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EX-32 - ISECURETRAC CORPv192703_ex32.htm
EX-31.1 - ISECURETRAC CORPv192703_ex31-1.htm
EX-31.2 - ISECURETRAC CORPv192703_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%.

 
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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.

 
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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.

 
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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  

 
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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.

 
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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

 
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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.

 
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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.

 
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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

 
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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).

 
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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

 
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