UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549-1004
FORM 10-QSB/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
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 0-26455
ISECURETRAC CORP.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
(FORMERLY ADVANCED BUSINESS SCIENCES, INC.)
DELAWARE 87-0347787
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5022 S. 114TH STREET, SUITE #103
OMAHA, NEBRASKA 68137
(402) 537-0022
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICE)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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 [ ]
The number of issuer's shares outstanding as of April 30, 2004, was
55,203,674.
Transitional Small Business Disclosure Form (Check One): YES [ ] NO [X]
1
Explanatory Note
iSecureTrac Corp. hereby amends its Quarterly Report on Form 10-QSB for the
quarter ended March 31, 2004, filed with the Securities and Exchange Commission
on May 14, 2004. The purpose of this amendment is to restate portions of the
Form 10-QSB, including the Consolidated Balance Sheets, the Consolidated
Statements of Operations, the Statement of Stockholders' Equity, the
Consolidated Statements of Cash Flows, Management's Discussion and Analysis, and
the Notes to the Consolidated Financial Statements as of and for the Quarter
ending March 31, 2004, as set forth in the original filing.
The restatement is related to the reduction of financing fees and additional
paid in capital of approximated $1.7 million for the quarter ended March 31,
2004. This reduction of financing fees reduced the previously reported net loss
of approximately $5,512,000 to $3,811,000. The restatement resulted from the
Company incorrectly expensing the fair value of stock warrants related to stock
issuance costs that were issued to an individual who assisted the Company in
raising additional equity for the Company in the amount of $1,346,536. The
Company also incorrectly expensed $354,557 of stock warrant expense issued to
another individual in connection with contributing cash for common stock of the
Company.
In order to preserve the nature and character of the disclosures set forth in
such items as originally filed, this report continues to speak as of the date of
the original filing, and, unless otherwise stated to the contrary, the Company
has not updated the disclosures in this report to speak as of a later date.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ISECURETRAC CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
Restated
March 31, 2004 December 31, 2003
- ------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 110,133 $ 125,399
Accounts receivable, net of allowance for doubtful accounts of
$15,600 in 2004 and $12,000 in 2003 628,610 602,367
Inventories 149,123 144,151
Prepaid expenses and other 92,005 95,032
- ------------------------------------------------------------------------------------------------------
Total current assets 979,871 966,949
- ------------------------------------------------------------------------------------------------------
Leasehold Improvements and Equipment, net 293,777 359,453
Monitoring Equipment, net of accumulated depreciation of $529,487
in 2004 and $470,331 in 2003 2,545,013 4,078,419
Product Development Costs, net of accumulated amortization of $659,743
in 2004 and $577,246 in 2003 330,218 367,338
Intangibles, subject to amortization 461,262 822,856
Goodwill 2,302,179 2,302,179
Other Assets 29,110 32,488
- ------------------------------------------------------------------------------------------------------
Total assets $ 6,941,430 $ 8,929,682
======================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Notes payable $ 2,625,582 $ 2,994,476
Current maturities of long-term debt 1,516,871 1,645,494
Accounts payable and accrued expenses 1,247,571 1,319,884
Deferred gain on sale-leaseback transaction 662,821 677,125
Accrued interest payable 209,951 195,587
Preferred dividends payable 439,826 218,513
- ------------------------------------------------------------------------------------------------------
Total current liabilities 6,702,622 7,051,079
- ------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities 4,728,812 4,839,547
- ------------------------------------------------------------------------------------------------------
Stockholders' Deficit
Series A convertible preferred stock 9,125,470 9,125,470
Series B convertible preferred stock; 2004, $9,000 dividends
in arrears; 2003, $7,500 dividends in arrears 295,000 295,000
Common stock 55,191 48,904
Additional paid-in capital 30,664,937 28,524,733
Unearned consulting expense -- (357,000)
Accumulated deficit (44,630,602) (40,598,051)
- ------------------------------------------------------------------------------------------------------
Total stockholders' deficit (4,490,004) (2,960,944)
- ------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' deficit $ 6,941,430 $ 8,929,682
======================================================================================================
See Notes to Condensed Consolidated Financial Statements.
2
ISECURETRAC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2004 and 2003
(Unaudited)
Restated
2004 2003
- -------------------------------------------------------------------------------------------------------------------
REVENUES:
Equipment $ 16,506 $ 29,268
Leasing 277,456 15,039
Hosting 505,003 21,355
Gain on sale-leaseback transactions
Related party 100,675 --
Other 5,653 --
Service 18,731 2,057
- -------------------------------------------------------------------------------------------------------------------
Total revenues 924,024 67,719
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Cost of revenues 1,954,530 126,556
Research and development 174,964 180,487
Sales, general and administrative 2,384,681 1,034,139
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 4,514,175 1,341,182
- -------------------------------------------------------------------------------------------------------------------
Operating loss (3,590,151) (1,273,463)
- -------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 8 109
Interest expense (199,497) (65,265)
Financing fees (21,598) --
- -------------------------------------------------------------------------------------------------------------------
Total other income (expense) (221,087) (65,156)
- -------------------------------------------------------------------------------------------------------------------
Loss before provision for income taxes (3,811,238) (1,338,619)
Provision for income taxes -- --
- -------------------------------------------------------------------------------------------------------------------
NET LOSS $ (3,811,238) $ (1,338,619)
===================================================================================================================
Preferred dividends (221,313) (203,463)
===================================================================================================================
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (4,032,551) $ (1,542,082)
===================================================================================================================
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.08) $ (0.04)
===================================================================================================================
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING 52,685,898 35,973,163
===================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
3
ISECURETRAC CORP. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2004
(Unaudited)
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------- --------------- ------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 9,126 $ 9,125,470 300 $ 295,000 48,904,299 $ 48,904
Shares issued for cash, net of offering costs - - - - 6,214,893 6,215
Shares issued for director's fees and services - - - - 71,879 72
Amortization of unearned consulting expense - - - - - -
Paid-in capital for cost of options issued - - - - - -
Series A preferred stock dividends - - - - - -
Net loss - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2004 9,126 $ 9,125,470 300 $ 295,000 55,191,071 $ 55,191
- -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL UNEARNED
PAID -IN CONSULTING ACCUMULATED
CAPITAL EXPENSE DEFICIT TOTAL
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ 28,524,733 $ (357,000) $ (40,598,051) $ (2,960,944)
Shares issued for cash, net of offering costs 2,055,109 - - 2,061,324
Shares issued for director's fees and services 32,261 - - 32,333
Amortization of unearned consulting expense - 357,000 - 357,000
Paid-in capital for cost of options issued 52,834 - - 52,834
Series A preferred stock dividends - - (221,313) (221,313)
Net loss - - (3,811,238) (3,811,238)
- ------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2004 $ 30,664,937 $ - $ (44,630,602) $ (4,490,004)
- ------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
4
ISECURETRAC CORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2004 and 2003
(Unaudited)
Restated
2004 2003
- -----------------------------------------------------------------------------------------------------------
Cash flow from operating activities:
Net loss $ (3,811,238) $ (1,338,619)
Depreciation and amortization 554,310 114,958
Impairment charge of monitoring equipment 1,341,251 --
Impairment charge of intangibles subject to amortization 302,298 --
Other 339,154 345,401
- -----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,274,225) (878,260)
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (194,185) (5,600)
- -----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in notes payable (368,894) 622,000
Net proceeds from issuance of common stock 2,061,313 428,155
Other (239,275) (172,236)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,453,144 877,919
- -----------------------------------------------------------------------------------------------------------
Decrease in cash (15,266) (5,941)
Cash, beginning of period 125,399 47,374
- -----------------------------------------------------------------------------------------------------------
Cash, end of period $ 110,133 $ 41,433
===========================================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash payments for:
Interest $ 185,133 $ 35,323
Income Taxes -- --
See Notes to Condensed Consolidated Financial Statements.
5
ISECURETRAC CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. GENERAL
The condensed consolidated balance sheet of iSECUREtrac Corp ("iSt" or "we",
"us", or "our") at December 31, 2003, has been taken from audited consolidated
financial statements at that date and condensed. The condensed consolidated
financial statements for the three months ended March 31, 2004, and for the
three months ended March 31, 2003, 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
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-KSB for the year ended
December 31, 2003. The results of operations and cash flows for the three months
ended March 31, 2004 are not necessarily indicative of the results for the
entire fiscal year ending December 31, 2004. Where appropriate, items within the
condensed consolidated financial statements have been reclassified from the
previous periods' presentation.
On August 17, 2004, iSecureTrac Corp. announced on Form 8-K and in a press
release that it would restate financial results for the quarter ended March 31,
2004. The restatement is related to the reduction of financing fees and
additional paid in capital of $1,701,093. The restatement resulted from the
Company incorrectly expensing the fair value of stock warrants related to stock
issuance costs that were issued to an individual who assisted the Company in
raising additional equity for the Company in the amount of $1,346,536. The
Company also incorrectly expensed $354,557 of stock warrant expense issued to
another individual in connection with contributing cash for common stock of the
Company.
BALANCE SHEET AT MARCH 31, 2004
As Previously Increase
Reported (Decrease) Restated
------------ ------------ ------------
Total current assets $ 979,871 -- $ 979,871
Total assets 6,941,430 -- 6,941,430
Total current liabilities 6,702,622 -- 6,702,622
Long term debt, less current maturities 4,728,812 -- 4,728,812
Series A convertible preferred stock 9,125,470 -- 9,125,470
Series B convertible preferred stock 295,000 -- 295,000
Common Stock 55,191 -- 55,191
Additional paid-in-capital 32,366,028 (1,701,091) 30,664,937
Accumulated deficit (46,331,693) 1,701,091 (44,630,602)
Total stockholders' deficit (4,490,004) -- (4,490,004)
Total liabilities and stockholders' deficit 6,941,430 -- 6,941,430
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended March 31, 2004
As Previously Increase
Reported (Decrease) Restated
------------- ---------- ------------
Total revenues $ 924,024 -- $ 924,024
Operating expenses 4,514,175 -- 4,514,175
Operating loss (3,590,151) -- (3,590,151)
Interest expense (199,497) -- (199,497)
Financing fees (1,722,691) 1,701,093 (21,598)
Total other (expense) (1,922,180) 1,701,093 (221,087)
Loss before provision for income taxes (5,512,331) 1,701,093 (3,811,238)
Provision for income taxes -- -- --
Net loss (5,512,331) 1,701,093 (3,811,238)
Preferred dividends (221,313) -- (221,313)
Net loss available to common stockholders (5,733,644) 1,701,093 (4,032,551)
Basic and diluted loss per common share $ (0.11) $ 0.03 $ (0.08)
The accompanying financial statements of iSECUREtrac Corp have been prepared on
a going-concern basis, which contemplates profitable operations and the
satisfaction of liabilities in the normal course of business. There are
uncertainties that raise substantial doubt about the ability of iSt to continue
as a going concern. As shown in the statements of operations, iSt has not yet
achieved profitable operations. As of March 31, 2004, iSt has insufficient
working capital to execute its business plan. These items raise substantial
doubt about the ability of iSt to continue as a going concern. Management plans
to continue financing operations and development of our technology through the
plan described herein.
NOTE 2. COMMON STOCK OPTIONS AND WARRANTS
During the quarter ended March 31, 2004, we granted options to purchase
2,947,750 shares of common stock to fifteen employees and one outside consultant
pursuant to their stock option agreements. The exercise prices are at 85% of
fair value of iST's common stock and vest ratably over one month to two years.
We had 685,109 options forfeited and 157,495 options exercised during the
quarter ended March 31, 2004.
iSECUREtrac Corp., at March 31, 2004, had 11,250,397 outstanding stock options,
9,403,561 outstanding warrants, 9,125,470 shares issuable upon the conversion of
Series A Convertible Preferred Stock, 500,100 shares issuable upon the
conversion of Series B Convertible Preferred Stock, 2,000,000 shares issuable
upon conversion of a Subordinated Convertible Note and 4,950 shares issuable
upon conversion of a convertible subordinated debenture, that could potentially
dilute basic EPS in the future that were not included in the computation of
diluted EPS because to do so would have been anti-dilutive for the period
presented.
NOTE 3. STOCK-BASED COMPENSATION
Stock-based compensation: As of March 31, 2004, iSt had various stock-based
compensation plans. iSt accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, which measures compensation as the
difference between the fair value of the stock at the date of award and the
amount required to be paid for the stock. Stock-based compensation of $52,834
and $36,077 has been reflected in net loss for the three months ending March 31,
2004, and 2003, respectively. The following table illustrates the effect on net
loss for the three months ending March 31, 2004, and 2003, as if iSt had applied
the fair value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, to stock-based compensation.
6
THREE MONTHS ENDED MARCH 31,
2004 2003
- --------------------------------------------------------------------------------------------------------------------
Net loss, as reported $ (3,811,238) $ (1,338,619)
Add: Stock-based employee compensation expense included in reported net loss 52,834 36,077
Deduct: Total stock-based employee compensation expense determined under fair
value based method for all awards (712,077) (84,803)
- --------------------------------------------------------------------------------------------------------------------
Pro forma net loss $ (4,470,481) $ (1,387,345)
- --------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per share:
As reported $ (0.08) $ (0.04)
- --------------------------------------------------------------------------------------------------------------------
Pro forma $ (0.08) $ (0.04)
- --------------------------------------------------------------------------------------------------------------------
In determining the pro forma amounts above during 2004 and 2003, the value of
each grant is estimated at the grant date using the fair value method prescribed
in SFAS No. 123 with the following assumptions: no dividends, risk free interest
rate of 5%; expected life of 3.5 years and; expected price volatility of 89.85%
and 80.93%.
The fair value of stock options and warrants issued to non-employees is being
accounted for using SFAS No. 123. Related compensation expense is charged to
income when incurred.
Warrants and common stock issued in consideration for notes payable and debt
guarantee fees is expensed in the period incurred due to the short term nature
of the related notes.
NOTE 4. MANAGEMENT PLANS
Because of a limited operating history, it is difficult to evaluate the
business. Factors that may cause a failure to meet business goals include the
following: the ability to raise adequate capital to finance the business plan;
the future financial condition, liquidity and business prospects generally; an
inability to respond to competitive market conditions; marketplace acceptance
and market demand of the Company's products; perceived opportunities in the
marketplace for the Company's current products and other products under
development; future sales levels and other business plans for the future.
Profitability will require the successful commercialization of the Series 2100
Personal Tracking Unit (PTU) and tracNET24 software. No assurances can be given
when this will occur or that the Company will ever be profitable.
To date, the Company has generated limited revenue from operations and has
accumulated significant losses. Consequently, it has had difficulty in obtaining
funding from commercial lenders, resulting in the need to obtain funding from
private sources. Management plans to continue financing development of the
technology and operations through external and related party financing. On March
3, 2004, iSt received a private placement commitment of $5,000,000 in equity
financing from a private investor group to continue to fund the operations and
production of tracking devices and related services. As of May 13, 2004, this
funding had not been received by the Company and there is substantial doubt that
it will be received.
7
iSt entered into a common stock purchase agreement on March 7, 2003, as amended
and restated on April 14, 2003, with Fusion Capital Fund II, LLC (Fusion), a
Chicago-based institutional investor. Under the agreement, Fusion was to buy up
to $12 million of common stock over a period of up to 40 months, subject to
iSt's right to extend the agreement for six months. iSt had the right to control
the timing and amount of stock sold to Fusion with the purchase price based upon
the market price of the Company's common stock at the time of sale without any
discount. On March 3, 2004, iSt elected to terminate its common stock purchase
agreement with Fusion. Prior to terminating the agreement, the Company had sold
8,175,207 shares of Common Stock for total proceeds of $3,324,084.
iSt's continuation as a going concern is dependent upon its ability to
satisfactorily meet its debt obligations, meet its product development goals,
secure new financing and generate sufficient cash flows from operations. The
financial statements do not include any adjustments that may result from these
uncertainties.
NOTE 5. MONITORING EQUIPMENT
Monitoring equipment, including leased equipment, is carried at cost and is
being depreciated by the straight line method over useful lives of up to 5
years. Depreciation expense on assets acquired under capital leases is included
with depreciation expense on owned assets. As of March 31, 2004 and December 31,
2003, leased equipment totaled $1,744,895 and $1,551,809, respectively.
Accumulated depreciation on iSt's leased equipment as of March 31, 2004 and
December 31, 2003 totaled $469,374 and $260,171, respectively.
NOTE 6. GOODWILL AND INTANGIBLES, SUBJECT TO AMORTIZATION
Goodwill is the excess of the cash paid over the net fair value of 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. The Company has determined that there is no
impairment of goodwill as of December 31, 2003.
Intangible assets are those that can be separately identified and assigned a
value. Intangible assets consist of customer monitoring contracts. The Company
is amortizing the intangible assets based on the revenue stream of the existing
contracts. For the three months ending March 31, 2004 and 2003, amortization
expense was $361,594 and none, respectively. The composition of goodwill and
intangible assets at March 31, 2004, is as follows:
GOODWILL OTHER INTANGIBLES TOTAL
- --------------------------------------------------------------------------------
Balance at December 31, 2003 $ 2,302,179 $ 822,856 $ 3,125,035
Amortization - (361,594) (361,594)
- --------------------------------------------------------------------------------
Balance at March 31, 2004 $ 2,302,179 $ 461,262 $ 2,763,441
- --------------------------------------------------------------------------------
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Discussions of certain matters contained in this Quarterly Report on Form 10-QSB
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-QSB,
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 other risks
detailed in "ITEM 1. Description of Business" contained in iSt's Form 10-KSB
filed with the SEC March 30, 2004.
The following discussion is intended to provide a better understanding of the
significant changes in trends relating to iSt's financial condition and results
of operations. Management's Discussion and Analysis should be read in
conjunction with the accompanying Condensed Consolidated Financial Statements
and Notes thereto.
iSt is an emerging technology company that has developed a Global Positioning
Satellite (GPS) based tracking and monitoring system for criminal offenders on
parole, probation or pre-trial release, consisting of a PTU and a web-based
automated monitoring system. Direct sales of the Company's Series 2100 PTUs and
tracNET24 services began in December 2002 and revenues from such sales have
increased throughout 2003 and 2004. 2003 marked the first full year of iSt's
reporting as an operating company. Previously, it had reported as a development
stage company.
iSt's product, which utilizes GPS technology, wireless communications and
proprietary computer software, provides real-time monitoring, tracking and
reporting of adult and juvenile offenders as a criminal justice rehabilitative
alternative. Based on patented technology, it is the latest generation of
software and hardware available for the monitoring of offenders. The system
tracks the geographic location of offenders, reports specific activities and
identifies violations against customer-established parameters. This information
is then delivered to the appropriate authorities using various methods,
including telephone calls, paging, e-mail and web-based reports. Use of the
system can offer substantial cost savings over the cost of incarceration and
improve the efficiency of probation and parole officers. It also offers the
backlogged criminal justice systems a more secure solution to the problems of
rapidly growing criminal populations, overcrowded correctional facilities and
more lenient sentencing alternatives.
Revenues are derived from selling and leasing monitoring units; selling services
such as training, monitoring services, and data archiving; and providing the use
of a web-based tracking and monitoring system, known as tracNET24(TM). tracNET24
is a hosted application, accessible with a standard web browser to distributors
and their justice agency customers through secured logins. It allows tracking
and monitoring of all electronically activated PTUs. For each monitoring system
hosted on the company's servers, a daily fee is charged. Agreements exist with
distributors, service providers (i.e. private companies which operate monitoring
centers for state and county agencies), and state and county agencies. The usual
term of such agreements is from one to three years, with automatic one year
renewals thereafter.
On August 12, 2003, iSt entered into a share exchange agreement with Tracking
Systems Corporation, Harrisburg, Pennsylvania (TSC), a privately held provider
of criminal offender monitoring equipment services. Under the terms of the
agreement, iSt exchanged 4,423,077 shares its common stock (valued at $2.3
million based upon the average of the bid and asked prices for 20 trading days
preceding the closing) for 100% of the common stock of TSC and assumed
$4,152,239 of TSC debt. The transaction was approved by the stockholders of TSC
on August 21, 2003, and was closed on August 28, 2003. TSC is now a wholly owned
subsidiary of iSt and the results of their operations from August 29, 2003,
through December 31, 2003, are included in the consolidated financial
statements.
EQUIPMENT REVENUE
Equipment Revenue is derived from the sale of product. For the three months
ended March 31, 2004, equipment revenues were $16,506 compared to $29,268 during
the same period in 2003. The reason for the decrease is the reduction in units
sold during 2004, compared to the same period of 2003. This reduction is
attributable to the shift in the company's business model from selling to
leasing of its product.
9
LEASING REVENUE
Leasing Revenue is derived from the leasing of monitoring equipment. For the
three month period ended March 31, 2004, leasing revenues were $277,456 compared
to $15,039 for the same period in 2003. $191,800 of this increase is
attributable to the acquisition of TSC with the balance due to an increase in
units under lease.
HOSTING REVENUE
Hosting Revenue is derived from the fees charged to customers for the use of ASP
and monitoring center services. For the three months ended March 31, 2004,
hosting revenues were $505,003 compared to $21,355 during the same period in
2003. $397,895 of this increase is attributable to the acquisition of TSC with
the balance due to the increased deployment of PTUs.
GAIN ON SALE-LEASEBACK TRANSACTIONS
The Gain on Sale-leaseback Transactions consists of amortization of the deferred
gain that is recorded upon delivery of units in conjunction with the
sale-leaseback transactions the Company entered into. For the three months ended
March 31, 2004, the gain on sale-leaseback transactions for related parties was
$100,675 compared to none during the same period in 2003. The gain on all other
sale-leaseback transactions for the three months ended March 31, 2004, was
$5,653 compared to none during the same period of 2003. There were no
sale-leaseback agreements in place until 2003.
SERVICE REVENUE
For 2004, Service Revenue consisted of sales of non-core product that included
various ancillary computer equipment and the maintenance associated with such
equipment. For the three months ended March 31, 2004, Service Revenue was
$18,731 compared to $2,057 for the comparable period of 2003.
COST OF REVENUES
Cost of Revenues represents all direct costs associated with the generation of
equipment and hosting revenue, including cost of goods for equipment that is
sold and leased, the direct variable communications and hardware equipment
expenses associated with the webcentric hosting services, the costs of
distribution of software and equipment, and the maintenance expenses on
equipment repaired under service agreements. A portion of the cost of revenues
consists of the amortization of product development costs, which began in March
2002. This amortization amounted to $78,715 for the three months ended March 31,
2004 and 2003 respectively. For the three months ending March 31, 2004, Cost of
Revenues was $1,954,530, compared to $126,556 during the same period in 2003.
$1,341,251 of this increase is attributable to the write down to market value of
certain host monitoring equipment pursuant to the company's strategy of moving
to the tracNET24 platform for all electronic monitoring. Other contributing
factors include the overall increase in deployment of PTUs and the increased
product development cost amortization.
RESEARCH AND DEVELOPMENT
Research and Development expenses are the direct costs associated with iSt's
development of its proprietary products. Expenses in this category include the
cost of outside contracted engineering and design, staffing expenses for iSt's
own engineers and software developers, and the actual costs of components,
prototypes, and testing equipment and services used in the product development
functions. The Research and Development expenses were $174,964 for the three
months ended March 31, 2004, compared to $180,487 for the same period in 2003.
This decrease in research and development expenses was the result of the shift
from development to operations.
10
SALES, GENERAL AND ADMINISTRATIVE
Sales, General and Administrative (SG&A) expenses are all the expenses
associated with the operations and marketing of the Company, outside of the
expenses described above. These expenses include executive, sales,
administrative and accounting staff payroll, taxes and benefits, rent on
property, all travel, fixed telephone expenses, office leases and supplies,
marketing, advertising in magazines and periodicals, attendance at trade shows,
production of marketing and related collateral material, as well as recruiting
and training expenses. For the three months ended March 31, 2004, SG&A expenses
increased to $2,384,681 from $1,034,139 in the comparable period of 2003.
$994,345 of this increase was due to the acquisition of TSC and the write down
of $302,298 of certain monitoring contracts, with the balance primarily
attributable to the amortization of unearned consulting fees and increases in
salaries and wages due to addition of sales personnel.
OPERATING LOSS
For the three months ended March 31, 2004, operating loss was $3,590,151,
compared to $1,273,463 for the same period in 2003. The increase is primarily
attributable to increases in Cost of Revenues and SG&A expenses as described
above.
INTEREST EXPENSE
For the three months ended March 31, 2004, interest expense totaled $199,497,
compared to interest expense of $65,265 in the comparable period of 2003. This
increase was due to higher borrowings by the Company in 2004.
FINANCING FEES
For the three months ended March 31, 2004, financing fees expense was $21,598,
compared to none for the comparable period of 2003. There were no financing fees
in the first quarter of 2003.
NET LOSS
For the three months ended March 31, 2004, the Company had a net loss of
$3,811,238, compared to a net loss of $1,338,619 in the comparable period of
2003, for the reasons described above.
PREFERRED DIVIDENDS
For the three months ended March 31, 2004, preferred dividends totaled $221,313,
as compared to $203,463 for the comparable period of 2003. This change was due
to more outstanding Series A Convertible Preferred Stock during 2004.
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
For the three months ended March 31, 2004, there was a net loss available to
common stockholders of $4,032,551 compared to $1,542,082 in 2003. The reasons
for these changes are described above.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 2004, the Company used $1,274,225 of cash
in operating activities, another $194,185 in investing activities, and generated
$1,453,144 in cash from financing activities. The total of all cash flow
activities resulted in a decrease in the balance of cash for the three months
ended March 31, 2004 of $15,266. For the same period of 2003, the Company used
$878,260 of cash in operating activities and $5,600 in investing activities.
$877,919 of cash was generated from financing activities. The total of all cash
flow activities resulted in a decrease in the balance of cash of $5,941.
11
The Company completed a sale-leaseback transaction with an unrelated party
involving 100 Series 2100 PTUs for $120,000 during the first quarter of 2003.
This transaction generated a gain of approximately $45,000 that is being
amortized into income over the term of the lease (24 months).
The Company completed a second sale-leaseback transaction with a related party
(consisting of various stockholders) involving 312 Series 2100 PTUs for $375,000
during the third quarter of 2003. This transaction generated a gain of
approximately $164,000 that is being amortized into income over the term of the
lease (24 months).
A third sale-leaseback transaction was completed with a related party
(consisting of various stockholders) involving 417 Series 2100 PTUs for $500,000
during the fourth quarter of 2003. This transaction generated a gain of
approximately $274,000 that is being amortized into income over the term of the
lease (24 months).
A fourth sale-leaseback transaction was completed with a related party
(consisting of various stockholders) involving 300 Series 2100 PTUs for $360,000
during the fourth quarter of 2003. This transaction generated a gain of
approximately $198,000 that is being amortized into income over the term of the
lease (24 months).
The Company completed a fifth sale-leaseback transaction with a related party
(consisting of various stockholders) involving 100 Series 2100 PTUs for $125,000
during the fourth quarter of 2003. This transaction generated a gain of
approximately $71,000 that is being amortized into income over the term of the
lease (24 months).
The Company is in the process of completing one other sale-leaseback transaction
with a related party (consisting of various stockholders) involving 235 Series
2200 PTUs. As of March 31, 2004, iSt had received funding from this related
party totaling $375,000. The Company has sold and leased back 166 of the 235
units under this lease agreement. This transaction has generated a gain of
approximately $140,000 that is being amortized into income over the term of the
lease (24 months).
Other sale-leaseback opportunities are being pursued with various third party
leasing companies. Lease funding of PTUs units can be an ongoing source of
funding to meet cash requirements.
Management plans to continue financing development of the technology and
operations through external and related party financing. On March 3, 2004, iSt
has received a private placement commitment of $5,000,000 in equity financing
from a private investor group to continue to fund the operations and production
of tracking devices and related services. As of May 13, 2004, this funding had
not been received by the Company and there is substantial doubt that it will be
received.
iSt entered into a common stock purchase agreement on March 7, 2003, as amended
and restated on April 14, 2003, with Fusion Capital Fund II, LLC (Fusion), a
Chicago based institutional investor. Under the agreement, Fusion was to buy up
to $12.0 million of common stock over a period of up to 40 months, subject to
iSt's right to extend the agreement for six months. iSt had the right to control
the timing and amount of stock sold to Fusion with the purchase price based upon
the market price of the Company's common stock at the time of sale without any
discount. On March 3, 2004, iSt elected to terminate its common stock purchase
agreement with Fusion.
As of May 13, 2004, the following additional borrowing facilities were in place:
A note payable from U.S. Bank N.A. of Omaha, Nebraska. This note calls for
monthly payments of $16,557, including interest, through March 15, 2005, when
all remaining principal and interest are due. The interest rate is a variable
rate based on the U.S. Bank N.A. Reference Rate (the "Index Rate") plus 1%. As
of March 31, 2004, the Index Rate was 4% and the outstanding loan balance was
$252,118. This loan is secured by a security interest in the Company's tangible
and intangible assets and the personal guarantees of various stockholders.
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An unsecured note payable from Merrill Corporation resulting from the conversion
of accounts payable. This short-term note carries an interest rate of 5% and
matured on March 31, 2004. As of May 14, 2004, the outstanding loan balance was
$57,210.
A $73,366 note payable from Nebraska State Bank of Omaha. This short-term note
matured on March 17, 2004, carried an interest rate of 7.25% which was due at
maturity, and is still outstanding. We are currently negotiating with this bank
to renew and extend this note payable.
A $3,452,239 note payable from Westburg Media Capital, LP. This long-term note
calls for monthly payments including interest of $67,000 with a balloon payment
for the remaining amount due in full in November 2007. The interest rate is
based on the U.S. Bank of Washington prime rate plus 4%. As of March 31, 2004,
the rate in effect was 8% and the outstanding loan balance was $3,038,030. This
note payable is secured by all corporate assets.
A $200,000 note payable from Keystone Venture IV, LP (a stockholder). This
unsecured, long-term note matures on August 31, 2006, and carries an interest
rate of 8% which is payable annually in arrears. This note payable is
subordinated to the Westburg Media Capital, LP note payable.
A $200,000 note payable from Penn Janney Fund, Inc. (a stockholder). This
unsecured, long-term note matures on August 31, 2006 and carries an interest
rate of 8% which is payable annually in arrears. This note payable is
subordinated to the Westburg Media Capital, LP note payable.
A $300,000 note payable from Oddyssey Capital Group, LP (a stockholder). This
unsecured, long-term note matures on August 31, 2006 and carries an interest
rate of 8% which is payable annually in arrears. This note payable is
subordinated to the Westburg Media Capital, LP note payable.
A $1,000,000 subordinated convertible note with MicroCapital Fund LLC. This long
term note carries an interest rate of 10% with quarterly interest payments and
matures in October 2008.
A 10%, convertible debenture, currently due, convertible into Common Stock at
$6.06 per share. iSt currently owes $30,000 on this debenture.
Six capital leases with related and unrelated parties carrying interest rates
ranging from 10.475% to 10.50% and maturing in January 2005 to December 2005. As
of March 31, 2004, the aggregate balance on these capital leases totaled
$1,381,674.
The majority of the remaining $2,240,388 in notes payable consists of amounts
owed to individuals, primarily directors of iSt, which mature within one year
and carry interest rates of 5% to 10%.
As of March 31, 2004, the Company lacked sufficient operating capital to fund
its ongoing development and operations and did not have commitments other than
the following for either debt or share purchases to meet its planned 2004
operating capital requirements. On March 3, 2004, iSt received a private
placement commitment of $5,000,000 in equity financing from a private investor
group to continue to fund the operations and production of tracking devices and
related services. Based on revenue forecasts and expense budgets, management
expects the proceeds from this financing to fund operating requirements until
the Company achieves breakeven from operations by 2005. As of May 13, 2004, this
funding had not been received by the Company and there is substantial doubt that
it will be received.
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ITEM 3. DISCOLSURE 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.
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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is subject to pending or threatened lawsuits that are ordinary to
its business. In the opinion of management, no material loss is expected from
any of such pending claims or lawsuits. The Company is also subject to a variety
of federal and state laws and regulations, especially those relating to
electronic devices and wireless communications.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
iST claims exemption under the Securities Act of 1933 Section 4(2) for the
following equity transactions which took place in the first quarter of 2004.
1. Board members were compensated in total with 9,524 shares of stock valued
at $4,000 for attending (1) first quarter board meeting. The 9,524 shares
are comprised of four board members receiving 2,381 shares each on
February 25, 2004. Ken Macke, retired Chairman and CEO of Dayton Hudson
Corp., was also compensated for being an Advisor to the Board of
Directors. He received 19,841 shares on February 25th valued at $8,333 for
attending (1) first quarter board meeting.
2. On January 15th and January 23, 2004, we issued 30,014 and 12,500 shares
of common stock respectively with a total value of $20,000 to an
individual for services per his consulting agreement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable
ITEM 5. OTHER INFORMATION.
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits
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.
(B) Reports on Form 8-K
15
On February 19, 2004, iSECUREtrac filed a report on Form 8-K under Item 5.
"Other Events" announcing a change of management with the resignation of Mr.
Michael P. May as Chairman and Chief Executive Officer. Mr. May's resignation
was for personal reasons. The Board of Directors of the corporation appointed
Mr. Thomas E. Wharton, Jr., a current director, as interim Chief Executive
Officer.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
iSECUREtrac Corp.
By: /s/ Thomas E. Wharton Jr.
--------------------------
Thomas E. Wharton Jr.
President & CEO
Dated: August 19, 2004
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