daily charges for Monitoring Center Intervention, in
connection with the leasing of GPS equipment outlined
above. For the three and six month periods ended June 30, 2010
the Company reported service revenue of $127,000 and $242,000 compared to
$116,000 and $248,000 for the same periods in 2009 which represents an increase
of approximately 9.5% for the three months ended June 30, 2010 and a decrease of
2.4% for the six months ended June 30, 2010.
The
increase for the three months ended June 30, 2010 is the result of an increase
in the number of units subject to Monitoring Center Intervention offset by a
decline in the average daily price per unit.
Royalty Revenue
The
Company earns royalty revenues, which are paid annually by March 31 of each
year, under a Patent License Agreement with Satellite Tracking of People, L.L.C.
(STOP) which grants STOP a license to utilize specific technology that is
patented by the Company. The Company earns a royalty equal
to 2.5% of STOP’s revenue utilizing this
technology.
For the
three and six month periods ended June 30, 2010, the Company reported royalty
revenue of $158,000 and $283,000 in comparison to $102,000 and $449,000 for the
same periods in 2009 which represent an increase for the three months ended June
30, 2010 of $56,000 and a decrease for the six month period ended June 30, 2010
of $166,000. As of June 30, 2010 the Company has earned the maximum
amount of royalties it can earn under the STOP Patent License Agreement.
Accordingly, the Company expects no future royalty revenue to be
recognized.
Page |
17
Cost
of Revenues
Cost of
revenues represents all direct costs related to delivery of proprietary and
third-party monitoring equipment including amortization of the acquisition
costs, lease costs on third-party equipment, repairs and maintenance of the
monitoring equipment, royalty expenses, transportation costs, communication
costs associated with the equipment, as well as costs to upgrade existing units
for advancements in technology.
For the
three and six month periods ended June 30, 2010 the Company reported costs of
revenue of $803,000 and $1,757,000 compared to $1,173,000 and $2,339,000 for the
same periods in 2009 which represent decreases of 31.5% and 24.9%,
respectively.
For the
three months ended June 30, 2010 the $370,000 decrease in cost of revenues is
attributable to the following:
|
·
|
$51,000
lower depreciation due to certain equipment now being fully
depreciated
|
|
·
|
$222,000
lower depreciation related to the change in the estimated useful life of
monitoring equipment as discussed
herein
|
|
·
|
$127,000
lower royalty costs as a result of the ProTech licensing settlement
reached in the fourth quarter of 2009 and thus no royalty costs are
reported in 2010
|
|
·
|
$43,000
increase in third party monitoring
costs
|
|
·
|
$13,000
decrease in various other costs including communication costs, repairs and
shipping
|
For the
six months ended June 30, 2010 the $582,000 decrease in cost of revenues is
attributable to the following:
|
·
|
$73,000
lower depreciation due to certain equipment now being fully
depreciated
|
|
·
|
$222,000
lower depreciation related to the change in the estimated useful life of
monitoring equipment as discussed
herein
|
|
·
|
$312,000
lower royalty costs as a result of the ProTech licensing settlement
reached in the fourth quarter of 2009 and thus no royalty costs are
reported in 2010
|
|
·
|
$80,000
increase in third party monitoring
costs
|
|
·
|
$55,000
decrease in various other costs including communication costs, repairs and
shipping
|
During
the three month period ended June 30, 2010 management increased the estimated
useful life of certain monitoring equipment to more accurately reflect the
expected life of the related assets. The effect of the increase in
estimated useful life was a decrease in depreciation for the three months ended
June 30, 2010 by $222,000. In the future, subject to the effect of purchasing
additional monitoring equipment, depreciation expense is expected to be similar
to the depreciation expense reported for the three months ended June 30,
2010.
Management
anticipates that as the Company experiences revenue growth there will be an
increase in Cost of Revenues proportionate to growth.
Page |
18
Research
and Development Expenses
Research
and Development (R&D) expenses represent the on-going direct costs
associated with the development of the Company’s proprietary hardware
and software including staffing expenses for the Company’s own
engineers and software developers, the cost of outside contracted engineering
and design, and the actual costs of components, prototypes, and testing
equipment and services used in the product development functions.
R&D
expenses for the three and six months ended June 30, 2010 were $295,000 and
$609,000 in comparison to $251,000 and $569,000 for the same periods in 2009 an
increase of $44,000 and $40,000, respectively. R& D expenses
increased due to the Company’s increased investment in system infrastructure and
service delivery applications.
The
Company is currently in the process of redesigning several major software
systems and technology improvements and has capitalized certain payroll and
related costs associated with the related development of the applications and
technology. For the three and six months ended June 30, 2010
the Company capitalized $11,000 and $37,000 respectively. For the
three and six months ended June 30, 2009 the Company capitalized $24,000 and
$52,000 respectively.
Over the
remainder of the year management anticipates continuing to have resources
dedicated to capitalizable projects. Accordingly, the reported
R&D in future periods will be in part dependent on the resources devoted to
these projects.
Sales,
General and Administrative Expenses
Sales,
General and Administrative (SG&A) expenses are all the expenses associated
with the operations of the Company, other than the expenses described
above. These expenses include payroll, taxes and benefits and related
travel for executive, sales, administrative, customer support and accounting
staff. In addition these costs include rent on property, corporate
communications, office leases and supplies, marketing, advertising, trade shows,
recruiting and training expenses, professional fees and bad debt
expense.
For the
three month period ended June 30, 2010, SG&A expenses decreased $347,000
from $1,862,000 reported in 2009 to $1,515,000 reported in
2010. Significant increases and decreases of SG&A expense
in the comparable periods are highlighted below:
|
o
|
Personnel
related expenses included salaries, benefits, recruiting, and travel
decreased approximately $203,000 as a result of the implemented cost
control measures
|
|
o
|
Consulting
fees increased $25,000 because of the use of consultants to staff open
positions
|
|
o
|
Facility
expenses decreased $19,000 as a result of consolidating office
space
|
|
o
|
Investor
relation expenses increased $13,000
|
|
o
|
Legal
and accounting fees decreased
$48,000
|
|
o
|
Bad
debt expense decreased $72,000 in connection with the improvement in the
uncertainty of collectability of certain accounts
receivable
|
|
o
|
Stock
option expenses decreased $67,000
|
|
o
|
Various
other expenses including advertising, insurance, communications, and other
expenses increased an aggregate of
$24,000
|
Page |
19
For the
six month period ended June 30, 2010, SG&A expenses decreased $721,000 from
$3,778,000 reported in 2009 to $3,057,000 reported in
2010. Significant increases and decreases of SG&A expense
in the comparable periods are highlighted below:
|
o
|
Personnel
related expenses included salaries, benefits, recruiting, and travel
decreased approximately $425,000 as a result of the implemented cost
control measures.
|
|
o
|
Consulting
fees increased $8,000 because of the use of consultants to staff open
positions
|
|
o
|
Facility
expenses decreased $24,000 as a result of consolidating office
space
|
|
o
|
Investor
relation expenses increased $24,000
|
|
o
|
Bad
debt expense decreased $166,000 in connection with the uncertainty of
collectability of certain accounts
receivable
|
|
o
|
Stock
option expenses decreased $125,000
|
|
o
|
Various
other expenses including advertising, insurance, communications, and other
expenses decreased an aggregate of
$13,000
|
The cost
reductions implemented by management over the past several years have
significantly reduced SG&A expenses. These reductions have
strategically positioned the Company to support material future revenue
growth. As revenue increases SG&A expenses are expected to
decrease as a percentage of revenue.
Interest
Expense, Net
Net
interest expense represents the total interest expense incurred by the Company
reduced by the interest income earned by the Company during the year. During the
three and six months ended June 30, 2010 the Company reported net interest
expense of $328,000 and $652,000, respectively, increases of $22,000 and $58,000
over the $306,000 and $594,000 reported for the three and six months
ended June 30, 2009. The increases are attributable to the increase
in net equipment purchased under capital leases, as well as the additional
borrowings from Crestpark.
As a
result of the additional borrowing from Crestpark and the Company’s continuing
use of capital leases to finance its equipment purchases, we expect to see net
interest expense continue at or slightly above the levels recorded in the three
months ended June 30, 2010.
Net
Loss
The
Company’s net loss for the three and six month periods ended June 30, 2010 was
$174,000, and $621,000 an improvement of $225,000 and $364,000 over the
comparable periods in 2009 for the reasons described above.
Preferred
Stock Dividends and Accretion
For the
three and six month periods ended June 30, 2010, preferred stock dividends and
accretion totaled $348,000 and $692,000 as compared to $325,000 and $646,000 for
the three and six month periods ended June 30, 2009. This increase
was due to compounding interest on accrued but unpaid dividends on our Series C
Preferred Stock. The Series C Exchangeable Preferred Stock accrues
interest at a cumulative compounded rate of 8.0% per annum.
Page |
20
Liquidity
and Capital Resources
The
Company’s principal uses of cash are the payment of operating expenses and debt
service payments on its debt obligations, including its capital lease
financing. In general, the Company expects to meet these
liquidity needs by generating positive cash flow from operating
activities. The Company also uses cash to acquire the monitoring
equipment that it leases or sells to its customers. For the six
months ended June 30, 2010, the Company used $137,000 of cash from operating
activities. Investing activities used $180,000 of cash and financing activities
used cash of $67,000. The total of all cash flow activities
resulted in a decrease in the balance of cash for the six months ended June 30,
2010 of $384,000. For the same period of 2009, the Company generated
$1,254,000 of cash in operating activities, used $1,659,000 in
investing activities, and generated $1,000,000 in cash from financing
activities. The total of all cash flow activities in the six months
ended June 30, 2009 resulted in an increase in the balance of cash of
$595,000
The
Company believes that its current working capital and the undrawn amounts
available under the Company’s Revolving Line of Credit Agreement, which was
recently amended as described in Notes 5 and 8 to the Financial Statements,
combined with the amounts available to it through the capital lease financing
arrangements with AHK are sufficient to meet its liquidity needs through
2010.
The
Company expects to become cash flow positive during 2011 due to anticipated
increases in equipment and services revenues as new monitoring contracts begin
to produce revenues, the receipt of an annual royalty payment under the Patent
License Agreement with STOP in the first quarter of 2011, its continued efforts
to control operating costs and the decrease in principal payments on long-term
capital leases which mature beginning in February 2011.
Management
uses estimates and assumptions in preparing our financial statements in
accordance with accounting principles generally accepted in the United States.
These estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. On an on-going basis, we evaluate our estimates
and assumptions based upon historical experience and various other factors and
circumstances. Management believes that our estimates and assumptions
are reasonable under the circumstances; however, actual results may vary from
these estimates and assumptions under different future circumstances. We do not
believe that any of the accounting estimates are critical at this time, however
we expect to continue to review our accounting estimates in order to determine
if any of these accounting estimates are critical. For further
discussion of our significant accounting policies, refer to Note 1 – “Nature of
Business and Significant Accounting Policies” in the Notes to the Consolidated
Financial Statements in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2009.
Off-Balance Sheet
Arrangements
We do not
have any off-balance sheet arrangements.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
Not
required for smaller reporting companies.
Page |
21
Item
4. Controls and Procedures
The
Company maintains disclosure controls and procedures designed to ensure that the
information the Company must disclose in its filings with the Securities and
Exchange Commission is recorded, processed, summarized and reported on a timely
basis. The Company's principal executive officer and principal financial officer
have reviewed and evaluated the Company's disclosure controls and procedures as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act") as of the end of the period covered by
this report (the "Evaluation Date"). Based on such evaluation, such officers
have concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures are effective in bringing to their attention on a timely
basis material information relating to the Company required to be included in
the Company's periodic filings under the Exchange Act.
The
Company’s principal executive officer and principal financial officer determined
that there have not been any changes in the Company's internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
that occurred during the Company's most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings.
The
Company is not subject to any material pending or threatened
lawsuits.
Item
1A. Risk Factors.
Not
required for smaller reporting companies.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
None
Item
3. Defaults Upon Senior Securities.
None
Item
4. Reserved.
Item
5. Other Information.
None
Page |
22
Item
6. Exhibits.
3.1
|
Amended
and Restated Certificate of Incorporation of the Company, as amended
(3)
|
3.2
|
Restated
Bylaws of the Company (1)
|
3.3
|
Certificate
of Designations, Preferences and Rights of Series C 8% Cumulative,
Compounding Exchangeable Preferred Stock of the Company
(2)
|
4.1
|
Form
of Common Stock Certificate (1)
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
(1)
|
Incorporated
by reference from the registrant’s registration statement on Form 10-SB,
filed on June 22, 1999 (Commission File No.
0-26455).
|
|
(2)
|
Incorporated
by reference from the registrant’s current report on Form 8-K, filed on
June 23, 2005 (Commission File No.
0-26455).
|
|
(3)
|
Incorporated by reference from
the registrant’s current report on Form 8-K, filed on December 14, 2006
(Commission File No.
0-26455).
|
Page |
23
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934 the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
iSECUREtrac
Corp.
|
||
By:
|
/s/ Peter A. Michel
|
|
Peter
A. Michel
|
||
President
& CEO
|
||
Dated: August
10, 2010
|
||
By:
|
/s/Lincoln
Zehr
|
|
Lincoln
Zehr
|
||
Chief
Financial Officer
|
||
Dated: August
10, 2010
|
Page |
24