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, 2009
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 August 7, 2009 was
10,811,630.
PART
I. FINANCIAL INFORMATION
Item 1. Financial
Statements
iSECUREtrac
Corp. and SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
|
ASSETS |
|
|
|
|
|
|
|
Current
Assets |
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
1,018,743 |
|
|
$ |
423,361 |
|
|
Accounts
receivable, net of allowance for doubtful accounts of
$623,334 |
|
|
|
|
|
|
|
|
|
in
2009 and $462,553 in 2008 |
|
|
2,028,417 |
|
|
|
2,445,505 |
|
|
Inventories |
|
|
256,619 |
|
|
|
193,820 |
|
|
Prepaid
expenses and other |
|
|
131,431 |
|
|
|
84,224 |
|
|
Total
current assets |
|
|
3,435,210 |
|
|
|
3,146,910 |
|
Leasehold
improvements and equipment, net of accumulated depreciation of $10,212,734
in 2009 and $9,125,376 in 2008 |
|
|
4,883,640 |
|
|
|
4,229,319 |
|
|
Intangibles,
net of accumulated amortization of $901,728 |
|
|
|
|
|
|
|
|
|
in
2009 and $892,128 in 2008 |
|
|
9,794 |
|
|
|
19,394 |
|
|
Goodwill |
|
|
2,302,179 |
|
|
|
2,302,179 |
|
|
Other
assets |
|
|
77,691 |
|
|
|
83,386 |
|
|
Total
assets |
|
$ |
10,708,514 |
|
|
$ |
9,781,188 |
|
|
LIABILITIES
AND STOCKHOLDERS' (DEFICIT) |
|
|
|
|
|
|
|
|
|
Current
Liabilities |
|
|
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
339,575 |
|
|
$ |
403,399 |
|
|
Accrued
expenses |
|
|
1,138,064 |
|
|
|
524,339 |
|
|
Revolving
Line of Credit |
|
|
750,000 |
|
|
|
500,000 |
|
|
Current
maturities of long-term debt |
|
|
1,594,112 |
|
|
|
1,272,508 |
|
|
Deferred
revenues & gain on sale-leaseback transactions |
|
|
142,244 |
|
|
|
299,548 |
|
|
Accrued
interest payable |
|
|
1,086,640 |
|
|
|
776,011 |
|
|
Total
current liabilities |
|
|
5,050,635 |
|
|
|
3,775,805 |
|
|
Long-term
debt, less current maturities |
|
|
13,709,078 |
|
|
|
13,280,368 |
|
|
Redeemable
convertible Series C preferred stock |
|
|
13,752,411 |
|
|
|
13,106,407 |
|
|
Commitments
and contingency |
|
|
|
|
|
|
|
|
|
Stockholders' (deficit) |
|
|
|
|
|
|
|
|
|
Common
stock |
|
|
10,808 |
|
|
|
10,799 |
|
|
Additional
paid-in capital |
|
|
55,482,443 |
|
|
|
55,369,880 |
|
|
Accumulated
deficit |
|
|
(77,296,861 |
) |
|
|
(75,762,071 |
) |
|
Total
stockholders' (deficit) |
|
|
(21,803,610 |
) |
|
|
(20,381,392 |
) |
|
Total
liabilities and stockholders' (deficit) |
|
$ |
10,708,514 |
|
|
$ |
9,781,188 |
|
See Notes
to Consolidated Financial Statements (unaudited).
iSECUREtrac
Corp. and SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
leasing |
|
$ |
2,947,849 |
|
|
$ |
2,239,019 |
|
|
$ |
5,518,732 |
|
|
$ |
4,418,596 |
|
|
Administrative,
field & support service revenues |
|
|
116,065 |
|
|
|
86,700 |
|
|
|
247,866 |
|
|
|
161,153 |
|
|
Equipment
sales |
|
|
25,807 |
|
|
|
23,958 |
|
|
|
79,918 |
|
|
|
59,390 |
|
|
Other
revenues |
|
|
101,834 |
|
|
|
6,004 |
|
|
|
448,755 |
|
|
|
218,852 |
|
|
Total
revenues |
|
|
3,191,555 |
|
|
|
2,355,681 |
|
|
|
6,295,271 |
|
|
|
4,857,992 |
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues |
|
|
1,172,618 |
|
|
|
948,121 |
|
|
|
2,338,748 |
|
|
|
2,036,015 |
|
|
Research
and development |
|
|
250,963 |
|
|
|
328,747 |
|
|
|
569,438 |
|
|
|
668,558 |
|
|
Sales,
general and administrative |
|
|
1,861,908 |
|
|
|
2,046,532 |
|
|
|
3,777,952 |
|
|
|
4,298,335 |
|
|
Total
operating expenses |
|
|
3,285,489 |
|
|
|
3,323,400 |
|
|
|
6,686,138 |
|
|
|
7,002,908 |
|
|
Operating
loss |
|
|
(93,934 |
) |
|
|
(967,719 |
) |
|
|
(390,867 |
) |
|
|
(2,144,916 |
) |
|
Other
income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
|
314 |
|
|
|
4,843 |
|
|
|
600 |
|
|
|
24,067 |
|
|
Interest
expense |
|
|
(306,155 |
) |
|
|
(268,388 |
) |
|
|
(594,356 |
) |
|
|
(533,372 |
) |
|
Total
other income (expense) |
|
|
(305,841 |
) |
|
|
(263,545 |
) |
|
|
(593,756 |
) |
|
|
(509,305 |
) |
|
Loss
before provision for income taxes |
|
|
(399,775 |
) |
|
|
(1,231,264 |
) |
|
|
(984,624 |
) |
|
|
(2,654,220 |
) |
|
Provision
for income taxes |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
Net
loss |
|
$ |
(399,776 |
) |
|
$ |
(1,231,264 |
) |
|
$ |
(984,624 |
) |
|
$ |
(2,654,220 |
) |
|
Preferred
stock dividends and accretion |
|
|
(324,641 |
) |
|
|
(305,190 |
) |
|
|
(646,006 |
) |
|
|
(610,380 |
) |
|
Net
loss available to common stockholders |
|
$ |
(724,417 |
) |
|
$ |
(1,536,454 |
) |
|
$ |
(1,630,630 |
) |
|
$ |
(3,264,601 |
) |
|
Basic
and diluted loss per common share |
|
$ |
(0.07 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.30 |
) |
|
Weighted
average shares of common stock outstanding |
|
|
10,806,399 |
|
|
|
10,785,534 |
|
|
|
10,803,963 |
|
|
|
10,783,583 |
|
See Notes
to Consolidated Financial Statements (unaudited).
iSECUREtrac
Corp. AND SUBSIDIARY
STATEMENT
OF STOCKHOLDERS' (DEFICIT)
For
the Six Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid
-in |
|
|
Accumulated |
|
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Total |
|
|
Balance,
December 31, 2008 |
|
|
10,799,090 |
|
|
$ |
10,799 |
|
|
$ |
55,369,880 |
|
|
$ |
(75,762,071 |
) |
|
$ |
(20,381,392 |
) |
|
Shares
issued for director's fees |
|
|
8,612 |
|
|
|
9 |
|
|
|
3,991 |
|
|
|
- |
|
|
|
4,000 |
|
|
Stock
issued upon exercise of options |
|
|
- |
|
|
|
- |
|
|
|
162 |
|
|
|
- |
|
|
|
162 |
|
|
Stock
based compensation |
|
|
- |
|
|
|
- |
|
|
|
204,251 |
|
|
|
- |
|
|
|
204,251 |
|
|
Series
C preferred stock dividends |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(550,166 |
) |
|
|
(550,166 |
) |
|
Accretion
to redemption value of preferred stock |
|
|
- |
|
|
|
- |
|
|
|
(95,842 |
) |
|
|
- |
|
|
|
(95,842 |
) |
|
Net
loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(984,624 |
) |
|
|
(984,624 |
) |
|
Balance,
June 30, 2009 |
|
|
10,807,702 |
|
|
$ |
10,808 |
|
|
$ |
55,482,443 |
|
|
$ |
(77,296,861 |
) |
|
$ |
(21,803,610 |
) |
See Notes
to Consolidated Financial Statements (unaudited).
iSECUREtrac
CORP. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Six
Months Ended June 30, 2009 and 2008
|
|
|
2009 |
|
|
2008 |
|
|
Cash
Flows From Operating Activities |
|
|
|
|
|
|
|
Net
loss |
|
$ |
(984,624 |
) |
|
$ |
(2,654,220 |
) |
|
Depreciation
and amortization |
|
|
1,096,958 |
|
|
|
1,143,794 |
|
|
Stock
based compensation |
|
|
208,251 |
|
|
|
214,347 |
|
|
Increase
in Allowance for Doubtful Accounts |
|
|
160,781 |
|
|
|
33,112 |
|
|
(Increase)
Decrease in accounts receivable |
|
|
256,307 |
|
|
|
(254,606 |
) |
|
(Increase)
in inventories |
|
|
(62,799 |
) |
|
|
(57,681 |
) |
|
(Increase)
Decrease in prepaid expenses |
|
|
(47,207 |
) |
|
|
29,129 |
|
|
(Decrease)
in accounts payable |
|
|
(146,514 |
) |
|
|
(708,771 |
) |
|
Increase
(Decrease) in accrued expenses |
|
|
613,725 |
|
|
|
(23,625 |
) |
|
(Decrease)
in deferred revenues and gain on sale - leaseback
transactions |
|
|
(157,304 |
) |
|
|
(22,845 |
) |
|
Increase
in accrued interest payable |
|
|
310,629 |
|
|
|
383,580 |
|
|
Net
cash provided by (used in) operating activities |
|
|
1,248,203 |
|
|
|
(1,917,786 |
) |
|
Cash
Flows From Investing Activities |
|
|
|
|
|
|
|
|
|
Purchases
of leasehold improvements and equipment |
|
|
(1,658,992 |
) |
|
|
(1,960,112 |
) |
|
Decrease
in other assets |
|
|
5,695 |
|
|
|
14,537 |
|
|
Net
cash (used in) investing activities |
|
|
(1,653,297 |
) |
|
|
(1,945,575 |
) |
|
Cash
Flows From Financing Activities |
|
|
|
|
|
|
|
|
|
Principal
proceeds from long-term debt |
|
|
1,700,000 |
|
|
|
1,600,000 |
|
|
Proceeds
from revolving line of credit |
|
|
250,000 |
|
|
|
- |
|
|
Principal
payments on long-term debt |
|
|
(949,686 |
) |
|
|
(473,109 |
) |
|
Proceeds
from the exercise of options and warrants |
|
|
162 |
|
|
|
- |
|
|
Net
cash provided by financing activities |
|
|
1,000,476 |
|
|
|
1,126,891 |
|
|
Increase
(Decrease) in cash |
|
|
595,382 |
|
|
|
(2,736,470 |
) |
|
Cash
at beginning of period |
|
|
423,361 |
|
|
|
3,442,712 |
|
|
Cash
at end of period |
|
$ |
1,018,743 |
|
|
$ |
706,242 |
|
|
Supplemental
Disclosure of Cash Payments for |
|
|
|
|
|
|
|
|
|
Interest |
|
|
283,727 |
|
|
|
149,792 |
|
|
Supplemental
Disclosure of Noncash Transactions |
|
|
|
|
|
|
|
|
|
Purchase
of leasehold improvements and equipment included in accounts
payable |
|
|
82,686 |
|
|
|
97,535 |
|
See Notes
to Consolidated Financial Statements (unaudited).
iSECUREtrac
CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1. General
The
unaudited interim condensed consolidated financial statements as of June 30,
2009 and for the three and six month periods ended June 30, 2009 and 2008,
included herein, have been prepared in accordance with accounting principals
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,
2008, 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, 2009 and June 30, 2008 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, 2008. The results of
operations and cash flows for the three and six months ended June 30, 2009 are
not necessarily indicative of the results for the entire fiscal year ending
December 31, 2009. 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, combined with the expected
amounts available through lease financing for its monitoring equipment described
in note 5, and positive cash flow expected to be generated from operating
activities will be sufficient to meet the Company’s liquidity needs through
2009.
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”) or which were issued under
employment agreements with executive officers.
During
the three and six months ended June 30, 2009, the Company granted options to
purchase a total of 38,000 and 41,500 shares of common stock to nine and
thirteen employees, respectively, pursuant to the 2006
Plan. During the three and six months ended June 30, 2009, 22,646 and
55,073 options issued under the 2006 Plan were forfeited, 2,500 and 9,275
options issued under the 2001 Plan were forfeited and 0 and 56,250 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, 2009, 292 and 292 options were exercised. The following
table shows stock option activity during the six month period ended June 30,
2009:
|
Options |
|
Number of
Shares |
|
|
Weighted
Average
Exercise Price
Per Share |
|
|
Weighted
Average
Remaining
Contractual Life
(Years) |
|
|
Aggregate
Intrinsic
Value |
|
|
Outstanding
at December 31, 2008 |
|
|
2,734,376 |
|
|
$ |
1.59 |
|
|
|
|
|
$ |
- |
|
|
Granted |
|
|
41,500 |
|
|
|
0.64 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(292 |
) |
|
|
0.56 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(120,598 |
) |
|
|
0.71 |
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2009 |
|
|
2,654,986 |
|
|
$ |
1.56 |
|
|
|
6.26 |
|
|
$ |
151,996 |
|
|
Exercisable
at June 30, 2009 |
|
|
2,045,053 |
|
|
$ |
1.88 |
|
|
|
5.38 |
|
|
$ |
45,629 |
|
As of
June 30, 2009, the aggregate intrinsic value of outstanding and exercisable
options, which is the actual value of the options if exercised, was $151,996 and
$45,629, respectively.
During
the three and six months ended June 30, 2009, warrants to purchase up to 459,028
and 1,083,765 shares of common stock expired and no warrants were granted or
exercised by warrant holders.
At June
30, 2009, the Company had 2,654,986 outstanding stock options, 6,287,045 shares
issuable upon exercise of warrants to be issued upon exchange of Preferred
Stock, and 2,460,770 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 period presented.
The
Company accounts for its share-based compensation awards under Financial
Accounting Standards Board (“FASB”) Statement No. 123 (revised 2004), “Share-Based Payment” (“FAS
No. 123(R)” or the “Statement”) which requires that the compensation cost
relating to share-based compensation awards, including grants of employee stock
options, be recognized in financial statements as these awards become vested,
based on the grant date fair value of the equity instruments
issued.
For
purposes of FAS No. 123(R), 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, 2009 |
|
|
Year Ended
December 31, 2008 |
|
|
Risk
free interest rate |
|
|
3.77 |
% |
|
|
3.79 |
% |
|
Expected
volatility factor |
|
|
83.22 |
% |
|
|
82.84 |
% |
|
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 |
|
23% and 24% |
|
|
23% 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.
Under FAS
No. 123(R), 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 are 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. The estimated forfeiture rate for senior
executive and non-senior executive option grants is 23% and 24%,
respectively. This rate is recalculated on an annual
basis.
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 $101,281 and $204,251 for the three and
six months ended June 30, 2009, respectively, compared to $105,218 and $210,347
for the same periods in 2008 related to stock-based compensation awards. All
expenses related to stock-based compensation awards are reflected in sales,
general and administrative expenses.
As of
June 30, 2009, there was approximately $192,411 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:
|
2009 |
|
$ |
122,495 |
|
|
2010 |
|
$ |
69,361 |
|
|
2011 |
|
$ |
555 |
|
|
Total |
|
$ |
192,411 |
|
Note
3. Leasehold Improvements and Equipment
The cost
and accumulated depreciation of our leasehold improvements and equipment as of
June 30, 2009 and December 31, 2008 are as follows:
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
|
|
|
Cost |
|
|
Accumulated
Depreciation |
|
|
Net Book
Value |
|
|
Cost |
|
|
Accumulated
Depreciation |
|
|
Net Book
Value |
|
|
Equipment |
|
$ |
1,067,086 |
|
|
$ |
660,693 |
|
|
$ |
406,393 |
|
|
$ |
969,624 |
|
|
$ |
592,072 |
|
|
$ |
377,552 |
|
|
Leasehold
improvements |
|
|
239,341 |
|
|
|
145,231 |
|
|
|
94,110 |
|
|
|
239,341 |
|
|
|
113,924 |
|
|
|
125,417 |
|
|
Monitoring
equipment |
|
|
13,789,947 |
|
|
|
9,406,810 |
|
|
|
4,383,137 |
|
|
|
12,145,730 |
|
|
|
8,419,380 |
|
|
|
3,726,350 |
|
|
Total
leasehold improvements and equipment |
|
$ |
15,096,374 |
|
|
$ |
10,212,734 |
|
|
$ |
4,883,640 |
|
|
$ |
13,354,695 |
|
|
$ |
9,125,376 |
|
|
$ |
4,229,319 |
|
Note
4. Goodwill and Intangible Assets Subject to
Amortization
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, 2008.
The
Company also separately records other intangible assets that can be identified
and assigned a value. At June 30, 2009, such intangible assets consisted
solely of customer monitoring contracts acquired in a prior
acquisition. The Company amortizes the initial carrying value
attributable to these monitoring contracts based on the projected revenue stream
of the monitoring contracts. This amortization expense is included in
sales, general and administrative expenses in the consolidated statements of
operations and equaled $4,800 and $9,600 for the three and six month periods
ended June 30, 2009, respectively, compared to $10,490 and $20,981 for the same
periods in 2008. These intangible assets are also tested for
impairment on an annual basis.
The
composition of goodwill and intangible assets at June 30, 2009 and December 31,
2008, is as follows:
|
|
|
June
30, 2009 |
|
|
December
31, 2008 |
|
|
|
|
|
|
|
Intangibles,
subject |
|
|
|
|
|
Intangibles,
subject |
|
|
|
|
Goodwill |
|
|
to
Amortization |
|
|
Goodwill |
|
|
to
Amortization |
|
|
Gross
Carrying Amount |
|
$ |
2,302,179 |
|
|
$ |
911,522 |
|
|
$ |
2,302,179 |
|
|
$ |
911,522 |
|
|
Accumulated
Amortization |
|
|
- |
|
|
|
(901,728 |
) |
|
|
- |
|
|
|
(892,128 |
) |
|
Balance |
|
$ |
2,302,179 |
|
|
$ |
9,794 |
|
|
$ |
2,302,179 |
|
|
$ |
19,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
estimated aggregate future amortization expense of the intangibles is as
follows:
|
|
|
2009 |
|
|
|
|
|
|
9,794 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
9,794 |
|
|
|
|
|
|
|
|
|
Note
5. Accounts Payable
The
Company has recorded accounts payable as follows for the six months ended June
30, 2009 and December 31, 2008:
|
|
|
June 30,
2009 |
|
|
December 31,
2008 |
|
|
Accounts
Payable, trade |
|
|
256,889 |
|
|
|
403,399 |
|
|
Accounts
Payable, equipment manufacturer 1 |
|
|
57,680 |
|
|
|
- |
|
|
Accounts
Payable, equipment manufacturer 2 |
|
|
25,006 |
|
|
|
- |
|
|
Total
Accounts Payable |
|
|
339,575 |
|
|
|
403,399 |
|
1These
invoice amounts are yet to be financed. The Company expects to
finance these invoices through AHK Leasing, LLC as described in Note 7, or via
the Equipment Term Loan as described in Note 6.
2These
invoice amounts have been financed through AHK Leasing prior to the close of the
quarter as described in Note 7. The proceeds from the financing of
the equipment related to these invoices is reflected in the Company's
cash balance at June 30, 2009.
The
Company expects to finance the acquisition of all monitoring equipment through
AHK Leasing, LLC (“AHK”) as described in Note 7 or via the Equipment Term Loan
as described in Note 6.
At June
30, 2009, the Company had completed the financing of $25,006 of equipment
through AHK but had not yet remitted payment to the manufacturer for all the
related equipment. This $25,006 is included in the Company’s cash
balance at June 30, 2009 and will be paid to the manufacturer when the
underlying invoices become due.
Note
6. Credit Facilities
On
November 10, 2008, the Company entered into a loan agreement (the “Loan
Agreement”) with Crestpark LP, Inc. (the “Lender”) and in connection with the
Loan Agreement executed two separate promissory notes. The first note
is for $750,000 for working capital via a Revolving Credit Commitment and the
second note is for $1,750,000 for equipment financing via an Equipment Term
Loan.
The
proceeds of the Revolving Credit Commitment of $750,000 were 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 July 1, 2010, is unsecured and bears interest at a fixed noncompounded
rate of 12% per annum. The Company is also required to pay the Lender
an unused commitment fee of 0.25% per annum on the average daily unused amount
of the Revolving Credit Commitment. For the three and six months
ended June 30, 2009, interest expense for the Revolving Credit Commitment,
including any applicable unused commitment fee, was $22,438 and $40,274,
respectively, as compared to $0 for the three and six months ended June 30,
2008. As of June 30, 2009, the Company had drawn down all of the
funds available under the Revolving Credit Commitment.
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 the Lender’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 July
1, 2010, 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 the Lender an unused
commitment fee of 0.25% per annum on the average daily unused amount of the
Equipment Term Loan. For the three and six months ended June 30,
2009, interest expense for the Equipment Term Loan, including any applicable
unused commitment fee, was $1,060 and $3,131, respectively, as compared to $0
for the three and six months ended June 30, 2008. As of June 30,
2009, the Company had $1,700,000 in proceeds still available under the Equipment
Term Loan, as amounts borrowed and repaid are no longer available under the
loan. As of June 30, 2009, all amounts previously borrowed under the
Equipment Term Loan have been repaid.
Note
7. Long-Term Debt
Long-term
debt consists of capital leases used to finance the acquisition of monitoring
equipment and secured borrowings for working capital.
Under its
capital lease arrangements, the Company sells its equipment to AHK, a company
controlled by three stockholders of the Company, one of which is a current
director. Maturity dates on these capital leases run from August 2009
to June 2012. During the three and six months ended June 30, 2009,
the Company financed $600,000 and $1,700,000, respectively, under capital lease
arrangements with AHK. As of June 30, 2009, the aggregate balance on
these capital leases totaled $3,425,715. For the three and six months ended June
30, 2009 interest expense to AHK was $91,422 and $168,566, respectively, as
compared to $47,869 and $82,278 for the three and six months ended June 30,
2008, respectively. There was no accrued interest at June 30, 2009
and December 31, 2008 due to AHK.
As of
June 30, 2009, the Company had outstanding borrowings of $11,877,475 under a
secured Promissory Note payable and associated Credit and Security Agreement
(the “Crestpark Note”) with Crestpark LP, Inc. (the
“Lender”). Principal on the Crestpark Note is due on the earlier of
(i) July 1, 2010 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 the
Crestpark Note, plus all accrued but unpaid interest. The Company may
prepay the Crestpark Note at any time without premium or penalty. The
Crestpark Note provides, among other things, that $6,455,250 of the borrowings
thereunder bears interest at 7.0% per annum and that such interest will be due
and payable at maturity of the Crestpark Note. The remaining
$5,422,225 of borrowings (the “Floating Tranche”) under the Crestpark Note bears
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 is
payable monthly. Accrued interest on the Crestpark Note at June 30,
2009 and December 31, 2008, equaled $1,086,640 and $772,545,
respectively.
Total
interest expense for the Company for the three and six months ended June 30,
2009 was $306,155 and $594,356, respectively, compared to $268,388 and $533,372
during the same periods in 2008. Of that amount, $275,907 and
$537,185 was expensed to related parties under the AHK capital leases and the
Crestpark Note for the three and six months ended June 30, 2009, respectively,
compared to $259,126 and $520,382 during the same periods in
2008.
Note
8. 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, 2009, the Company had accrued Series C
Preferred Stock dividends totaling $3,977,530 and accretion to redemption value
of the Series C Preferred Stock totaling $755,802. Of these amounts,
$276,602 and $48,039, respectively, were accrued during the three months ended
June 30, 2009.
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%.
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
9. Subsequent Events.
On July
21, 2009, the Company paid down $200,000 of the $750,000 borrowed under the
Company’s Revolving Credit Commitment with Crestpark LP,
Inc. The terms of the Revolving Credit Commitment, as outlined in
Note 6 allow for the Company to re-draw these funds and as such, subsequent to
this payment to Crestpark LP, Inc. the Company has $200,000 available
to be borrowed under the Revolving Credit Commitment.
On July
28, 2009, the Company drew down approximately $82,000 from the Equipment Term
Loan with Crespark LP, Inc. also described in Note 6. As a result of
this advance, the Company has remaining approximately $1,618,000 of credit
available under the agreement.
The
Company evaluated events and transactions through August 11, 2009 for
potential recognition or disclosure in our financial
statements. Besides those noted above, there are no additional
matters which require disclosure.
Note
10. Recent Accounting Pronouncements
In
September 2006 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements
(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value
measurement. SFAS No. 157 also emphasizes that fair value is a
market-based measurement, not an entity-specific measurement, and sets out a
fair value hierarchy with the highest priority being quoted prices in active
markets. Under SFAS No. 157, fair value measurements are disclosed by
level within that hierarchy. The Company adopted SFAS No. 157 for the
fiscal year beginning January 1, 2008, except for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the
financial statements on a nonrecurring basis for which delayed application is
permitted until fiscal years beginning after November 15, 2008. Under
the elected deferral, the following are assets and liabilities recognized or
disclosed at fair value for which the Company has not yet applied the provisions
of SFAS No. 157; (non financial assets and
liabilities in business combinations, reporting units measured at fair value in
goodwill testing, indefinite lived intangibles measured at fair value for
impairment testing, long lived assets measured at fair value for impairment,
asset retirement obligations and liabilities for exit or disposal
activities.) The Company adopted the remaining provisions of
SFAS No. 157 on January 1, 2009. The adoption of the remaining provisions of
SFAS No. 157 had no material impact on the Company’s financial position, results
of operations or cash flows.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
consolidated Financial Statements - an Amendment of ARB No. 51." This statement
requires that noncontrolling or minority interests in subsidiaries be presented
in the consolidated statement of financial position within equity, but separate
from the parents' equity, and that the amount of the consolidated net income
attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of income.
SFAS No. 160 is effective for the fiscal years beginning on or after December
15, 2008. The Company adopted SFAS No. 160 for the fiscal year
beginning January 1, 2009. The adoption of SFAS No. 160 had no
material impact on the financial statements of the Company.
In
December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations”.
SFAS No. 141 (Revised) establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. The statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination.The
Company adopted SFAS No. 141 for the fiscal year beginning January 1, 2009. SFAS
No. 141 (Revised) will have an impact on any future acquisitions.
In April
2009, the FASB issued Financial Staff Position (“FSP”) 107-1 “Interim
Disclosures about Fair Value of Financial Instruments”. FSP 107-1
requires disclosures about the fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial
statements and also requires those disclosures in summarized financial
information at interim reporting periods A publicly traded company includes any
company whose securities trade in a public market on either a stock exchange or
in the over-the-counter market, or any company that is a conduit bond obligor.
Additionally, when a company makes a filing with a regulatory agency in
preparation for sale of its securities in a public market it is considered a
publicly traded company for this purpose.
FSP 107-1
is effective for periods ending after June 15, 2009. The
Company adopted the staff positions for its second quarter 10-Q. The
staff positions had no material impact on the financial statements. Additional
disclosures have been provided where applicable.
In May
2009, the FASB issued SFAS No. 165 “Subsequent Events”. SFAS 165
provides guidance on when a subsequent event should be recognized in the
financial statements. Subsequent events that provide additional evidence about
conditions that existed at the date of the balance sheet should be recognized at
the balance sheet date. Subsequent events that provide evidence about conditions
that arose after the balance sheet date but before financial statements are
issued, or are available to be issued, are not required to be recognized. The
date through which subsequent events have been evaluated must be disclosed as
well as whether it is the date the financial statements were issued or the date
the financial statements were available to be issued. For nonrecognized
subsequent events which should be disclosed to keep the financial statements
from being misleading, the nature of the event and an estimate of its financial
effect, or a statement that such an estimate cannot be made, should be
disclosed. The standard is effective for interim or annual periods ending after
June 15, 2009. See Note 9 for Management’s evaluation of subsequent
events.
In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets – an amendment of FASB Statement No. 140. In SFAS No.
166, the FASB improves the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a
transferor’s continuing involvement, if any, in transferred financial assets.
SFAS No. 166 shall be effective as of the first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. Our adoption of SFAS No. 166 will
not have a material effect on our consolidated financial
statements.
In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R). In SFAS No. 167, the FASB replaces the quantitative-based
risks and rewards calculation for determining whether an enterprise is the
primary beneficiary in a variable interest entity with an approach that is
primarily qualitative, requires ongoing assessments of whether an enterprise is
the primary beneficiary of a variable interest entity, and requires additional
disclosures about an enterprise’s involvement in variable interest entities.
SFAS No. 167 shall be effective as of the first annual reporting period
that begins after November 15, 2009, for interim periods within that first
annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. Our adoption of SFAS No. 167 will
not have a material effect on our consolidated financial
statements.
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles. In SFAS No. 168, the FASB identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities.
SFAS No. 168 shall be effective for financial statements issued for
interim and annual periods ending after September 15, 2009. Our adoption of SFAS
No. 168 will not have a material effect on our consolidated financial
statements.
Note
11. 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 approximate fair value.
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 maturity dates.
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 $18,600,000 at June 30, 2009 using
a discount rate 5%.
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
Discussions
of certain matters contained in this Quarterly Report on Form 10-Q may contain
statements that plan for or anticipate the future. Forward-looking
statements include statements about the future of our products and the industry,
statements about our future business plans and strategies, and most other
statements that are not historical in nature. In this Form 10-Q, forward-looking
statements are generally identified by the words "anticipate," "plan,"
"believe," "expect," "estimate," and the like. Because forward-looking
statements involve future risks and uncertainties, there are factors that could
cause actual results to differ materially from those expressed or
implied. The actual outcomes of these matters may differ
significantly from the outcomes expressed or implied in these forward-looking
statements and are subject to certain risks and uncertainties that may affect
such outcomes, including without limitation the risks set forth in “ITEM 1A. Risk Factors”
contained in the Company’s Annual Report on Form 10-K filed for the year ended
December 31, 2008.
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 Condensed 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 (reflected below as Recurring 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”).
Results
of Operations
Highlights
of Operations for the three months ending June 30, 2009
Revenue
Growth and Reduced Loss
The
deployment of the contracts signed in late 2008 and early 2009 continued into
the three months ended June 30, 2009 during which the Company again reported
record levels of recurring revenue. In addition, the cost reduction
plan and cost control measures implemented in mid-2008 continue to return
benefits through lower costs.
In
comparison to the same period in 2008, during the three months ended June 30,
2009, the Company reported a 35% increase in total revenue and an $874,000
decrease in the reported operating loss. Dating back to January 2008,
the Company has now reported six consecutive quarters of significantly improving
(lower) operating loss and net loss.
Positive
Cash Flow
For the
three months ended June 30, 2009, the Company reported approximately $629,000 of
net cash provided by operating activities - as defined in the Consolidated
Statement of Cash Flows. This was the second consecutive quarter of
net cash provided by operating activities and year-to-date the Company has
reported over $1,200,000 of net cash provided by operating
activities.