UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549-1004
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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)
5078 S. 111TH STREET
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 October 29, 2004, was
60,589,366.
Transitional Small Business Disclosure Form (Check One): YES [ ] NO [X]
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ISECURETRAC CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, 2004 December 31, 2003
- -------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 232,590 $ 125,399
Accounts receivable, net of allowance for doubtful accounts of
$15,600 in 2004 and $12,000 in 2003 916,306 602,367
Inventories 120,203 144,151
Prepaid expenses and other 57,209 95,032
- -------------------------------------------------------------------------------------------------------------
Total current assets 1,326,308 966,949
- -------------------------------------------------------------------------------------------------------------
Leasehold Improvements and Equipment, net 255,116 359,453
Monitoring Equipment, net of accumulated depreciation of $2,869,998
in 2004 and $470,331 in 2003 2,786,455 4,078,419
Product Development Costs, net of accumulated amortization of $824,736
in 2004 and $577,246 in 2003 165,224 367,338
Intangibles, subject to amortization 400,607 822,856
Goodwill 2,302,179 2,302,179
Other Assets 314,786 32,488
- -------------------------------------------------------------------------------------------------------------
Total assets $ 7,550,675 $ 8,929,682
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Notes payable $ 2,337,079 $ 2,994,476
Current maturities of long-term debt 1,882,290 1,645,494
Accounts payable and accrued expenses 1,016,817 1,319,884
Deferred gain on sale-leaseback transaction 934,861 677,125
Accrued interest payable 269,138 195,587
Preferred dividends payable 900,851 218,513
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 7,341,036 7,051,079
- -------------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities 5,975,352 4,839,547
- -------------------------------------------------------------------------------------------------------------
Stockholders' Deficit
Series A convertible preferred stock 9,125,470 9,125,470
Series B convertible preferred stock; 2004, $27,000 dividends in
arrears; 2003, $23,500 dividends in arrears 295,000 295,000
Common stock 59,444 48,904
Additional paid-in capital 33,815,855 28,524,733
Unearned consulting expense -- (357,000)
Accumulated deficit (49,061,482) (40,598,051)
- -------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (5,765,713) (2,960,944)
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' deficit $ 7,550,675 $ 8,929,682
=============================================================================================================
See Notes to Condensed Consolidated Financial Statements.
Page 2
ISECURETRAC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------
REVENUES:
Equipment $ 126,729 $ 38,261 $ 278,520 $ 119,211
Leasing 389,654 105,300 980,856 143,523
Hosting 559,732 207,251 1,606,504 262,982
Gain on sale-leaseback transactions
Related party 162,184 22,766 390,618 22,766
Other 7,051 5,653 18,685 16,959
Service 49,018 7,621 99,544 11,346
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 1,294,368 386,852 3,374,727 576,787
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Cost of revenues 738,397 274,554 3,507,055 573,502
Research and development 162,850 178,328 519,322 551,777
Sales, general and administrative 1,048,626 1,163,666 4,536,504 3,178,339
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,949,873 1,616,548 8,562,881 4,303,618
- ---------------------------------------------------------------------------------------------------------------------------
Operating loss (655,505) (1,229,696) (5,188,154) (3,726,831)
- ---------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 23 39 32 250
Interest expense (958,968) (107,629) (2,571,373) (238,108)
Financing fees -- (558,158) (21,598) (558,158)
- ---------------------------------------------------------------------------------------------------------------------------
Total other income (expense) (958,945) (665,748) (2,592,939) (796,016)
- ---------------------------------------------------------------------------------------------------------------------------
Loss before provision for income taxes (1,614,450) (1,895,444) (7,781,093) (4,522,846)
Provision for income taxes -- -- -- --
===========================================================================================================================
NET LOSS $ (1,614,450) $ (1,895,444) $ (7,781,093) $ (4,522,846)
===========================================================================================================================
Preferred dividends (234,470) (216,771) (682,338) (629,687)
===========================================================================================================================
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (1,848,920) $ (2,112,215) $ (8,463,431) $ (5,152,533)
===========================================================================================================================
Basic and diluted loss per common share $ (0.03) $ (0.05) $ (0.16) $ (0.13)
===========================================================================================================================
Weighted average shares of common stock outstanding 57,721,146 43,535,697 52,132,115 39,416,506
===========================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
Page 3
ISECURETRAC CORP. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' DEFICIT
For the Nine Months Ended September 30, 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 -- -- -- -- 8,492,572 8,493
Shares issued upon conversion of convertible notes -- -- -- -- 1,864,240 1,864
Shares issued for director's fees and services -- -- -- -- 183,429 183
Amortization of unearned consulting expense -- -- -- -- -- --
Paid-in capital for cost of options issued -- -- -- -- -- --
Warrants issued for loans and consulting services -- -- -- -- -- --
Series A preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2004 9,126 $9,125,470 300 $295,000 59,444,540 $59,444
===============================================================================================================================
ADDITIONAL UNEARNED
PAID -IN CONSULTING ACCUMULATED
CAPITAL EXPENSE DEFICIT TOTAL
- -------------------------------------------------------------
$28,524,732 $(357,000) $(40,598,051) $(2,960,945)
4,479,354 -- -- 4,487,847
426,911 -- -- 428,775
61,400 -- -- 61,583
-- 357,000 -- 357,000
117,449 -- -- 117,449
206,009 -- -- 206,009
-- -- (682,338) (682,338)
-- -- (7,781,093) (7,781,093)
- -------------------------------------------------------------
$33,815,855 $ -- $(49,061,482) $(5,765,713)
=============================================================
See Notes to Condensed Consolidated Financial Statements.
Page 4
ISECURETRAC CORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2004 and 2003
(Unaudited)
2004 2003
- -------------------------------------------------------------------------------------------------------
Cash flow from operating activities:
Net loss $(7,781,093) $(4,522,847)
Depreciation and amortization 1,475,877 452,276
Impairment charge of monitoring equipment 1,341,251 --
Impairment charge of intangibles subject to amortization 302,298 --
Interest expense related to convertible debt 1,900,000 --
Other (7,016) 3,712,885
- -------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,768,683) (357,686)
- -------------------------------------------------------------------------------------------------------
Monitoring equipment (1,077,705) (22,412)
Deferred gain on sale-leaseback transaction 667,039 39,725
Other (18,558) 308,128
- -------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (429,224) 325,441
- -------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Decrease in notes payable (657,397) (1,011,422)
Proceeds from long term debt 3,025,000 1,120,000
Principal payments on long term debt (1,223,624) (361,233)
Net proceeds from issuance of common stock 3,148,592 1,252,540
Other (987,473) (926,461)
- -------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,305,097 73,424
- -------------------------------------------------------------------------------------------------------
Increase in cash 107,191 41,179
Cash, beginning of period 125,399 47,374
- -------------------------------------------------------------------------------------------------------
Cash, end of period $ 232,590 $ 88,553
=======================================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash payments for:
Interest $ 597,822 $ 174,082
Income Taxes -- --
See Notes to Condensed Consolidated Financial Statements.
Page 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 and nine months ended September 30, 2004, and
for the three and nine months ended September 30, 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 and nine months ended September 30, 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.
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 September 30, 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 September 30, 2004, we granted options to purchase
21,500 shares of common stock to fourteen employees pursuant to their stock
option agreements and employee bonus incentive plans. The exercise prices for
21,500 of the employee's options are at 85% of fair value of iSt's common stock
and vest ratably over two years. iSt had 248,648 options forfeited and no
options exercised during the quarter ended September 30, 2004.
iSECUREtrac Corp., at September 30, 2004, had 13,316,874 outstanding stock
options, 20,011,683 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, 9,028,210 shares
issuable upon the conversion of subordinated convertible notes 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 periods presented.
Page 6
NOTE 3. STOCK-BASED COMPENSATION
Stock-based compensation: As of September 30, 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 $25,612
and $21,730 has been reflected in the net loss for the three-month periods
ending September 30, 2004 and 2003, respectively, and $96,489 and $65,510 has
been reflected in net loss for the nine-month periods ending September 30, 2004,
and 2003, respectively. The following table illustrates the effect on net loss
for the three and nine-month periods ending September 30, 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.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
Net loss, as reported $(1,614,450) $(1,895,444) $(7,781,093) $(4,522,846)
Add: Stock-based employee compensation expense included in
reported net loss 25,612 21,730 96,489 65,510
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards (3,645) (121,377) (1,475,673) (302,411)
- -------------------------------------------------------------------------------------------------------------------------------
Pro forma net loss $(1,592,483) $(1,995,091) $(9,160,277) $(4,759,747)
===============================================================================================================================
Basic and diluted loss per share:
As reported $ (0.03) $ (0.05) $ (0.16) $ (0.13)
===============================================================================================================================
Pro forma $ (0.03) $ (0.05) $ (0.19) $ (0.14)
- -------------------------------------------------------------------------------------------------------------------------------
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 94.09%
and 85.94%.
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.
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 Company's
Personal Tracking Units (PTUs) and tracNET24 software. No assurances can be
given when this will occur or that the Company will ever be profitable.
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.
Page 7
10,956,523 shares of our authorized but unissued common stock has been reserved
for issuance to certain private investors to whom iSt issued 4% subordinated
convertible promissory notes, in the aggregate amount of $1,200,000 on May 28,
2004. 5,217,392 of such shares are issuable pursuant to the promissory notes and
5,739,131 of such shares are issuable pursuant to certain warrants. The notes
may be converted at any time up to the maturity date of May 28, 2006. As of
September 30, 2004, iSt converted $34,500 of the $1,200,000 of convertible notes
from this group of investors totaling 150,000 shares.
6,326,087 shares of our authorized but unissued common stock has been reserved
for issuance to certain private investors to whom iSt issued 4% subordinated
convertible promissory notes, in the aggregate amount of $700,000 on July 1,
2004. 3,043,479 of such shares are issuable pursuant to the promissory notes and
3,282,608 of such shares are issuable pursuant to certain warrants. The notes
may be converted at any time up to the maturity date of May 28, 2006. As of
September 30, 2004, iSt converted $394,275 of the $700,000 of convertible notes
from this group of investors totaling 1,714,240 shares.
The Company has made numerous expense cuts that have significantly improved our
results of operations. Over the last two quarters, sales, general and
administrative costs have been reduced by 56% and costs of revenues have been
reduced by 62% while revenues have increased by 40%. Over the same time period,
cash revenues and cash gross profit have increased by 38% and 87%, respectively,
while cash operating expenses have been cut by 30%. Additional expense
reductions have been realized and will be reflected in the fourth quarter's
operations.
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. To date, the Company 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 November 9, 2004,
the Company closed on a private placement of $925,000 in equity financing from
related parties. Negotiations for additional equity financing from unrelated
parties are in process.
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 September 30, 2004 and December
31, 2003, leased equipment totaled $2,676,180 and $1,551,809, respectively.
Accumulated depreciation on iSt's leased equipment as of September 30, 2004 and
December 31, 2003 totaled $988,082 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 and loan
acquisition costs. In regards to the customer monitoring contracts,
Page 8
the Company is amortizing the intangible assets based on the revenue stream of
the existing contracts. As for the loan acquisition costs, the Company is
amortizing those costs over the life of the loan. For the nine months ending
September 30, 2004 and 2003, amortization expense was $422,249 and none,
respectively. The composition of goodwill and intangible assets at September 30,
2004, is as follows:
GOODWILL OTHER INTANGIBLES TOTAL
- ----------------------------------------------------------------------------------------
Balance at December 31, 2003 $2,302,179 $ 822,856 $ 3,125,035
Amortization -- (422,249) (422,249)
- ----------------------------------------------------------------------------------------
Balance at September 30, 2004 $2,302,179 $ 400,607 $ 2,702,786
- ----------------------------------------------------------------------------------------
NOTE 7. SUBSEQUENT EVENT
On November 9, 2004, the Company completed a $925,000 private placement at $0.23
per share. The private placement was made with an investment group which
included iSECUREtrac's Chairman Roger Kanne and Board members Martin Halbur,
Robert Badding, and Ronald Muhlbauer. The additional capital will be used to
support the company's growth objectives.
Page 9
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
Page 10
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 and nine
months ended September 30, 2004, equipment revenues were $126,729 and $278,520
compared to $38,261 and 119,211 for the three and nine month periods in 2003.
$6,804 and $108,601 of this three and nine month increase, respectively, is
attributable to the acquisition of TSC. $105,840 in equipment revenue was
recorded in the 3rd quarter 2004 from the sale of 63 PTUs.
LEASING REVENUE
Leasing Revenue is derived from the leasing of monitoring equipment. For the
three and nine month periods ended September 30, 2004, leasing revenues were
$389,654 and $980,856 compared to $105,300 and $143,523 for the same periods in
2003. $179,924 and $538,660 of this three and nine month increase, respectively,
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 and nine months ended September
30, 2004, hosting revenues were $559,732 and $1,606,504 compared to $207,251 and
$262,982 during the three and nine month periods in 2003. $200,107 and $986,718
of this three and nine month increase, respectively, 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 and nine
months ended September 30, 2004, the gain on sale-leaseback transactions for
related parties was $162,184 and $390,618 compared to $22,766 and $22,766 during
the same periods in 2003. The gain on all other sale-leaseback transactions for
the three and nine months ended September 30, 2004, was $7,051 and $18,685,
compared to $5,653 and $16,959 during the same periods in 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 and nine months ended September 30, 2004, Service
Revenue was $49,018 and $99,544 compared to $7,621 and $11,346 for the
comparable periods of 2003. $17,817 and $54,500 of this three and nine month
increase, respectively, is attributable to the acquisition of TSC.
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 and $236,145 for the three and nine
months ended September 30, 2004 and $78,715 and $236,145 for the same periods in
2003. For the three and nine months ending September 30, 2004, Cost of Revenues
was $738,397 and
Page 11
$3,507,055, compared to $274,554 and $573,502 during the same periods in 2003.
$208,450 and $2,150,585 of this three and nine month increase, respectively, is
attributable to the acquisition of TSC, including a $1,341,251 write down to
market value during the 1st Quarter of 2004 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.
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 $162,850 and $519,322 for
the three and nine months ended September 30, 2004, compared to $178,328 and
$551,777 for the three and nine month periods in 2003.
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. SG&A expenses were $1,048,626 and $4,536,504 for the
three and nine months ended September 30, 2004, compared to $1,163,666 and
$3,178,339 for the three and nine month periods in 2003. $99,243 of this three
month decrease was due to the merging of operations with TSC. The primary
reasons for the three month decrease were decreases in salaries and wages and
decreases in fees paid for contract labor. $1,341,581 of this nine month
increase was related to the acquisition of TSC. The nine month increase included
a $302,298 1st quarter write down 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 and nine months ended September 30, 2004, operating loss was
$655,505 and $5,188,154, compared to $1,229,696 and $3,726,831 for the same
periods in 2003. The three month decrease is primarily related to the decrease
in SG&A expenses and increase in revenues for the three month period as stated
above. The nine month increase is primarily attributable to the 1st quarter 2004
impairment charge.
INTEREST EXPENSE
For the three and nine months ended September 30, 2004, interest expense totaled
$958,968 and $2,571,373, compared to interest expense of $107,629 and $238,108
in the three and nine month periods of 2003. During the three and nine months
periods of 2004, the company recorded $700,000 and $1,900,000, respectively, of
non-cash interest expense related to the issuance of convertible debt with
detachable warrants and pursuant to APB Opinion No. 14, Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants. The balance of
the increase was due to higher borrowings by the Company in 2004.
FINANCING FEES
For the three and nine months ended September 30, 2004, financing fees were none
and $21,598, respectively, compared to $558,158 and $558,158 for the comparable
periods of 2003. In 2004,
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financing fees were directly related to private placement offerings. In 2003,
financing fees were issued prior to any funding received by the Company and were
not tied to any private placement offerings.
NET LOSS
For the three and nine months ended September 30, 2004, the Company had a net
loss of $1,614,450 and $7,781,093, compared to a net loss of $1,895,444 and
$4,522,846 in the three and nine month periods of 2003, for the reasons
described above.
PREFERRED DIVIDENDS
For the three and nine months ended September 30, 2004, preferred dividends
totaled $234,470 and $682,338, as compared to $216,771 and $629,687 for the
comparable periods 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 and nine months ended September 30, 2004, there was a net loss
available to common stockholders of $1,848,920 and 8,463,431 compared to
$2,112,215 and $5,152,533 in the three and nine month periods of 2003. The
reasons for these changes are described above.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2004, the Company used $2,768,683 of
cash in operating activities, another $429,224 in investing activities, and
generated $3,305,097 in cash from financing activities. The total of all cash
flow activities resulted in an increase in the balance of cash for the nine
months ended September 30, 2004 of $107,191. For the same period of 2003, the
Company used $357,686 of cash in operating activities and generated $325,441
from investing activities and $73,424 from financing activities. The total of
all cash flow activities resulted in an increase in the balance of cash for the
nine months ended September 30, 2003 of $41,179.
The Company completed a sale-leaseback transaction with a related party
(consisting of various stockholders) involving 235 Series 2200 PTUs for $375,000
during the second quarter of 2004. This transaction generated a gain of
approximately $199,000 that is being amortized into income over the term of the
lease (24 months).
The Company is in the process of completing an additional sale-leaseback
transaction with a related party (consisting of various stockholders) involving
500 Series 2150 PTUs. As of September 30, 2004, iSt had received funding from
this related party totaling $625,000. Of the 500 units under this lease
agreement, 434 have been distributed to customers. This transaction has
generated a gain of approximately $260,000 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 500 Series
2250 PTUs. As of September 30, 2004, iSt had received funding from this related
party totaling $500,000. Of the 500 units under this lease agreement, 206 have
been distributed to customers. This transaction has generated a gain of
approximately $227,000 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.
As of September 30, 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 November 9, 2004, the
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Company closed on a private placement of $925,000 in equity financing from
related parties. Negotiations for additional equity financing from unrelated
parties are in process. 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 the end of
the first quarter of 2005.
The Company has made numerous expense cuts that have significantly improved our
results of operations. Over the last two quarters, sales, general and
administrative costs have been reduced by 56% and costs of revenues have been
reduced by 62% while revenues have increased by 40%. Over the same time period,
cash revenues and cash gross profit have increased by 38% and 87%, respectively,
while cash operating expenses have been cut by 30%. Additional expense
reductions have been realized and will be reflected in the fourth quarter's
operations.
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 October 29, 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 October 29, 2004, the Index Rate was 4.75% and the outstanding loan balance
was $152,774. This loan is secured by a security interest in the Company's
tangible and intangible assets and the personal guarantees of various
stockholders.
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 October 29, 2004, the outstanding loan balance
was $44,710.
A $73,366 note payable from Nebraska State Bank of Omaha. This long-term note
matures on May 10, 2005 and carries an interest rate of 6.50%. Principal and
interest payments are due monthly. As of October 29, 2004, the outstanding loan
balance was $71,650.
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 October 29, 2004,
the rate in effect was 8.75% and the outstanding loan balance was $2,724,172.
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.
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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% convertible into shares of the
Company's common stock at $0.38 per share with quarterly interest payments and
matures in October 2008.
A series of notes with nine entities totaling $1,900,000 at 4% interest
convertible into shares of the Company's common stock at $0.23 per share. These
convertible notes mature on May 28, 2006. As of October 29, 2004, conversion
requests have resulted in the reduction of principal balances of these notes to
$1,441,225.
A 10%, convertible debenture, currently due, convertible into Common Stock at
$6.06 per share. iSt currently owes $30,000 on this debenture.
Eight capital leases with related and unrelated parties carrying interest rates
ranging from 9.75% to 10.65% and maturing in January 2005 to October 2007. As of
October 29, 2004, the aggregate balance on these leases totaled $1,887,356.
The majority of the remaining $2,051,388 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%.
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ITEM 3. 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. UNREGISTERED SALES OF EQUITY 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 third quarter of 2004.
1. Board members were compensated in total with 13,635 shares of stock
valued at $3,000 for attending one (1) third quarter board meeting.
The 13,635 shares were comprised of three board members receiving
4,545 shares each on August 27, 2004.
2. On August 13, 2004, we issued 326,087 shares of our common stock
valued at $75,000 to an outside investor for purchasing stock via
our private placement.
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
Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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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: November 15, 2004
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