As filed with the Securities and Exchange Commission on March 16, 2011.


UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K





x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended December 31, 2010                    Commission file number: 000-26455




OR




 ̈  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934


For the transition period from _____________ to _____________.




iSecureTrac Corp.


(Exact name of registrant as specified in its charter)





DELAWARE
87-0347787(State or other jurisdiction
(I.R.S. Employerof incorporation or organization)
Identification No.)





5078 South 111th Street


Omaha, Nebraska 68137


(Address of principal executive offices)(Zip Code)


Registrant’s telephone number: (402) 537-0022





Securities registered under Section 12(b) of the Exchange Act:  None


Securities registered under Section 12(g) of the Exchange Act:  Common Stock, par value $0.001 per share





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act    Yes  ̈  No x





Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.   Yes  ̈  No x




Indicate by check mark whether the registrant  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No  ̈




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   ̈     No   ̈





Indicate by check mark if  disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein and  will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [X]





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated file, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act)


Large accelerated filer   ̈     Accelerated filer   ̈     Non-accelerated filer   ̈     Smaller reporting company  x





Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ̈   No x





The aggregate market value of the common stock of the registrant held by non-affiliates, all of which is voting, was approximately $9,240,000, based on the closing sale price reported on June 30, 2010.





As of February 14, 2011, there were 10,927,451 shares of the registrant’s common stock outstanding.




DOCUMENTS INCORPORATED BY REFERENCE




Portions of the definitive Proxy Statement for the Registrant’s 2011 Annual Meeting of Stockholders to be filed within 120 days of the fiscal year ended December 31, 2010, are incorporated by reference in Items  10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K








iSecureTrac Corp.





Table of Contents





Item

PagePART I1
Business
011A.
Risk Factors
081B.
Unresolved Staff Comments2.
Properties
143.
Legal Proceedings
144.
Reserved
14PART II5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
146.
Selected Financial Data ( Not Required for SRC)
157.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
157A.
Quantitative and Qualitative Disclosures about Market Risk ( Not Required for SRC)
248.
Financial Statements and Supplementary Data
259.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
459A.
Controls and Procedures
459B.
Other Information
46PART III10.
Directors, Executive, Officers and Corporate Governance
4711.
Executive Compensation
4712.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
4713.
Certain Relationships and Related Transactions, and Director Independence
4714.
Principal Accounting Fees and Services
47PART IV15.
Exhibits and Financial Statement Schedules
48Signatures
51









PART I




Regarding Forward-Looking Statements




This Form 10-K contains forward-looking statements including statements about the future of iSECUREtrac Corp.’s products and the industry, statements about future business plans and strategies, and most other statements that are not historical in nature.  In this Form 10-K, forward-looking statements are generally identified by the words “believes,” “intends,” “expects,” “may,” “will,” “should,” “plan,” “projected,” “contemplates,” “anticipates,” “estimates,” “predicts,” “potential,” “continue,” or similar terminology.  Readers of this Form 10-K should understand that a number of factors could cause the
Company’s actual results to differ materially from those expressed in the forward-looking statements contained herein.  Many of these factors are described in Item 7 Managements’ Discussion and Analysis of Financial Condition and Results of Operations and under the heading “Risk Factors”.  Other factors discussed elsewhere in this report, in filings with the Securities and Exchange Commission or in materials incorporated herein or therein by reference may also affect the Company’s future financial condition and results of operations.




Item 1.  Business




General




As used in this report the terms “we”, “us”, “our”, “iSECUREtrac”, or the “Company” refer to iSECUREtrac Corp., a Delaware corporation that is the successor in interest to a Colorado corporation initially incorporated in 1983.




iSECUREtrac develops, markets, leases and services products that assist in “monitoring compliance and modifying behavior” of individuals who are under the supervision of the criminal justice system and social service agencies, primarily in the United States.




The Company’s principal sources of revenue are daily leasing of electronic monitoring equipment including access to the corresponding web-based monitoring software, and providing administrative, field and support services, generally charged on a per offender/per day basis.




Background




For more than a decade, the Company has been engaged in its current business of providing electronic monitoring products and services including its proprietary Global Positioning System (“GPS”) tracking systems and non-proprietary visual breath alcohol testing for individuals under community supervision with the objective of “monitoring compliance and modifying behavior.”




In 1997, the Company introduced its first GPS tracking system -1600 series, followed by the 2000 Series (System 2150 and System 2250) in 2003, and the latest generation system – the System 5000 in the fourth quarter of 2007.




Based upon customer feedback and reported results of field testing in connection with RFP evaluations, the System 5000 remains an industry leading GPS tracking solution supported by the Verizon wireless network – widely recognized as America’s largest and most reliable wireless network. In addition, the Company offers products and services through third-party providers.  Automated-Voice-Notification was added in 2006; complementary, non-proprietary, GPS tracking systems were added in 2008; and biometric voice verification was added in 2009.




Market Overview




According to the Pew Public Safety Performance Project, the incarcerated population in the United States has reached 2.3 million and more than one in every 100 adults is now confined in an American jail or prison.  This growing number of incarcerated offenders is burdening states’ budgets with soaring costs.  Agencies are seeing increases in facilities, health care, and labor costs while at the same time seeing a lag in victim restitution, child support and tax payments as incarcerated persons lose their jobs and become a tax burden.




1




As significant as the incarcerated population may be, it is the growth in those being monitored outside of prison by probation and parole departments that has skyrocketed.  Today more than 5 million adults – or one in every 45 adults - are subject to community corrections supervision in the United States.




The growth in both populations (incarcerated and community supervised) and the growth in related costs is unsustainable.   The existing facilities simply can’t house the growing population and agencies at all levels are struggling to find funding as budgets are being cut.  Electronic monitoring systems offered by the Company (e.g. GPS, House Arrest, Voice Verification and Visual Breath Alcohol) are very logical and economical alternatives.




Electronic monitoring systems enable an agency to monitor, at a greater level of supervision, the activities of a growing number of probationers and parolees without having to allocate additional labor resources to such monitoring efforts.  Community supervision programs give corrections and law enforcement agencies more flexibility in solving budget-related problems.  Since public safety is maintained or improved by linking alternative sentencing programs with electronic monitoring, programs like work release become viable, cost-effective tools for today’s correctional system.




In summary, the use of products and services offered by iSECUREtrac offer four distinct advantages over incarceration:




(1)
the cost of managing an offender in the community with electronic monitoring is almost 85% less expensive than the cost of incarceration,




(2)
electronic monitoring  reduces the public's tax burden by allowing the offender to work thereby providing the offender the opportunity to meet their financial obligations,




(3)
electronic monitoring  reduces prison and jail overcrowding, and




(4)
electronic monitoring helps to reduce the rate of recidivism (re-offense) when combined with regular rehabilitation/reintegration counseling.




Industry/Technology Advancements




The electronic monitoring market remains an emerging, early stage industry.   Accordingly, new technology is being developed and introduced at a rapid pace.  In general, the technological advancements of the new products are able to demand a higher price point.  However, the industry has historically demonstrated that in most instances, there remains a steady and consistent demand for the existing technology and products.




Our Products and Services




iSECUREtrac has a full suite of electronic monitoring products and services consisting of:




·
GPS Tracking Systems, including Automated Voice Notification




·
House Arrest




·
Visual Breath Alcohol Testing




·
Bio-metric Voice Verification




·
Supplemental Monitoring Center Services




The Company sees a continued demand for its existing product offerings and remains committed to continuing to provide and support all product lines.




2




GPS Tracking Systems




GPS tracking systems enable law enforcement agencies to continuously monitor an individual’s location, and thereby compliance, with pre-determined terms.




Operated by the United States Department of Defense and provided free of charge, the Global Positioning System consists of at least 24 operational satellites that orbit the Earth every 12 hours.  Eight to twelve GPS satellites are visible from any point on Earth at any given moment in time.  A position fix can be acquired when a GPS receiver receives signals from at least three of these satellites.




Our GPS tracking products use this state-of-the-art positioning technology to monitor the movements of individuals under community supervision to a degree not previously possible or cost efficient.




The Company’s Series 2000 (System 2150 and System 2250) and System 5000 GPS systems are manufactured in the United States and consist of:




·
Personal Tracking Unit (PTU) that is carried by the offender when not in the charging base.  The PTU may include cellular communication capabilities.  The reception of the radio frequency (RF) signal from the ankle cuff indicates the cuff and PTU are in proximity. The absence of that RF signal indicates a possible violation.




·
An ankle cuff that is worn continuously by the offender. The cuff emits an RF signal to the PTU.




·
A charging base that re-charges the PTU battery and in some systems contains traditional land line communication capability.




Our GPS unit tracks an individual by collecting data points regarding their location and time, at intervals as short as every 10 seconds.   All data processing and compliance assessments take place in the PTU, a capability we call on-board intelligence.  When operating in an “active” mode, this feature provides officers with near real-time compliance reporting and potentially quicker response to violations by high risk offenders.




Our GPS systems offer:




·
Tracking units equipped with on-board intelligence allowing them to compute GPS locations and discern violation status without the assistance of a monitoring center or other secondary sources




·
Advanced circumvention sub-systems to identify, report and log attempts by the offender to tamper with the equipment or render it inoperable




·
The latest generation GPS chip sets for greater accuracy and sensitivity in areas that typically have weak GPS signals (e.g., urban canyons, terrain under dense foliage)




·
Secure, web-based management reporting through any Internet-ready device, anywhere in the world




·
Geo-fencing to control entrance and/or egress from geographically defined locations (e.g., home, work, spouse’s residence, elementary schools, etc.)




·
Automated voice notification with escalation to an unlimited number of parties including but not limited to supervising officers, law enforcement officials, judicial personnel and potential victims




·
Equipment designed and manufactured specifically for the corrections market that is hypoallergenic (ankle bracelet or cuff), tamper and shock resistant and water resistant or water proof (ankle bracelet or cuff)




3




·
Crime scene analysis (Crime Scene Inquiry) to assist agencies in identifying or eliminating potential suspects based upon their proximity to a specific crime location within a specified time period.




All of the Company’s GPS products collect data points regarding the offender time and location and provide the offender immediate feedback regarding compliance violations.  Depending on the specifications of the law enforcement or social services agency, the agency or monitoring center is notified of compliance violations based on the modes of operations outlined below:




·
Active GPS - uses on-board intelligence and a cellular communications network to report locations and violation status in near real time (Series 2000 and System 5000).  In addition, the Company’s System 5000 also offers the capability of reporting locations and violation status via a traditional land-line when the PTU is returned to the charging base.  This service is particularly useful in areas where cellular coverage is weak.




·
Passive GPS - uses the same on-board intelligence as the Active GPS unit, but reports the locations and violation status via a traditional land-line telephone only when the PTU is returned to the charging base (Series 2000 only)




House Arrest




House Arrest is a system that enables law enforcement agencies to verify an offender’s presence at a particular location (house, residence, work release facility, etc.).  Equipment and features of the iSECUREtrac House Arrest System include:




·
The ability to move from House Arrest to Active or Passive GPS remotely with the flip of a switch




·
A hypoallergenic and water proof ankle bracelet or cuff worn continuously by the offender which is equipped with tamper-detecting sub-systems and a radio frequency (RF) transmitter




·
A shock resistant monitoring base with enhanced signal reception to ensure superior signal monitoring at a range of distances




·
Reporting through a single, secure, web-based platform utilizing common management software for monitoring offenders on House Arrest, Active or Passive GPS




The agency can set a schedule for each offender corresponding to the rules of release.  For example, the offender must be at home between 6:00 p.m. and 7:00 a.m. every day.  Offender deviation from the schedule results in a violation notification sent to the agency.If the offender takes off the ankle bracelet or tampers with it, it sends out a unique signal alerting the monitoring base of the violation.  The base then communicates with the monitoring center which, in turn, automatically alerts the appropriate authorities.




Visual Breath Alcohol Testing




Our breath alcohol monitoring system enables an offender’s breath alcohol levels to be tested remotely and at the offender’s residence.  The system calls the offender on a scheduled, random, or on-demand basis, giving him clear instructions.  The offender blows into a drinking straw inserted in the HomeStation while a camera on the unit photographs the offender.  Breath Alcohol Test data and photographs are sent electronically to our data center.  Our personnel confirm the offender’s identity by comparing the event verification photo with original reference picture provided by the agency.  Deviation from program parameters, as defined by the agency, results in monitoring center staff contacting appropriate agency personnel.




Advantages of the iSECUREtrac Alcohol Testing System include:




·
In-home testing of individuals who may not have convenient access to a central testing facility




·
A proven alcohol testing methodology that yields court admissible evidence




4




·
The ability to customize a testing schedule (fixed, random or on-demand) to fit an individual’s supervision/corrections plan




·
The use of a time-tested reliable system designed to meet agency program parameters and budget




Many agency programs use a combination of iSECUREtrac systems to better monitor compliance and shape more socially responsible behavior.  For example, it is not unusual for individuals accused or convicted of domestic violence to be supervised with both active GPS and remote alcohol monitoring.




BioMetric Voice Verification




In 2009, the Company became an independent distributor of the voice biometrics speaker verification technology of ShadowTrack Technologies, Inc. ® ShadowTrack Technologies, Inc offers an interactive voice response system coupled with biometric authentication technology which is integrated into iSECUREtrac’s proprietary web-based platform tracNET24.




Supplemental Monitoring Center Services




To effect a more seamless integration with agency protocols and programs, iSECUREtrac provides supplemental services.  These optional services include:




·
Direct Monitoring Center Intervention in which iSECUREtrac will attempt to resolve common compliance issues through direct contact with the monitored individual.  If iSECUREtrac cannot resolve the issue, the situation is escalated in accordance with agency protocols.




·
Equipment Install and Removal frees agents from the task of fitting their clients and retrieving the equipment at the end of the program.




·
Automated Voice Notificationprovides voice alerts to officers in addition to text, pager and email notifications when those individuals under community supervision violate the terms of their release. These automated voice alerts can be customized by offender, violation and content. Voice messages can be automatically and simultaneously sent to a virtually unlimited number of recipients including potential victims.




·
On-Site Inventory Management provides precise control and safeguarding of equipment.  An on-site iSECUREtrac administrator maintains accurate inventory records including data pertaining to equipment receipt, the movement of equipment within and between locations and inventory assignments that match equipment serial numbers with client case numbers.




·
Extended Trainingincludes follow-up training and refresher courses to ensure agents, officers and supervisors are comfortable with the operation of the equipment and proficient in reading and interpreting electronic monitoring reports.




·
Program Development and Consulting can help fine tune protocols and procedures to reduce program “noise”, annoyance alerts and unnecessary data.




·
Financial Services and Administrationprovides agencies several options in the financial administration of community supervision programs.  For example, iSECUREtrac provides client billing services in which the offender/client is directly invoiced by iSECUREtrac for the cost of their electronic supervision.




·
Day Reporting Servicesincludes the provision by iSECUREtrac of a reporting center and staff to effectively supervise release compliance by those individuals under community supervision.




Web-Based Software/System Interface (tracNET24)




Our web-based software/system interface, known as tracNET24, is provided to end-user agencies through the Internet.  Probation or corrections officers with a secure log-in can access the system and know where his or her clients have been over any given time period.  With GPS monitoring, the officer can create or modify a schedule of locations where the offender must be at certain times of the day, week or month (e.g., a place of work, medical appointments, counseling appointments, meetings with the probation officer, etc.).  He/she merely enters a drop down menu for the schedule and either enters an address or points to a spot on the map and specifies a radius.  He/she thereby creates “inclusion zones” for the offender.  Similarly, the officer can
create “exclusion zones” (e.g., schools, home of an ex-spouse, etc.).  Once the parameters are entered, the Personal Tracking Unit is synchronized to download the scheduling and zone information to the unit.




5




Features of iSECUREtrac’s proprietary reporting and management software include but are not limited to:




·
The ability to establish boundaries or geo-fences via “inclusion” and “exclusion” zones, either for individual clients or entire caseload populations




·
The flexibility to change the content, delivery method and timing of alert notifications to best fit agency needs




·
Access to all reports and key events pertaining to monitored individuals through a secure, web-based program




·
Utilization of Microsoft’s Virtual Earth® as a mapping system overlay as well as recognizable and easy-to-read names of countries, states, counties, cities, municipalities, landmarks, points of interest, and street names




·
The ability to present mapping and monitoring information for all enrolled clients in the vicinity of a crime at the time the crime was committed, enabling the officer to research multiple clients simultaneously




Customers




Our principal customers are federal, state, county, and municipal law enforcement and corrections agencies and not-for-profit agencies in the United States.  Our customers also include social service agencies dealing with curbing juvenile delinquency and domestic violence/abuse.




Sales and Distribution Channels




The Company's markets its products and services through two methods: through direct contracts with state, local and county correction agencies and not-for-profit agencies or through resellers who have direct relationships with those same agencies and other end users of our products who integrate iSECUREtrac’s systems with their own localized install and removal services or case management services.





Direct contracts with the state, county or local agencies - These contracts are generally won through the competitive bid processes as required by the particular state, county or local procurement laws.   The length of contracts vary and range from one year to five years, including renewal options and typically include cancellation clauses with 30 to 60 days notice.  In general, contracts do not specify a minimum or maximum number of units.





Resellers - These contracts are won through direct solicitation to the reseller.  They generally have no stated expiration or automatically renew on a month to month basis with cancellation clauses of 30 to 60 days notice.




Competition




The Company competes for GPS-based offender monitoring with a number of different companies, including:




·
G4S a subsidiary of Group 4 Securicor


·
Omnilink Systems


·
ProTech Monitoring, Inc., an affiliate of 3M


·
BI Incorporated, an affiliate of The GEO Group


·
Satellite Tracking of People, LLC


·
SecureAlert




6




Neither the Company nor any of these competitors has attained a dominant market position, however, several of the Company’s principal competitors have access to financial, technical, marketing, distribution and procurement resources that are greater than those of the Company.




In addition, there are several other companies that use GPS, electronic mapping and Internet technologies to provide tracking and monitoring products and services.  The markets served by these companies include vehicle and rail car tracking, vehicle fleet management, container tracking as well as cell phones and 911 emergency response services.  While the companies serving these markets do not currently sell products or services to the corrections and social services markets, these companies or others may enter this market in the future.




Seasonality




The Company has observed that contract awards and the rollout of new programs is noticeably slower in the three months ended June 30th, which negatively impacts the revenue growth opportunities for the three months ended September 30th.   We believe this slowdown in the award and roll-out of new programs is the result of  uncertainty surrounding agency budgets in the months leading up to the new fiscal year which begins July 1st.  In recent years, many agencies have been unable to finalize budgets until well into the new fiscal year.




In addition, the lack of availability of program decision makers, judges who sentence offenders, program managers during the traditional United States vacation months of May, June and July and August also impact our customers’ usage of the Company’s equipment and as such also impacts revenue for the three months ended September 30th.




Principal Suppliers




The Company’s products are manufactured in the United States by Altron Inc. of Anoka, Minnesota, an ISO-9002 qualified electronics manufacturer in accordance with manufacturing specifications set by the Company.




The Company has in place a purchase order for System 5000 units which can be delivered within a short period of time.  Management believes the units on this purchase order are sufficient to meet expected demand in 2011.




Principal Customers




The Company has one customer, the Office of the Commissioner of Probation of the Commonwealth of Massachusetts, which accounted for 22.1% and 18.8% of its total revenues for the year ended December 31, 2010 and 2009, respectively.  The receivable balance for this customer at December 31, 2010 and 2009 was $213,313 and $178,792, respectively.




Intellectual Property Rights




We have been issued four patents to date by the United States Patent Office: (i) No. 6,072,396 for an "Apparatus and Method for Continuous Electronic Monitoring and Tracking of Individuals" was issued on June 6, 2000 and will expire on December 30, 2014; (ii) No. 6,100,806, also for an "Apparatus and Method for Continuous Electronic Monitoring and Tracking of Individuals" was issued on August 8, 2000 and will expire on December 30, 2014; (iii) No. 6,337,665 was issued on January 8, 2002 for an "Antenna Orientation Maintaining System in a System for Tracking Individuals and Method of Use" and will expire on April 24, 2017; and (iv) No. 6,646,617 was issued on November 11, 2003, for an "Antenna Orientation Maintaining System in a System for Tracking Individuals and Method of Use" and will expire on April 24,
2017.




We have been issued patent rights in Australia, patent No. 2000235013, issued November 17, 2005 relating to an “Apparatus and Method for Continuous Electronic Monitoring and Tracking of Individuals” and will expire on February 24, 2020.




We have been granted a non-exclusive software license from SiRF Technology Incorporated (“SiRF”) allowing us to embed SiRF’s patented GPS technology into our products.




7




We assert common law copyright and statutory trade secret protection to our proprietary software. Our logo, the words “tracNET24”, Reg No. 3114715, “iSECUREtrac”, Reg No. 3159632, “IntelliCuff”, Reg No. 3313220  and the word "iSecureTrack”, Reg. No. 2520981 are registered trademarks.




In addition, we have applied for several additional patents and trademarks.




Regulation




The manufacture, sale and use of devices that utilize any part of the radio frequency radiation spectrum are subject to regulation. The Federal Communications Commission (the "FCC") is the principal agency responsible for regulations relating to the manufacture, sale and use of devices that transmit radio frequency radiation.  All of our equipment utilizing radio frequency has each received full FCC compliance certification.




Similarly, insofar as GPS remains funded and controlled by the U.S. government, devices utilizing GPS must conform to government specifications.




Research and Development




The electronic monitoring market remains an emerging, early stage industry.  Accordingly, new technology is being developed and introduced at a rapid pace.  In order to maintain our competitive position, we must constantly improve our products and services.  Our research and development staff designs and develops products incorporating GPS technology, wireless communications, web-based reporting and data storage and transmission.




Our research and development activities are primarily related to our GPS products and the systems by which the equipment and services are delivered.  During 2010, these activities were mainly related to improving the functionality of the core systems (tracNET24) and the expansion of new service delivery platform (tracNET24 and Salesforce.com).  During 2010 and 2009, our research and development expenses totaled $1,120,000 and $1,263,000, respectively.




Employees




As of December 31, 2010, the Company had 64 full-time employees and three part-time employees on staff.  Of the 64 full-time employees, two are executives, four are administrative personnel, four are in sales, 12 are in customer support, 16 operate the monitoring center, two are in technology services, 16 are in operations and 11 are in engineering and development.




General Information




The Company’s principal office is located at 5078 South 111th Street, Omaha, Nebraska, 68137 (telephone: 402-537-0022) and its internet address is www.isecuretrac.com.  The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available free of charge through its website as soon as reasonably practicable after these documents are filed with the Securities and Exchange Commission.  The information contained in the Company’s website is not part of this Report on Form 10-K.




Item 1A.  Risk Factors




The Company’s business and financial condition are subject to a number of risks and uncertainties, many of which are beyond the control of the Company.  These risks and uncertainties include the following:




Budgetary issues faced by government agencies could adversely impact our future revenue.




Our revenues are primarily derived from contracts with state, local and county government agencies in the United States.  Many of these government agencies are experiencing budget deficits and may continue to do so.  As a result, the amount spent by the Company’s current clients on equipment and services supplied by the Company may be reduced or grow at rates slower than anticipated and it may be more difficult to attract additional government clients for the Company’s equipment and services.  In addition, since 2009, the industry has experienced a general decline in the average daily lease rate for GPS tracking units. As a result of these factors, our ability to maintain or increase our revenues may be negatively affected.




8




We have incurred significant losses and expect losses to continue.




Our revenues have not been sufficient to cover our cost of operations and other expenses, and we have yet to establish profitable operations.  We incurred net losses of $1,007,000 and $1,923,000 for the years ended December 31, 2010 and 2009 respectively.   As a result, on December 31, 2010, the Company is reporting an accumulated deficit of $81,093,000.  There is no assurance that we will be able to increase our revenues or manage our operating expenses so that our revenues will be sufficient to cover our operating expenses or that we will achieve profitability in the future.




We have incurred a substantial amount of secured debt and may not have enough cash to repay it at maturity.




As of December 31, 2010 we have borrowed a total of $14,891,000, under a Credit and Security Agreement with Crestpark LP, Inc (“Crestpark”), an affiliate of our controlling shareholder.  This debt is split into two tranches – a fixed tranche of $9,891,000 bearing interest at 9.5% and a floating tranche of $5,000,000 bearing interest at prime plus 2%.  The fixed tranche along with all applicable accrued interest will be due and payable on January 1, 2015.  With respect to the floating tranche, interest is payable quarterly.  In addition, quarterly principal payments of $125,000 are due beginning March 31, 2012. Additional borrowings at December 31, 2010 from Crestpark include $643,000 under a separate revolving credit agreement of $1,469,000 which is due
and payable January 1, 2015.





The borrowings under the revolving credit agreement are unsecured.  All other borrowings under these credit facilities are secured by a first priority security interest in all of the assets of the Company except that Crestpark’s security interest in certain monitoring equipment is subordinate to the interest of AHK Leasing LLC.    To the extent that the Company is not able to retain sufficient cash flow from operations to repay principal and interest on these loans,   we will need to refinance the loans through additional debt or equity financings.  There is no assurance that the Company will be able to generate sufficient cash flow from operations to service these loans and there is no assurance that we will be able to refinance them or otherwise raise
capital in order to repay all amounts that will be due and payable on the loans.  If we cannot repay all principal and interest on the loans as due, we will be subject to all of the remedies available to the lender upon default, including foreclosure of virtually all of our assets.  It is unlikely that the holders of our common stock would recover any of their investment if that were to occur.




Markets for our products and services may develop slowly.




The long-term financial viability of our company depends on our ability to attract additional customers for our GPS tracking system in order to increase revenues.  There are many factors that affect the demand for our products and services that we cannot control.  In particular, we sell our products to governmental agencies, such as state corrections departments.  Accordingly, the acquisition and continued use of our products by these types of customers is generally subject to legislative appropriation of funds which is subject to budgetary and political considerations that change over time.  Adoption of our GPS tracking system may represent a significant expenditure by these types of customers which often face restrictive budgetary constraints.  In addition,
contracts with governmental agencies are generally subject to a competitive bid process which is often time consuming and does not assure that we will be successful in selling our products and services or that we will be able to do so at prices that are economically beneficial for us.  In addition, our industry is relatively new and many of our target customers are only now becoming aware of our products and services and the possible advantages they may provide.  As a result, there is often a long sales cycle involved with sales of our products and services.  Due to these market factors, the demand for GPS tracking systems is difficult to forecast and may develop slowly or sporadically.  Accordingly, we may not be able to commercialize our products on the scale necessary to achieve profitability.




9




We face significant competition and this may make it difficult to achieve profitability.




We compete with a number of other companies that offer GPS solutions for offender tracking.  In addition, many companies use GPS, electronic mapping and Internet technologies to provide tracking and monitoring products and services in other markets such as vehicle and rail car tracking, vehicle fleet management, container tracking and emergency response services.  Companies serving these other markets may enter the offender tracking market in the future.  Some of the companies with which we currently compete, or may compete against in the future, may have access to greater financial, technical, marketing, distribution and procurement resources than we have.  There can be no assurance that we will be able to continue to successfully compete in our
market.  Accordingly, we may not be able to commercialize our products on the scale necessary to achieve profitability.




Our technology may become obsolete which could materially adversely affect our ability to sell our products and services.




If our technology, products and services become obsolete, our business operations would be materially adversely affected.  The market in which we compete is characterized by technological change, evolving industry standards, introductions of new products, and changes in customer demands that can render existing products obsolete and unmarketable.  We must continuously improve our product as the market demands smaller, lighter and more versatile PTUs.  Faster and more accurate mapping software may make the mapping software currently used in our tracNET24 application obsolete.  Future releases of Windows may also compel us to upgrade our application software.  Our current application servers will require continuous upgrading with newer and faster models or our
technology will become obsolete.  Our future success will depend upon our ability to address the increasingly sophisticated needs of our customers by supporting existing and emerging hardware, software, database, and networking platforms and by developing and introducing enhancements to our existing products and new products on a timely basis that keep pace with technological developments, evolving industry standards, and changing customer requirements.  Accordingly, we have and expect to continue to incur significant research and development expenses in the future.




We rely on third party vendors to manufacture our products and if these vendors are unable to timely supply us with required components our business will be materially adversely affected.




While we acquire the components used in our products from various vendors, we currently rely on a single electronics manufacturer, Altron, Inc. to manufacture most of our PTUs.  In addition we have only one provider of ankle cuffs for each of the GPS tracking systems we offer.  We have not qualified or contracted with other manufacturers for our PTUs or ankle cuffs.  Accordingly, if our vendors encounter difficulties with meeting our demand, alternative components may not be available quickly enough to avoid delaying production and shipment of customer orders.  Any such delays may hamper our ability to service existing customers or market our products and services to new customers.  Also, if the agreements with our current providers are terminated or expire, our
search for additional or replacement providers could result in significant delays, added expense and our inability to maintain or expand our customer base.




We face the risk of systems interruptions and capacity constraints, possibly resulting in adverse publicity, revenue loss and erosion of customer trust.




The satisfactory performance, reliability and availability of our network infrastructure are critical to our reputation and our ability to attract and retain customers and to maintain adequate customer service levels.  We may experience temporary service interruptions for a variety of reasons, including telecommunications or power failures, fire, water damage, vandalism, computer bugs or viruses or hardware failures.  We may not be able to correct a problem in a timely manner.  Any service interruption that results in the unavailability of our system or reduces its capacity could result in real or perceived public safety issues that may affect customer confidence in our services and result in negative publicity that could cause us to lose customer accounts or fail to obtain new
accounts.  Any inability to scale our systems may cause unanticipated system disruptions, slower response times, degradation in levels of customer service, or impaired quality and speed of transaction processing.  We are not certain that we will be able to project the rate or timing of increases, if any, in the use of our services to permit us to upgrade and expand our systems effectively or to integrate smoothly any newly developed or purchased modules with our existing systems.




10




If we were denied access to GPS technology, our business will be materially adversely affected.




Our services rely on signals from GPS satellites built and maintained by the U.S. Department of Defense.  GPS satellites and their ground support systems are subject to electronic and mechanical failures and sabotage.  If one or more satellites malfunction, there could be a substantial delay before they are repaired or replaced, if at all, and our services may cease and customer satisfaction would suffer.  In addition, the U.S. government could decide not to continue to operate and maintain GPS satellites over a long period of time or to charge for the use of the satellites.  Furthermore, because of increasing commercial applications of the GPS satellites, other U.S. government agencies may become involved in the administration or the regulation of the use of GPS signals in
the future.  If the foregoing factors affect the availability and pricing of GPS technology, our business will suffer.  GPS technology is also dependent on the use of radio frequency spectrum.  An international organization known as the International Telecommunications Union controls the assignment of spectrum.  If the International Telecommunications Union reallocates radio frequency spectrum, our services may become less useful or less reliable.  This would, in turn, harm our business.  In addition, emissions from mobile satellites and other equipment using other frequency bands may adversely affect the utility and reliability of our services.




If we are not able to protect our intellectual property rights, our business may be materially adversely affected.




In order to protect the technology and other intellectual property underlying our products and services, we rely on a combination of patents, license agreements, copyrights, trade secrets, and trademarks.  We also rely on confidentiality procedures and contractual provisions to protect our intellectual property rights.  There can be no assurance that any of the measures we take to protect our intellectual property rights will be adequate.  There is a risk that any patents issued to us may be invalidated, circumvented, or challenged; that the rights granted thereunder will not provide competitive advantages to us; or that none of our future patent applications will be issued with the scope of protection sought by us, if at all.  Furthermore, there is a risk that others may
develop technologies that are similar or superior to our technology or design around any patents issued to us.  Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary.




The protection of our intellectual property in foreign countries is uncertain.




We have not registered our patents with most foreign countries and may have no legal recourse to proceed against entities in such countries that choose to copy our hardware and/or software.  In addition, the laws of some foreign countries do not protect proprietary information rights as fully as do the laws of the United States.




We depend on licensed technologies and may need to obtain additional licenses in the future to remain competitive.




We have been granted a nonexclusive software license from a technology company that has designed GPS chip sets and software solutions that allow us to embed GPS technology into our products.  This license has an indefinite term; however, it may be terminated if the licensor loses any of its rights to the software products encompassed therein or by either party upon thirty (30) days written notice in the event of a material breach of the license by the other party.  Termination of this license could have a material adverse effect on our business.  In addition, we may need to obtain licenses to additional technologies in the future in order to keep our products competitive.  If we fail to license or otherwise acquire necessary technologies, we may not be able to develop new
products or services needed to remain competitive.




Our products could infringe on the intellectual property rights of others.




There are other U.S. patents and patent applications submitted for technologies in, or related to, our principal area of business, and it is possible that foreign patents are also in existence or have been applied for by others.  As a result, any application or exploitation of our technology could infringe on patents or proprietary rights of others and any licenses required as a result of such infringement might not be available on commercially reasonable terms, if at all.  This may lead others to assert patent infringement or other intellectual property claims against us.




11




We may not be able to effectively manage the growth of our company.




If our business grows in the manner that we currently project, we must continue to implement and improve our operational, financial and management information systems and expand, train and manage our employees.  We may not have made adequate allowances for the costs and risks associated with this expansion, and our systems, procedures or controls may not be adequate to support the growth of our operations.  Our failure to manage growth effectively could cause us to incur substantial additional costs, lose opportunities to generate sales or impair our ability to maintain our customers.




Risks Relating to the Ownership of Our Common Stock




The price for our common stock is volatile and may drop.




The trading price for our common stock has fluctuated significantly over recent years.  The volatility in the price of our stock is attributable to a number of factors, not all of which relate to our operating results and financial position.  Nevertheless, continued volatility in the market price for our stock should be expected and we cannot assure you that the price of our stock will increase in the future.  Fluctuations or further declines in the price of our stock may affect our ability to sell shares of our stock and to raise capital through future equity financing.




We have issued a large number of dilutive instruments to holders of preferred stock and employees and issuance of the related shares of common stock may depress the market price of our common stock.




We currently have warrants outstanding which entitle the holders thereof to acquire 680,000 shares of common stock.   An additional 6,287,000 shares of our common stock are issuable upon exercise of warrants to be issued upon exchange of our Series C 8% Exchangeable Preferred Stock (“Series C Preferred Stock”).  In addition, the holder of our Series C Preferred Stock may convert this Series C Preferred Stock into 4,783,000 shares of common stock. In addition 3,283,000 options to purchase our common stock are outstanding at December 31, 2010 in connection with stock options granted to employees. The issuance and sale of these shares is likely to result in substantial dilution to the proportionate equity interest and voting power of holders of our common
stock.  The sale of these shares also has potential to cause significant downward pressure on the price of our common stock.  This is particularly the case if the shares being placed into the market exceed the market's ability to absorb the increased stock.  Such an event could place further downward pressure on the price of our common stock.  This presents an opportunity for short sellers to contribute to the further decline of our stock price.  If there are significant short sales of our stock, the price decline that would result from this activity will cause the share price to decline more so, which, in turn, may cause long holders of the stock to sell their shares thereby contributing to sales of stock in the market.




In 2005, we issued a significant number of shares of Series C Preferred Stock as part of a refinancing transaction and the holder of these shares has the ability to acquire a majority position in our common stock and appoint a majority of our Board.




On June 27, 2005, we issued 1,000,000 shares of our Series C Preferred Stock plus warrants to acquire 3,234,000 shares of the Company’s common stock, of which 680,000 are currently outstanding, at exercise prices ranging from $2.30 to $16.50 per share.  The Series C Preferred Stock is exchangeable for 4,783,000 shares of Common Stock and warrants to acquire 6,287,000 shares of Common Stock at an exercise price of $2.30 per share.  Upon conversion of the Series C Preferred Stock into common stock, and exercise of its warrants, the holder of the Series C Preferred Stock will control a majority of the shares of our common stock.  Prior to that time, the holder of the Series C Preferred Stock has the right to appoint a majority of our Board of Directors.  In addition,
each share of Series C Preferred Stock will have 11 votes on all other matters submitted to the vote of the Company’s stockholders.  Accordingly, the holder of our Series C Preferred Stock holds a majority of the voting power held by all stockholders of the Company.  If the holder of the Series C Preferred Stock exchanges its Series C Preferred Stock for shares of the Company’s common stock and exercises all of its warrants, it would own approximately 52% of the issued and outstanding shares of the Company’s common stock.




12




The holder of the Series C Preferred Stock is entitled to a preference payment in transactions treated as liquidations.




Upon any liquidation of the Company, which may include a merger or sale transaction, no distribution shall be made to the holders of shares of Common Stock or other stock ranking junior to the Series C Preferred Stock unless, prior thereto, the holders of shares of Series C Preferred Stock shall have received an amount per share equal to the per share Original Issue Price plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, multiplied by a factor of 105%.





A single entity controls a significant number of the voting rights of the Company.





By virtue of their voting rights associated with their ownership of the Series C Preferred Stock, Mykonos 6420 LP (“Mykonos”), an affiliate of Crestpark, has the ability to effectively control the affairs of the Company including but not limited to the election of our directors and approval or preclusion of corporate transactions. This concentration of voting rights may also have the effect of delaying or preventing a change of control or making other transactions more difficult or impossible without their support.




Our common stock is deemed to be "penny stock," which may make it more difficult for investors to sell their shares due to suitability requirements.




The Securities and Exchange Commission has adopted Rule 3a51-1 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions.  For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires:




·
that a broker or dealer approve a person's account for transactions in penny stocks; and




·
that the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.




In order to approve a person's account for transactions in penny stocks, the broker or dealer must:




·
obtain financial information and investment experience objectives of the person; and




·
make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.




Among other requirements, the broker or dealer must also deliver, prior to any transaction in a penny stock, a written statement, which:




·
sets forth the basis on which the broker or dealer made the suitability determination;




·
states, in a highlighted format, that it is unlawful for the broker or dealer to effect a transaction in a penny stock unless the broker or dealer has received a signed, written agreement from the investor prior to the transaction; and




·
states, in a highlighted format immediately preceding the customer signature line, that the broker or dealer is required to provide the person with the written statement and that the investor should not sign and return the written statement to the broker or dealer if it does not accurately reflect the person’s financial situation, investment experience, and investment objectives.




Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules.  This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.  Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions.  Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.




13




Item 2.  Properties




The Company leases approximately 11,477 square feet of office space located at 5078 South 111th Street, Omaha, Nebraska where most of the Company’s administrative, service, and other business operations are conducted.  The lease was amended on December 14, 2009 to extend the term of the lease to December 31, 2014.  The base rent for this property was $6,547 per month for 2010.  In addition to base rent, the Company pays a pro rata share of the operating expenses of the building.  The Company’s pro rata share of operating expenses on the leased premises is $2,405 per month.  In the opinion of management, the 5078 South 111th Street facility is adequate for the Company’s
current and reasonably foreseeable needs.  The Company does not own any real property.




Item 3.  Legal Proceedings





The Company is not currently involved in any material pending legal proceedings but may, from time to time, be involved in ordinary routine litigation incidental to the business.




Item 4.  Reserved




PART II




Item 5.  Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities




Market Information.iSECUREtrac’s common stock is listed on the OTC Bulletin Board under the trading symbol “ISEC”.  The following table sets forth the high and low sale prices for the Company’s common stock during each calendar quarter of 2009 and 2010:




Year

Quarter

High


Low1st

$
0.45


$
0.202009

2nd

$
0.70


$
0.343rd

$
0.80


$
0.404th

$
0.54


$
0.331st

$
0.72


$
0.372010

2nd

$
1.01


$
0.563rd

$
1.30


$
0.784th

$
1.04


$
0.60




The source of the foregoing information is Bloomberg, LP Quotations and reflects inter-dealer prices, without retail markup, markdown or commission and may not represent actual transactions.




Holders.As of December 31, 2010 there were approximately 364 stockholders of record for the Company’s common stock.




Dividends.The Company has not declared any dividends on shares of Common Stock and has no plans to do so in the foreseeable future.




Recent Sales of Unregistered Securities.  The Company issued 12,696, 17,010 and 19,410 shares of common stock without registration under the Securities Act of 1933 during 2010, 2009 and 2008, respectively, to non-management directors as payment of director fees.  The number of shares of common stock issued in each case was based on the fair market value of the Company’s common stock as of the date of the meetings to which such fees related.  All previously unreported, unregistered issuances of common stock during 2010 are as follows:




14




Date



Amount of





Cash toIssued

Title

Securities Sold

Security Holder

Description of Transaction

Company03/01/10

Common Stock


5,000

Various Directors

Shares issued for directors' fees

N/A07/22/10

Common Stock


2,666

Various Directors

Shares issued for directors' fees

N/A08/02/10

Common Stock


2,000

Various Directors

Shares issued for directors' fees

N/A11/10/10

Common Stock


3,030

Various Directors

Shares issued for directors' fees

N/A




All of the foregoing transactions of common stock were exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) of such Act.  All such shares are subject to restrictions on resale.




Company Purchases of its Equity Securities.No purchases of the Company’s common stock were made by the Company or any “affiliated purchaser” (as defined in Rule 10b-18 under the Securities Exchange Act of 1934) during 2010.




Item 6.  Selected Financial Data




Not Required for Smaller Reporting Company




Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations




Highlights of 2010 Operations





Revenues


At the beginning of this year we indicated the following:


·
We believed that the economic conditions existing at that time had slowed the growth in established programs and negatively impacted the development and award of new programs.


·
We believed that those same economic conditions were likely to continue to make it difficult for many state, county and local governments to accurately budget their tax revenues and costs.


·
We expected a slow increase in program growth and awards of new programs throughout 2010.


·
We had observed a general decline in the average daily lease price on GPS units.




In looking back, we believe that the economic conditions did in fact slow the growth of existing programs and negatively impacted the awarding of new programs.





While the increase in established programs came later in the year than we anticipated, we did see increases in the number of units deployed during the year.  However, the net effect of the increases in units deployed was offset by the continued pressure on daily lease rates as existing contracts came up for renewal resulting in flat equipment  revenues, quarter over quarter, for 2010.





Expenses


As we have done for the last three years, management has been diligent about ensuring that all expenditures are adding value and where possible we continue to strive to reduce costs.


·
We began the year with an overall headcount of 73 and ended the year at 67 – a reduction of approximately 8%.


·
Subsequent to December 31, 2010 the Company renegotiated its contract with Verizon which will result in a lower daily charge for equipment communications in 2011.




15




Liquidity


During the year, management negotiated an increase of approximately $718,000 in the Company’s revolving line of credit with Crestpark LP, Inc and at December 31, 2010 extended the maturity date on all credit obligations with Crestpark LP, Inc until January 1, 2015.





Operations – Service Delivery


Throughout 2010 the Company has continued to focus on its service delivery platforms.   We have begun to see some efficiencies in certain areas as a result of this investment.  More importantly, in an effort that will continue into 2011, we are intent on expanding the capabilities of this platform to satisfy increasing customer demands for information and flexibility.





Outlook for 2011





Sex-offender legislation and the tracking of various classifications of sex-offenders has historically been a significant driver in the electronic monitoring industry.  In 2011, management expects the industry to continue to be driven by sex-offenders, but also see the following factors having a significant impact:





Prison Overcrowding and Budgetary Concerns


While the financial and economic crisis appears to be easing across the United States, management believes it will be several years before state and local budgets will derive the benefit of these apparent improvements.  Until that time, management believes that agencies will eventually look to expand electronic monitoring as a solution to overcrowding and other related budget concerns and believes that the Company is well positioned to capitalize on these opportunities.





Domestic Violence Programs


Over the past several years, there has been an increasing demand by the general public for a means of protecting domestic violence victims, and as well, a growing interest by agencies in the implementation of domestic violence programs. During this time, the technology has also advanced to the point where it is possible to provide acceptable levels of protection to domestic violence victims – especially given the unpredictable nature of these situations. The Company offers one of only two known domestic violence solutions in the industry and management believes we have the potential to emerge as an industry leader in this area.





Offender Pay Programs


In response to budget concerns many agencies have begun to look at programs where the offender pays for all or a portion of the costs of electronic monitoring – commonly referred to as an “offender pay program”.  These programs can be effective in addressing both prison overcrowding and domestic violence, but also the more traditional sex-offender.  The Company has been, and will continue to be intent on identifying opportunities where these programs can be implemented.





Specifically for the Company, we anticipate that during the first half of 2011 equipment revenues will be down slightly as a result of a customer contract not being renewed.   Most significantly, notwithstanding the decline in revenues, due to declining debt service requirements in connection with the Company’s equipment leases, management expects the Company to return to generating positive cash flow before the end of 2011.




16




Summary of Financial Information


The following table provides a comparison of selected financial highlights for the years ended December 31, 2010 and 2009:





CONDENSED CONSOLIDATED FINANCIAL HIGHLIGHTS


Year Ended December 31, 2010 and 2009


(In thousands)


Fav / (Unfav)2010


2009


ChangeRevenue:Equipment revenue

$
9,874


$
11,124


$
(1,250
)Services revenue


483



461



22Royalty revenue


283



754



(471
)Total revenue


10,640



12,339



(1,699
)Costs of revenue


3,496



4,600



1,104Gross profit margin


7,144



7,739



(595
)Gross profit margin %*


67.1
%


62.7
%Research and development expenses (R&D)


1,120



1,263



143Sales, general and administrative expenses (SG&A)


5,736



7,187



1,451Total R&D and SG&A


6,856



8,450



1,594Operating income (loss)


288



(711
)


999Interest expense, net


(1,295
)


(1,212
)


(83
)Net loss

$
(1,007
)

$
(1,923
)

$
916Preferred stock dividends and accretion


(1,443
)


(1,347
)


(96
)Net loss available to common stockholders

$
(2,450
)

$
(3,270
)

$
820


* Gross proft margin percentage = Gross Profit Margin / Total Revenue




17




Quarterly Highlights


In addition to the annual statements of operation presented above, the following tables of selected quarterly financial and non-financial data is important in understanding the Company’s results of operation for the year ended December 31, 2010 and the operating trends going into 2011.





CONDENSED CONSOLIDATED QUARTERLY  FINANCIAL HIGHLIGHTS


Quarterly Trend


(In Thousands)


Mar 31 2010


Jun 30 2010


Sept 302010


Dec 31 2010Revenue:Equipment leasing

$
2,448


$
2,482


$
2,502


$
2,442Service Revenue


115



127



123



118Royalty Revenue


125



158



-



-Total Revenue


2,688



2,767



2,625



2,560Costs of Revenue


954



803



829



910Gross profit margin


1,734



1,964



1,796



1,650Gross profit margin %*


64.5
%


71.0
%


68.4
%


64.5
%Research & Development (R&D)


314



295



286



225Selling General & Admin (SG&A)


1,542



1,515



1,413



1,266Subtotal R&D and SG&A


1,856



1,810



1,699



1,491Operating Income (Loss)

$
(122
)

$
154


$
97


$
159Total Full-Time Employees  at Quarter End


71



71



67



67


* Gross proft margin percentage = Gross Profit Margin / Total Revenue




18




CONDENSED CONSOLIDATED QUARTERLY  FINANCIAL HIGHLIGHTSQuarterly Trend(In Thousands)





Cash Flows From Operating Activities

Mar 31

2010


Jun 30

2010


Sept 30

2010


Dec 31

2010Net loss

$
(446
)

$
(174
)

$
(230
)

$
(157
)Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization


494



185



262



259Stock based compensation


48



34



35



74Provision for Doubtful Accounts


-



-



-



-Changes in operating assets and liabilities:Accounts receivable


192



(195
)


(154
)


317Inventories


8



57



(19
)


15Prepaid expenses


(28
)


27



(59
)


18Accounts payable


(31
)


(17
)


105



(162
)Accrued expenses


(397
)


(288
)


(35
)


(160
)Deferred revenue


(9
)


(15
)


(1
)


(1
)Accrued interest payable


215



205



201



146Net cash provided by (used in) operating activities


46



(181
)


105



349Adjustment for payment of royalty expenses for comparative purposes


508



-



-



-Adjusted Net cash provided by (used in) operating activities


554



(181
)


105



349Principal payments on long-term debt


(421
)


(433
)


(436
)


(433
)Adjusted Net cash provided by (used in) operating activities less principal payments on long-term debt

$
133


$
(614
)

$
(331
)

$
(84
)





For the year ended December 31, 2010 compared to the year ended December 31, 2009





Revenue





Equipment Revenue


Equipment revenue consists of the daily leasing of electronic monitoring equipment and periodic charges for lost or damaged equipment.  For year ended December 31, 2010 the Company reported equipment revenue of $9,874,000 compared with $11,124,000 for 2009 which represents decreases of approximately 11.2%.





Approximately 80% of the decline in equipment revenue is attributable to a decline in daily lease rates on GPS equipment, off-set by an increase of approximately 9.4% in the number of units deployed.  The remaining decline in equipment revenue is attributable to a 35% decline in visual breath alcohol units deployed in comparison to the same period of the prior year.




19




Service Revenue


Service revenue consists of daily charges for Monitoring Center Intervention, in connection with the leasing of GPS equipment outlined above. For the year ended December 31, 2010 the Company reported service revenue of $483,000, an increase of 4.8% over the $461,000 reported in 2009.





The increase in service revenue is the net result of an increase in the number of units subject to Monitoring Center Intervention offset by a decline in the average daily price per unit.





Royalty Revenue


Royalty revenue reported by the Company for the year ended December 31, 2010 was $283,000, a decrease of $471,000 from the $754,000 reported in 2009.





The Company earned royalty revenues, which are paid annually by March 31st of each year, under a Patent License Agreement with Satellite Tracking of People, L.L.C. (STOP) which grants STOP a license to utilize specific technology that is patented by the Company.  The Company earned a royalty equal to 2.5% of STOP’s revenue utilizing this technology.





As of June 30, 2010, the Company had earned the maximum amount of royalties it can earn under the STOP Patent License Agreement. Accordingly, the Company expects no future royalty revenue to be recognized.  The Company has a remaining receivable of approximately $210,000 due in March 2011.





Cost of Revenue


Cost of Revenue represents all direct costs related to delivery of monitoring equipment including amortization of the acquisition costs, repairs and maintenance of the monitoring equipment, transportation costs, communication costs associated with the equipment, as well as costs to upgrade existing units for advancements in technology.





Cost of revenue for the year ended December 31, 2010 were $3,496,000, a decrease of $1,104,000 from $4,600,000 reported in 2009.





The decrease in cost of revenue is the net result of the following changes:


·
$713,000 decrease in the depreciation, of which $608,000 is attributed to the lengthening in estimated useful life effected during the three months ended June 30, 2010


·
$414,000 decrease in royalty costs as a result of the Pro Tech licensing settlement reached in the fourth quarter of 2009 which resulted in no royalty costs being reported for 2010


·
$94,000 decrease in various other costs including communication costs, repairs, and shipping


·
$117,000 increase in the costs of sub-contracted services and equipment which are revenue producing to the Company




In December 2009 the Company and Pro Tech Monitoring, Inc. reached substantial agreement over a Confidential Patent License Agreement ("Patent License Agreement") under which the Company was granted a limited license to provide the applicable technology to specific customers.  In addition, the Patent License Agreement fixed the amount of all royalties due Pro Tech for the limited license under the Patent License Agreement and all royalties due under the November 27, 2007 Confidential Settlement Agreement at $650,000, of which, approximately $142,000 was paid prior to December 31, 2009 with the balance being reflected in Accrued Expenses on the balance sheet of the Company at December 31, 2009.  The Patent License Agreement was entered into effective March 1, 2010 on substantially the same
terms as agreed upon in December 2009 with the final payment being made to Pro Tech on March 4, 2010.




20




Gross Profit Margin


The net effect of the $1,699,000 decrease in revenues offset by the $1,104,000 decrease in cost of revenues is a decrease in the Company’s gross profit margin of $595,000.  Gross profit margin, as a percentage of total revenue, improved to 67.1% in 2010 from 62.7 % in 2009, largely as a result of the lengthening in estimated useful life effected during the three months ended June 30, 2010.





Research and Development Expenses


Research and Development (R&D) expenses represent the on-going direct costs associated with the development of the Company’s proprietary hardware and software including staffing expenses for the Company’s own engineers and software developers, the cost of outside contracted engineering and design, and the actual costs of components, prototypes, and testing equipment and services used in the product development functions.





The Company is currently in the process of redesigning several major software systems and, in accordance with standards, has capitalized certain payroll and related costs associated with the development of the applications.  In addition, during December 31, 2009, the Company capitalized costs related to improvements in the System 5000 equipment.





The following table depicts the activity in Research & Development during the years ended 2010 and 2009.





2010


2009Gross Research & Development Costs

$
1,259,000


$
1,421,000Less:Costs capitalized in accordance with sofware improvements


139,000



83,000Costs capitalized in connection with System 5000 improvements


-



75,000Research & Development Costs expensed in the Consolidated Statement of Operations

$
1,120,000


$
1,263,000





Future R&D expenses are expected to fluctuate as a result of open positions and subsequent staffing as well the amount of capitalization of certain payroll costs in connection with projects that qualify for capitalization.




Sales, General and Administrative Expenses


Sales, General and Administrative (SG&A) expenses are all the expenses associated with the operations of the Company, other than the expenses described above.  These expenses include payroll, taxes and benefits and related travel for executive, sales, administrative, customer support and accounting staff.  In addition these costs include rent on property, corporate communications, office leases and supplies, marketing, advertising, trade shows, recruiting and training expenses, professional fees and bad debt expense.





For the year ended December 31, 2010, SG&A expenses decreased $1,451,000 to $5,736,000 from $7,187,000 incurred in 2009.  Significant components of the decrease in SG&A expense from 2009 to 2010 are highlighted below:


·
$941,000 reduction in personnel related expenses including salaries, benefits, consultants, recruiting, and travel due to the decrease in staffing levels related to sales, administrative,  customer support and the monitoring center.


·
$224,000 reduction in bad debt expense


·
$148,000 reduction in stock option expense


·
$138,000 reduction in professional fees


·
$52,000 reduction in depreciation expense


·
$33,000 increase in investor relations expenses


·
$19,000 increase in other operating expenses




21




Looking forward, management expects Operating Expenses which include SG&A and R&D to continue near the levels incurred during mid-2010.




Interest Expense, Net


Net interest expense represents the total interest expense incurred by the Company  in connection with its borrowings from Crestpark, LP Inc. (“Crestpark”) and AHK Leasing LLC (“AHK”) reduced by the interest income earned by the Company during the year.  The net interest expense increased $83,000 from $1,212,000 in 2009 to $1,295,000 in 2010.  The increase is attributable to additional borrowings under the credit facilities with Crestpark.





In 2011, management expects that interest expense in connection with equipment financing will decrease while interest in connection with borrowings under the Revolving Line of Credit will increase. Overall we expect net interest expense to continue at or above the current levels.




Net Loss


The Company’s net loss for 2010 was $1,007,000 a decrease of $916,000 from the $1,923,000, reported in 2009 for the reasons described herein.




Preferred Stock Dividends and Accretion


For the year ended December 31, 2010, preferred stock dividends and accretion totaled $1,443,000 as compared to $1,347,000 for 2009.  This increase was due to compounding interest on accrued but unpaid dividends on our Series C Preferred Stock.  The Series C Exchangeable Preferred Stock accrues interest at a cumulative compounded rate of 8.0% per annum.




Liquidity and Capital Resources




For the year ended December 31, 2010, the Company generated $319,000 of cash in operating activities, used $458,000 in investing activities and $492,000 in financing activities.  The total of all cash flow activities in 2010 resulted in a decrease in the balance of cash of $631,000.




For the year ended December 31, 2009, the Company generated $2,240,000 of cash in operating activities, used $2,322,000 in investing activities, and generated $378,000 in cash from financing activities.  The total of all cash flow activities resulted in an increase of $296,000 in the balance of cash for the year ended December 31, 2009.





In addition to cash generated by operations, the Company has access to credit facilities under lending agreements with AHK to finance the acquisition of tracking equipment and Crestpark to meet its other working capital needs as follows:





AHK:





AHK, a company controlled by three stockholders, one of which is a current director has indicated that they expect to continue to provide lease financing for our monitoring equipment purchases during 2011.  Through sale-leaseback arrangements, the Company sells the inventory to AHK and then leases the equipment back.  All capital leases are treated as financing transactions with interest rates ranging from 9.50% to 12.50% per annum.  At December 31, 2010, these capital leases had final lease payments due between January 2011 and July 2013.   As of December 31, 2010, the aggregate balance on the capital leases totaled $1,560,000 of which $1,185,000 is current and the balance of $375,000 is classified as long-term debt. The Company made principal payments on capital
leases with AHK totaling $1,723,000 and $1,702,000 during 2010 and 2009, respectively.




22




Crestpark:





The Company has a $1,469,000 Revolving Line of Credit with Crestpark for its working capital needs.  The Revolving Line of Credit has a term ending on January 1, 2015, is unsecured and bears interest at a fixed noncompounded rate of 12% per annum.  The Company is also required to pay Crestpark a fee of 0.25% per annum on the average daily unused amount of the Revolving Line of Credit. The Company had a net increase in borrowings on the Revolving Line of Credit of $293,000 in 2010 and $150,000 in 2009.  As of December 31, 2010, the Company had $643,000 outstanding under the Revolving Line of Credit and $826,000 available.




By the end of 2010, the Company was incurring approximately $185,000 in recurring monthly costs of revenues and $500,000 in recurring monthly operating expenses, excluding non-cash expenses such as the provision for doubtful accounts, depreciation and amortization of stock options.  The majority of the recurring monthly operating expenses consisted of salaries, wages, payroll taxes, health insurance and other employee benefits.  In addition to these recurring monthly operating expenses, the Company’s other principal uses of cash are the payment of other recurring monthly operating expenses, the acquisition of monitoring equipment and the changes in working capital.  In general, the Company meets its liquidity needs from its current revenues, existing cash and cash equivalents (including
the proceeds of the additional borrowings from Crestpark, as described above), and through capital leasing arrangements.  As of December 31, 2010, the Company had $89,000 in cash and cash equivalents however in the interest of eliminating unnecessary interest expense, the Company limits its borrowings on the Revolving Line of Credit to amounts required in the following 10 – 15 days.





The Company believes that its current working capital combined with the amounts available for additional working capital via the Revolving Line of Credit with Crestpark and through lease financing for its monitoring equipment through AHK are sufficient to meet its liquidity needs through 2011.




Critical Accounting Policies




The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”).  This requires management to make estimates and judgments that affect reported amounts and related disclosures.  Actual amounts will differ from those estimates.  The significant accounting policies are described in Note 1 to the audited Consolidated Financial Statements.  Of those policies, the following have been identified as the most critical because they are the most important to the portrayal of the Company’s results of operations and financial condition and they require subjective or complex management judgments:




Revenue recognition and deferred revenue


The Company derives revenue from equipment leasing and services and patent royalties.





Equipment leasing and services – the Company charges a daily rate for equipment leasing and service revenue (e.g. per day/per individual being monitored) and recognizes revenue as equipment leasing and services are provided.     The majority of the Company’s contracts are billed on a monthly basis in arrears.  However, in some instances customers are billed in advance, in which case, those billings are reflected as deferred revenue and recognized as equipment leasing and services are provided.





Royalty revenue – the Company earns royalty revenues on a patent license agreement under which it licenses its patented technology to a competitor.  Prior to and during the quarter ended September 30, 2008, the Company accounted for these royalty revenues on a cash basis.  Beginning in the quarter ended December 31, 2008, the Company accounted for these royalty revenues on an accrual basis as the amounts were then estimable and probable of collection.




23




Multiple Element Arrangements – The majority of the Company’s revenue transactions do not have multiple elements.  On occasion, the Company has revenue transactions that have multiple elements (such as product sales and monitoring services).  For revenue arrangements that have multiple elements, the Company considers whether: (i) the delivered devices have standalone value to the customer; (ii) there is objective and reliable evidence of the fair value of the undelivered monitoring services, which is generally determined by surveying the price of competitors’ comparable monitoring services; and (iii) the customer does not have a general right of return.  Based on these criteria, the Company recognizes revenue
from the sale of devices separately from the monitoring services to be provided to the customer.




Stock–based compensation


The Company accounts for its stock-based compensation in accordance with Accounting Standards Codification (“ASC)” 718, “Compensation-Stock Compensation”, which requires that the compensation cost relating to share-based payment transactions, including grants of employee stock options, be recognized in the financial statements based on the fair value of the equity or liability instruments issued.  ASC 718 covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.  Under ASC 718, the Company is required to measure the cost of its employee services received in exchange for stock options based on the grant-date fair value of the award,
and to recognize the cost over the period the employee is required to provide services for the award.





Research and Development Expenses


Except to the extent that research and development costs meet the requirements for capitalization, the Company expenses research and development expenses as incurred.





Impairment of Long-Lived Assets


The Company evaluates goodwill for impairment on an annual basis.  The Company assesses the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  These computations utilize judgments and assumptions inherent in management’s estimate of future undiscounted and discounted cash flows to determine recoverability of these assets.  If management’s assumptions about these assets were to change as a result of events or circumstances, the Company may be required to record an impairment loss.  The Company recorded no impairment charges for the years ended December 31, 2010 and December 31, 2009.





Off-Balance Sheet Arrangements




The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources




Item 7A.  Quantitative and Qualitative Disclosures about Market Risk




Not Required for Smaller Reporting Company




24




Item 8.  Financial Statements.


iSECUREtrac Corp. and Subsidiary


Consolidated Financial Report





Table of Contents





Report of Independent Registered Public Accounting Firm
26Consolidated Financial Statements:Consolidated Balance Sheets
27Consolidated Statements of Operations
28Consolidated Statements of Stockholders' Deficit
29Consolidated Statements of Cash Flows
30Notes to Consolidated Financial Statements
31





25





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the Board of Directors


iSECUREtrac Corp.


Omaha, Nebraska





We have audited the accompanying consolidated balance sheets of iSECUREtrac Corp. and Subsidiary as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended.  These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.    The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,  assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of iSECUREtrac Corp. and Subsidiary as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.





/s/ McGladrey & Pullen LLP


Kansas City, Missouri


March 16, 2011





26




iSECUREtrac Corp. and SUBSIDIARY


CONSOLIDATED BALANCE SHEETS


December 31, 2010 and 2009





2010


2009ASSETSCurrent AssetsCash and cash equivalents

$
88,956


$
719,662Accounts receivable, net of allowance for doubtful accounts of $470,998 in 2010 and $666,630 in 2009


1,717,235



1,877,330Inventories


223,629



284,838Prepaid expenses and other


158,749



115,004Total current assets


2,188,569



2,996,834Leasehold improvements and equipment, net of accumulated depreciation of $12,428,434 in 2010 and $11,228,684 in 2009


3,719,361



4,461,466Goodwill


2,302,179



2,302,179Other assets


68,059



69,889Total assets

$
8,278,168


$
9,830,368LIABILITIES AND STOCKHOLDERS' DEFICITCurrent LiabilitiesAccounts payable

$
449,414


$
554,592Accrued expenses


298,009



1,177,666Revolving line of credit


642,886



350,000Equipment term loan


-



280,000Current maturities of long-term debt


1,185,254



1,674,221Deferred revenues


71,024



96,937Total current liabilities


2,646,587



4,133,416Long-term debt, less current maturities, including accrued interest on long-term debt


15,266,221



14,555,564Total liabilities


17,912,808



18,688,980Redeemable convertible Series C preferred stock


15,896,210



14,453,227Commitments and contingencyStockholders'  deficitCommon stock


10,928



10,816Additional paid-in capital


55,551,402



55,516,568Accumulated deficit


(81,093,180
)


(78,839,223
)Total stockholders' deficit


(25,530,850
)


(23,311,839
)Total liabilities and stockholders' deficit

$
8,278,168


$
9,830,368





See Notes to Consolidated Financial Statements.




27




iSECUREtrac Corp. and SUBSIDIARY


CONSOLIDATED STATEMENTS OF OPERATIONS


Years Ended December 31, 2010 and 2009





2010


2009Revenue:Equipment leasing & hosting

$
9,749,671


$
10,958,294Administrative, field & support service revenues


482,881



460,670Equipment sales


124,316



165,618Royalty


282,815



754,405Total revenue


10,639,683



12,338,987Operating expenses:Cost of revenue


3,495,918



4,599,864Research and development


1,120,293



1,263,148Sales, general and administrative


5,736,213



7,187,031Total operating expenses


10,352,424



13,050,043Operating income (loss)


287,259



(711,056
)Other income (expense):Interest income


7



652Interest expense


(1,294,699
)


(1,212,559
)Total other expense


(1,294,692
)


(1,211,907
)Loss before provision for income taxes


(1,007,433
)


(1,922,963
)Provision for income taxes


-



-Net loss

$
(1,007,433
)

$
(1,922,963
)Preferred stock dividends and accretion


(1,442,983
)


(1,346,822
)Net loss available to common stockholders

$
(2,450,416
)

$
(3,269,785
)Basic and diluted loss per common share

$
(0.23
)

$
(0.30
)Weighted average shares of common stock outstanding


10,868,372



10,807,963





See Notes to Consolidated Financial Statements.





28





iSECUREtrac Corp. AND SUBSIDIARY


STATEMENT OF STOCKHOLDERS' DEFICIT


Years Ended December 31, 2010 and 2009





AdditionalCommon Stock


Paid -in


AccumulatedShares


Amount


Capital


Deficit


TotalBalance, December 31, 2008


10,799,090


$
10,799


$
55,369,880


$
(75,762,071
)

$
(20,381,392
)Shares issued for directors' fees


17,010



17



7,983



-



8,000Shares issued upon exercise of options


-



-



162



-



162Stock based compensation


-



-



331,175



-



331,175Series C preferred stock dividends


-



-



-



(1,154,189
)


(1,154,189
)Accretion to redemption value of preferred stock


-



-



(192,632
)


-



(192,632
)Net loss


-



-



-



(1,922,963
)


(1,922,963
)Balance, December 31, 2009


10,816,100


$
10,816


$
55,516,568


$
(78,839,223
)

$
(23,311,839
)Shares issued for directors' fees


12,696



13



7,987



-



8,000Shares issued upon exercise of options


98,655



99



40,226



-



40,325Stock based compensation


-



-



183,080



-



183,080Series C preferred stock dividends


-



-



-



(1,246,524
)


(1,246,524
)Accretion to redemption value of preferred stock


-



-



(196,459
)


-



(196,459
)Net loss


-



-



-



(1,007,433
)


(1,007,433
)Balance, December 31, 2010


10,927,451


$
10,928


$
55,551,402


$
(81,093,180
)

$
(25,530,850
)





See Notes to Consolidated Financial Statements.





29





iSECUREtrac CORP. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CASH FLOWS


Years Ended December 31, 2010 and 2009





2010


2009Cash Flows From Operating ActivitiesNet loss

$
(1,007,433
)

$
(1,922,963
)Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization


1,199,750



2,122,701Stock based compensation


191,080



339,175Provision for doubtful accounts


-



204,077Changes in operating assets and liabilities:Accounts receivable


160,095



364,098Inventories


61,209



(91,018
)Prepaid expenses and other assets


(41,915
)


(30,780
)Accounts payable


(105,178
)


151,193Accrued expenses


(879,657
)


653,327Deferred revenues


(25,913
)


(202,611
)Accrued interest payable


766,832



652,767Net cash provided by operating activities


318,870



2,239,966Cash Flows From Investing ActivitiesPurchases of leasehold improvements and equipment


(193,743
)


(2,175,783
)Capitalization of software development costs


(263,902
)


(146,175
)Net cash used in investing activities


(457,645
)


(2,321,958
)Cash Flows From Financing ActivitiesPrincipal proceeds from long-term debt


360,000



2,000,000Proceeds from revolving line of credit, net


292,886



(150,000
)Proceeds from equipment term loan


538,000



230,000Principal payments on long-term debt


(1,723,142
)


(1,701,869
)Proceeds from the exercise of options and warrants


40,325



162Net cash provided by (used in) financing activities


(491,931
)


378,293Increase (Decrease) in cash


(630,706
)


296,301Cash at beginning of period


719,662



423,361Cash at end of period

$
88,956


$
719,662





Supplemental Non-cash Disclosure


Accrued interest payable of $2,195,611 capitalized into long-term debt in connection with the December 31, 2010 amendment to the Credit and Security Note with Crestpark LP, Inc as described in Note 5.





Short-term Equipment Term Loan of $818,000 capitalized into long-term debt in connection with the December 31, 2010 amendment to the Credit and Security Note with Crestpark LP, Inc as described in Note 5.





See Notes to Consolidated Financial Statements.




30




iSECUREtrac CORP AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





Note 1.  Nature of Business and Significant Accounting Policies





Nature of Business





iSECUREtrac develops, markets, leases and services products that assist in “monitoring compliance and modifying behavior” of individuals who are under the supervision of the criminal justice system and social service agencies, primarily in the United States.  The Company’s suite of services  (e.g. Global Positioning System (“GPS”)  tracking systems, house arrest, visual breath alcohol monitoring and supplemental monitoring services) are designed to offer an alternative to incarceration thereby reducing  the overall cost associated with individuals under correctional or community supervision.





The Company deploys equipment and services through two methods: through direct contracts with state, local and county agencies or through resellers who have contracts with state, local and county agencies. The actual number of units deployed by the Company's customers will vary from month to month and the Company's revenue will vary accordingly. Therefore, in the absence of new contracts won, the Company's revenue may increase and in the absence of contracts lost, the Company's revenue may decrease.





Direct contracts with the state, county or local agencies - These contracts are generally won through the competitive bid processes as required by the particular state, county or local procurement laws.   The length of contracts vary and range from one year to five years, including renewal options and typically include cancellation clauses with 30 to 60 days notice.  In general, contracts do not specify a minimum or maximum number of units.





Resellers - These contracts are won through direct solicitation to the reseller.  They generally have no stated expiration or automatically renew on a month to month basis with cancellation clauses of 30 to 60 days notice.





Significant Accounting Policies





Principles of consolidation:  The consolidated financial statements include the accounts of iSECUREtrac and its wholly-owned subsidiary, iSt Services, Inc., formed September 25, 2002. All material intercompany balances and transactions have been eliminated in consolidation.




Accounting estimates and assumptions:  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.




Reclassification:  Certain amounts in the prior years’ financial statements and footnotes have been reclassified to conform to the current year presentation.




Cash and cash equivalents:For financial statement purposes, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.  The carrying value of these investments approximates fair value due to the nature of the maturity period.




31




Trade accounts receivable:Trade accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis.  Management determines the allowance for doubtful receivables by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions.  Trade accounts receivable are written off when deemed uncollectible.  Recoveries of trade accounts receivable previously written off are recorded when received.  The Company offers credit terms to select customers of up to 45 days.  Additionally, the Company reserves the right
to assess finance charges on delinquent accounts where such charges are permitted.  Accounts are considered delinquent after 45 days.  There was $0 and $223,656 of bad debt expense for 2010 and 2009, respectively.




Inventories:Inventories consist of repair parts or components that will be used in the production or repair of revenue producing equipment.  Inventories are reviewed for obsolescence on a quarterly basis.




Leasehold improvement and equipment:  Leasehold improvements and equipment are recorded at cost.  Equipment, including monitoring equipment, is depreciated on the straight-line method over the estimated useful lives of the related assets ranging from 3 to 10 years.  The cost of leasehold improvements is amortized over the lesser of the estimated lives of the assets or the lease term.  Amortization of assets acquired under capital leases is included with depreciation expense on the owned assets.




During the three month period ended June 30, 2010 management lengthened the estimated useful life of certain monitoring equipment to more accurately reflect the expected life of the related assets.




The Company assesses the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  These computations utilize judgments and assumptions inherent in management’s estimate of future undiscounted and discounted cash flows to determine recoverability of these assets.  If management’s assumptions about these assets were to change as a result of events or circumstances, the Company may be required to record an impairment loss.  With respect to the Company’s long lived assets, the Company recorded no impairment charges for the years ended December 31, 2010 and 2009.




Product development:  The Company capitalizes software and hardware development costs when a product's technological feasibility has been established and ends when the product is available for general release to customers.  All software and hardware development costs are amortized on a straight-line basis over 36 months.   As of December 31, 2010, the Company had capitalized development costs of $321,207 related to the System 5000 (included within Equipment) and $523,879 related to the improvements in the functionality of our web-based software and customer-facing interfaces.  Of these amounts, $282,948 and $99,483, respectively, had been amortized through December 31, 2010.  The net value of these
capitalized software and hardware development costs are included in the Leasehold improvements and equipment line of the Consolidated Balance Sheets.




Research and development expenses:Research and development cost of $1,120,293 and $1,263,148, net of amounts capitalized, were charged to operations for the years ended December 31, 2010 and 2009, respectively.




Goodwill:  Goodwill represents the excess of purchase price paid over the net identifiable assets of the acquired business.  It is subject to annual tests for impairment, or whenever an impairment indicator is identified.  The Company has recorded no impairment charges related to goodwill for the years ended December 31, 2010 and 2009.




Intangibles, subject to amortization:  Amortizable intangibles represent the value assigned to the future net income stream attributable to customer monitoring contracts assumed by the Company in a prior acquisition based on their capacity to generate such income.  The intangible asset was amortized over seven years, the estimated life of the monitoring contracts to which they relate.  Amortization was based on the ratio of projected annual revenue streams to total projected revenue per existing customer monitoring contracts.  All intangibles were fully amortized as of December 31, 2009.




32




Earnings (loss) per share:  Basic Earnings (Loss) Per Common Share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted Earnings (Loss) Per Common Share shall be computed by including contingently issuable shares with the weighted average shares outstanding during the period.  When inclusion of the contingently issuable shares would have an antidilutive effect upon earnings per share, no diluted earnings (loss) per share shall be presented.  The following potentially dilutive shares were not included in diluted earnings (loss) per common share as they would have an antidilutive effect upon earnings (loss) per
share:




December 31, 2010


December 31, 2009Shares issuable upon conversion of Series C Exchangeable Preferred Stock


4,782,609



4,782,609Warrants issuable upon conversion of Series C Exchangeable Preferred Stock


6,287,045



6,287,045Common stock options outstanding


3,282,529



3,054,320Common stock warrants outstanding


679,568



2,227,074




Revenue recognition and deferred revenue:   The Company derives revenue from equipment leasing and services and patent royalties.





Equipment leasing and services – the Company charges a daily rate for equipment leasing and service revenue (e.g. per day/per individual being monitored) and recognizes revenue as equipment leasing and services are provided.     The majority of the Company’s contracts are billed on a monthly basis in arrears.  However, in some instances customers are billed in advance, in which case, those billings are reflected as deferred revenue and recognized as equipment leasing and services are provided.





Royalty revenue – the Company entered into a Patent License Agreement in 2005 with Satellite Tracking of People, L.L.C.  (STOP), which grants STOP a license to utilize specific technology that is patented by the Company.  In exchange for that license the Company is entitled to receive a royalty payment from STOP equal to 2.5% of the revenue utilizing such technology, due annually by March 31 of each year, up to $1,500,000.   The Company accounts for these revenues on an accrual basis as the amounts are estimable and probable of collection.    Through December 31, 2010 the Company has earned the full $1,500,000, of which approximately $210,000 has yet to be collected.




Income taxes:  Deferred taxes are provided for by the liability method wherein deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences.  Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.




Stock–based compensation:The Company accounts for its stock-based compensation in accordance with Accounting Standards Codification (“ASC”) 718, “Compensation-Stock Compensation”, which requires that the compensation cost relating to share-based payment transactions, including grants of employee stock options, be recognized in the financial statements based on the fair value of the equity or liability instruments issued.  ASC 718 covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.  Under ASC 718, the Company is required to measure the cost of its
employee services received in exchange for stock options based on the grant-date fair value of the award, and to recognize the cost over the period the employee is required to provide services for the award.




The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.  The significant assumptions used in the Black Scholes model to estimate compensation expense are as follows:




33




2010


2009Risk free interest rate


3.29
%


3.60
%Expected volatility factor


81.28
%


81.50
%Expected option term in years

3.5 to 6.5


3.5 to 6.5Dividends

$
0.00


$
0.00Forfeitures for executives


0
%


0
%Forfeitures for non-executives


3
%


2
%




The risk-free interest rate is determined on the date the grant is issued.  This rate is equal to the rates based on yields from U.S. Treasury zero-coupon issues with maturity of 3.5 years to 6.5 years.  Expected volatilities are based upon looking back at historical stock prices over the expected option term.




The Company is required to estimate forfeitures. The forfeiture rate is the rate at which options are expected to be forfeited prior to full vesting.  The forfeiture rate is determined based on actual forfeiture rate experience as follows:  For each historical year of option issuance, the total options issued for the year is compared to the options forfeited prior to having vested.  For option years in which the two year vesting period has not passed, past experience is used to project future forfeitures.  The total of pro forma forfeitures is then compared to total options awarded and the resultant percentage is used as the forfeiture rate.  This forfeiture rate is recalculated on an annual basis.




The annual rate of quarterly dividends is 0% since iSECUREtrac has historically not paid dividends on its common stock and does not anticipate paying dividends on its common stock in the future.




The Company recorded pre-tax compensation expense for stock options issued to its employees of $183,080 and $331,175 for the years ended December 31, 2010 and 2009, respectively.  The Company has recorded a full valuation allowance on deferred tax assets and, therefore, no tax benefit is recognized.




The fair value of stock warrants issued to non-employees is also accounted for using ASC 718.  Related compensation expense is charged to income when incurred.





Advertising costs:  Advertising costs are expensed as incurred.  Advertising expense for the years ended December 31, 2010 and 2009 was $10,235 and $13,355, respectively.





Uncertain Tax Positions.  The Company accounts for all income taxes in accordance with ASC 740 – Income Taxes which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  It requires that we recognize in our consolidated financial statements, only those tax positions that are “more-likely-than-not” of being sustained as of the adoption date, based on the technical merits of the position.  There are no unrecognized tax benefits in the Company’s financial statements as of December 31, 2010 and 2009.





The Company recognizes interest and penalties related to uncertain tax positions in general and administrative expense.  As of December 31, 2010, the Company has not recorded any provisions for accrued interest and penalties related to uncertain tax positions.





34





Recent Accounting Pronouncements:





In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition(ASC 605):Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force); effective for years beginning after June 15, 2010. Vendors often provide multiple products and/or services to their customers as part of a single arrangement.  These deliverables may be provided at different points in time or over different time periods.  The existing guidance regarding how and whether to separate these deliverables and how to allocate the overall arrangement consideration to each was
originally captured in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, which is now codified at ASC 605-25, Revenue Recognition - Multiple-Element Arrangements.  The issuance of ASU 2009-13 amends ASC 605-25 and represents a significant shift from the existing guidance that was considered abuse-preventative and heavily geared toward ensuring that revenue recognition was not accelerated.  The application of this new guidance is expected to result in accounting for multiple-deliverable revenue arrangements that better reflects their economics as more arrangements will be separated into individual units of accounting.  Our adoption of ASU No. 2009-13 will not have a material effect on our consolidated financial statements.




In October 2009, the FASB issued ASU No. 2009-14, Software (ASC 985): Certain Revenue Arrangements That Include Software Elements (a consensus of the FASB Emerging Issues Task Force);effective for years beginning after June 15, 2010.  ASU 2009-14 modifies the existing scope guidance in ASC 985-605, Software Revenue Recognition, for revenue arrangements with tangible products that include software elements.  This modification was made primarily due to the changes in ASC 605-25 noted previously, which further differentiated the separation and allocation guidance applicable to non-software arrangements as compared to software
arrangements.  Prior to the modification of ASC 605-25, the separation and allocation guidance for software and non-software arrangements was more similar.  Under ASC 985-605, which was originally issued as AICPA Statement of Position 97-2, Software Revenue Recognition, an arrangement to sell a tangible product along with software was considered to be in its scope if the software was more than incidental to the product as a whole.  Our adoption of ASU No. 2009-14 will not have a material effect on our consolidated financial statements.




In December 2010, the FASB issued ASU 2010-28, Intangibles – Goodwill and Other (Topic 350).  This ASU modifies the first step of the goodwill impairment test to include reporting units with zero or negative carrying amounts.  For these reporting units, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any, when it is more likely than not that a goodwill impairment exists.  This ASU is effective for fiscal years and interim periods beginning after December 15, 2010.  The Company has evaluated the ASU and does not believe that it will have a material impact on our consolidated financial statements.




35




Note 2.  Leasehold Improvements and Equipment




The cost and accumulated depreciation of our leasehold improvements and equipment for the years ended December 31, 2010 and 2009 are as follows:




2010


2009Cost


Accumulated

Depreciation


Net Book

Value


Cost


Accumulated

Depreciation


Net Book

ValueEquipment

$
1,074,334


$
834,957


$
239,377


$
1,055,794


$
719,639


$
336,155Leasehold improvements


173,521



98,365



75,156



249,081



176,522



72,559Components held for future monitoring equipment builds


210,000



-



210,000



210,000



-



210,000Software development costs


523,879



99,483



424,396



259,977



-



259,977Monitoring equipment


14,166,061



11,395,629



2,770,432



13,915,298



10,332,523



3,582,775Total leasehold improvements and equipment

$
16,147,795


$
12,428,434


$
3,719,361


$
15,690,150


$
11,228,684


$
4,461,466




The Company incurred depreciation and amortization expense of $1,199,750 and $2,103,307 for the years ended December 31, 2010 and 2009, respectively.




Note 3.  Goodwill




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 at the end of each calendar year.  The Company has determined that there is no impairment of goodwill as of December 31, 2010 and 2009.




Goodwill at December 31, 2010 and 2009 was $2,302,179.




Note 4. Credit Agreements




On November 10, 2008, the Company entered into a loan agreement (the “Loan Agreement”) with Crestpark LP, Inc. (“Crestpark”) and in connection with the Loan Agreement executed two separate promissory notes.  The first note for $750,000 for working capital via a Revolving Credit Commitment and the second note for $1,750,000 for equipment financing via an Equipment Term Loan.  The Loan Agreement was subsequently amended, as disclosed in interim filings, leaving only the Revolving Credit Commitment terms in effect as outlined below as of December 31, 2010.




Revolving Credit Commitment - The proceeds of the Revolving Credit Commitment of $1,468,788 are to be used for working capital needs and are anticipated to be repaid from cash flow generated by the operations of the Company.  The Revolving Credit Commitment has a term ending on January 1, 2015, is unsecured and bears interest at a fixed noncompounded rate of 12% per annum, payable quarterly.  The Company is also required to pay Crestpark an unused fee of 0.25% per annum on the average daily unused amount of the Revolving Credit Commitment.  Interest expense to Crestpark in 2010 and 2009 was $60,181 and $70,468, respectively.  As of December 31, 2010, the Company had $642,886 outstanding
under the Revolving Credit Commitment and $825,902 available, compared with $350,000 outstanding and $400,000 available as of December 31, 2009.  Amounts borrowed and repaid remain available under the Revolving Credit Commitment.




36




Equipment Term Loan - The proceeds of the $1,750,000 Equipment Term Loan were to be used to purchase GPS-based offender tracking and monitoring equipment that is leased or sold by the Company to its clients.  It is anticipated that borrowings under the Equipment Term Loan will be repaid from permanent equipment financing secured by the Company from time to time.  At Crestpark’s discretion, any borrowings under the Equipment Term Loan that remain outstanding more than 30 days can be converted into separate 36 Month Notes, which are notes payable over 36 month terms.  The Equipment Term Loan had a term ending January 1, 2012, bears interest at a fixed rate of 12% per annum and was secured by the
monitoring equipment purchased with the proceeds of the Equipment Term Loan.  The Company is also required to pay Crestpark an unused fee of 0.25% per annum on the average daily unused amount of the Equipment Term Loan.  Interest expense to Crestpark in 2010 and 2009 was $95,039 and $13,033 respectively.  The outstanding principal balance on the Equipment Term Loan of $818,000 was capitalized into the new note payable under the Credit and Security Agreement, as amended December 31, 2010 and the Equipment Term Loan was terminated.




Crestpark is an affiliate of Mykonos 6420 LP (“Mykonos”).  As the sole holder of the Company’s Series C Preferred Stock 8% Cumulative Compounding Exchangeable Preferred Stock, Mykonos has the right to elect a majority of the Company’s Board of Directors.  The terms of the loan were approved by a Special Committee of the Board of Directors consisting solely of disinterested directors.




Note 5.  Long-Term Debt and Lease Obligations




The Company had the following long-term debt at December 31, 2010 and 2009:




2010


2009Long-Term DebtCrestpark LP, IncOne secured note payable in the amount of $11,877,475 maturing on January 1, 2012Fixed Tranche ~ with an interest rate of 9% effective November 4, 2009 and 7% prior to that date

$
-


$
6,455,250Floating Tranche ~ with an interest rate of 2% over prime (5.25% at September 30, 2010)


-



5,422,225One secured note payable in the amount of $14,891,086 maturing on January 1, 2015Fixed Tranche ~ with an interest rate of 9.5% effective December 31, 2010


9,891,086



-Floating Tranche ~ with an interest rate of 2% over prime (5.25% at December 31, 2010)


5,000,000



-Crestpark LP, Inc Total

$
14,891,086


$
11,877,475AHK Leasing, LLCThirteen separate capital leases with related parties that are carrying interest rates at 9.50% to 11.25% and maturing March 2011 to September 2013


1,560,389



2,923,532Total long term debt

$
16,451,475


$
14,801,007Less current maturities


(1,185,254
)


(1,674,221
)Total long-term debt less current maturities

$
15,266,221


$
13,126,786Accrued interest on long-term debt related to the note payable to Crestpark LP, Inc


-



1,428,778Total long-term debt less current maturities, including accrued interest on long-term debt


15,266,221



14,555,564





Crestpark LP, Inc.


On December 31, 2010, the parties executed an amendment to the Credit and Security Note.  Under the terms of this amendment, the outstanding principal balance on the Equipment Term Loan of $818,000 plus all interest accrued through December 31, 2010 ($2,195,611) and the outstanding note payable of $11,877,475 were capitalized into the new note payable in the amount of $14,891,086, due January 1, 2015.





As of December 31, 2010, the Company had outstanding a Note Payable (“Note”) with Crestpark for $14,891,086 under a Credit and Security Agreement originally dated December 18, 2007 and subsequently amended.   Outstanding borrowings are due and payable on the earlier of (i) January 1, 2015 or (ii) the first date on which the Company either issues equity securities or arranges for additional indebtedness (other than trade indebtedness incurred in the ordinary course of its business) in a transaction or series of transactions which generates aggregate net proceeds to the Company of not less than the then current principal amount outstanding under this Note, plus all accrued but unpaid interest.  The Company may prepay the Note at any time without premium or penalty.




37




The Note provides, among other things, that $9,891,086 (the “Fixed Tranche”) of the borrowings thereunder shall bear interest at 9.5% per annum and that such interest will be due and payable at maturity of the Note.  The remaining $5,000,000 of borrowings (the “Floating Tranche”) under the Note will bear interest at a floating rate equal to 2% over the prime rate (the “Base Rate”), payable quarterly beginning March 31, 2011.  In addition, quarterly principal payments of $125,000 are due beginning March 31, 2012.




As of December 31, 2009, the Company had outstanding a Note Payable (“Note”) with Crestpark LP, Inc (“Crestpark”),   for $11,877,475 under a Credit and Security Agreement originally dated December 18, 2007 and subsequently amended. Outstanding borrowings are due and payable on the earlier of (i) January 1, 2012 or (ii) the first date on which the Company either issues equity securities or arranges for additional indebtedness (other than trade indebtedness incurred in the ordinary course of its business) in a transaction or series of transactions which generates aggregate net proceeds to the Company of not less than the then current principal amount outstanding under this Note, plus all accrued but unpaid interest.  The Company may prepay the Note at any time
without premium or penalty.  The Note provides, among other things, that $6,455,250 (the “Fixed Tranche”) of the borrowings thereunder shall bear interest at 9.0% per annum, compounded annually,  and that such interest will be due and payable at maturity of the Note.  The remaining $5,422,225 of borrowings (the “Floating Tranche”) under the Note will bear interest at a floating rate equal to 2% over the prime rate (the “Base Rate”).  The portion of the interest on the Floating Tranche determined by the Base Rate will be compounded annually, but payable at maturity, but the remaining portion of the interest representing the 2% premium over the Base Rate will be payable monthly.





The borrowings under the Note are secured by a first priority security interest in all of the assets of the Company except that Crestpark’s security interest in certain monitoring equipment is subordinate to the interest of AHK Leasing LLC under its sale leaseback arrangements.





Crestpark is an affiliate of Mykonos 6420 LP (“Mykonos”).  As the sole holder of the Company’s Series C 8% Cumulative Compounding Exchangeable Preferred Stock, Mykonos has the right to elect a majority of the Company's Board of Directors.  The terms of the Loan and subsequent amendments were approved by a Special Committee of the Board of Directors consisting solely of disinterested directors.





Capital Leases - AHK Leasing, LLC


AHK Leasing, LLC (“AHK”) is a company controlled by three stockholders, one of which is a current director, which lent the Company money to acquire revenue producing equipment.  These loans were in the form of capital leases with 36 month terms and bearing interest at a rate of 9.50% to 11.25% per annum and mature between March 2011 and September 2013.   There was no accrued interest payable to AHK at December 31, 2010.




38




Total interest expense, including unused commitment fees, for the years ended December 31, 2010 and 2009 is as follows:




2010


2009AHK interest on long-term debt

$
245,490


$
341,392Crestpark LP interest on long-term debt


876,293



765,870Crestpark LP credit agreements


155,710



83,501Other


17,205



21,797Total interest expense

$
1,294,699


$
1,212,559




Interest expense paid during 2010 and 2009 was $401,200 and $424,893, respectively.




The carrying value of the secured note payable to Crestpark and the capital leases with AHK approximates their fair value in each case due to the short-term nature of the borrowings and, in the case of the capital leases, a guarantee from a stockholder.




The following is a schedule of aggregate debt maturities, including lease related obligations, due in future years as of December 31, 2010:




Operating


Capital Leases


Revolving


Long-term debtLease


Related Party


Line of Credit


Note Payable2011

$
81,360


$
1,285,176


$
-


$
-2012


82,988



318,427



-



500,0002013


84,647



80,088



-



500,0002014


86,340



-



-



500,0002015


-



-



642,886



13,391,086Total

$
335,335


$
1,683,691


$
642,886


$
14,891,086Less the amount representing interest


-



(123,302
)


-



-Approximate present value of minimum lease payments

$
335,335


$
1,560,389


$
642,886


$
14,891,086




The cost and accumulated depreciation of assets acquired under capital leases is as follows:




2010


2009Equipment

$
5,105,890


$
5,451,873Less accumulated depreciation


(2,684,623
)


(2,280,734
)Total

$
2,421,267


$
3,171,139




The Company has a noncancelable operating lease for its facility in Omaha, Nebraska and an operating lease for office equipment, as outlined above.  The total rent expense under the operating leases was $90,694 and $106,225 for the years ended December 31, 2010 and 2009, respectively.




39




Note 6.  Common Stock, Stock Options, Warrants and Benefit Plan




Common Stock




In 2010 and 2009, the Company issued 12,696 and 17,010 shares of common stock, respectively, to non-management directors in lieu of director fees.  The number of shares of common stock issued, in each case was based on the fair value of the Company’s common stock as of the date of the meetings to which such fees related.  Expense related to these director’s fees totaled $8,000 for each of the years ended December 31, 2010, and 2009.




Stock Options




The Company has issued options to acquire shares of its common stock under two equity incentive plans and pursuant to certain employment agreements with current and former executive officers.  The terms of these equity incentive plans and non-plan option grants are described below.




2006 Omnibus Equity Incentive Plan




On May 4, 2006, at the Company’s annual meeting of stockholders, the stockholders approved the adoption of the Company’s newly created 2006 Omnibus Equity Incentive Plan (the “2006 Plan”).  The 2006 Plan became effective on May 31, 2006.  The 2006 Plan provides for the granting of stock options and other equity incentives to the Company’s officers, employees, directors and consultants who provide services to the Company.  The 2006 Plan has a term of ten years unless terminated by the board of directors.  Stock options are granted with an exercise price not less than fair market value of the common stock on the date of the grant.  Vesting schedules and expiration dates for the grants issued under this plan are specified at the time of
grant.




2001 Omnibus Equity Incentive Plan




In June 2001, the stockholders of iSECUREtrac approved the 2001 Omnibus Equity Incentive Plan (the “2001 Plan”).  As of May 31, 2006, the Company’s 2001 Plan expired.  The 2001 Plan provided for the granting of stock options and other equity incentives for up to 100,000 shares of the Company’s Common Stock to the Company’s officers, directors, and consultants who provided services to the Company and key employees at an exercise price 85% of the average daily closing price of the Company’s common stock for the week prior to when the options were granted.  The options are to vest on a monthly basis over a one month to a 36-month period of time from the date of grant.  As of January 1 of each year, commencing with the year 2002, the
aggregate number of options that were awarded under the 2001 Plan was automatically increased by a number equal to the lesser of 1% of the total number of Common Shares then outstanding or 20,000.




Non-Plan Stock Options




In 2004 and prior, the Company has granted options to purchase common stock outside of the 2001 Plan and 2006 Plan to various executive officers pursuant to the terms of their employment agreements.  These options have exercise prices ranging from $2.30 to $3.15 per share and have terms expiring through April 30, 2014.  These options vest on a monthly basis over two year periods from their grant date.




40




The options granted, exercised, forfeited and outstanding under the various Plans for the years ended December 31, 2010 and 2009 are detailed as follows:




2006 Omnibus Plan


2001 Omnibus Plan


Non-Stock Option Plan


Total Stock Option2010


2009


2010


2009


2010


2009


2010


2009Options outstanding at beginning of year


2,287,302



1,760,583



47,000



72,525



720,018



901,268



3,054,320



2,734,376Granted


693,000



651,250



-



-



-



-



693,000



651,250Excercised


(98,363
)


(292
)


-



-



-



-



(98,363
)


(292
)Forfeited


(249,303
)


(124,239
)


(16,125
)


(25,525
)


(101,000
)


(181,250
)


(366,428
)


(331,014
)Options outstanding at end of year


2,632,636



2,287,302



30,875



47,000



619,018



720,018



3,282,529



3,054,320




A summary of employee stock option activity during the years ended December 31, 2010, and 2009, is as follows:




For the Year Ended December 31,2010


For the Year Ended December 31,2009Weighted Average





Weighted AverageOptions

Shares


Exercise Price


Shares


Exercise PriceOutstanding at beginning of year


3,054,320


$
1.32



2,734,376


$
1.59Granted


693,000



1.02



651,250



0.45Exercised


(98,363
)


0.41



(292
)


0.56Forfeited


(366,428
)


1.13



(331,014
)


1.78Outstanding at end of year


3,282,529


$
1.31



3,054,320


$
1.32Exercisable at end of year


2,439,528


$
1.46



2,188,700


$
1.69Weighted-average fair value for options granted during the year


693,000


$
0.68



651,250


$
0.30




Additional information regarding options outstanding at December 31, 2010, is as follows:




Options Outstanding


Options ExercisableNumber

WeightedAverage

WeightedAverage


Number


WeightedAverageRange of Exercise Prices

Outstanding

Remaining Life

Exercise Price


Exercisable


Exercise Price$0.20 to 1.00


1,441,218

8.0 years

$
0.48



1,158,134


$
0.47$1.01 to 2.00


730,563

9.0 years

$
1.06



170,646


$
1.13$2.01 to 3.00


985,331

3.5 years


2.47



985,331



2.47$3.01 to 4.00


125,418

0.4 years


3.09



125,418



3.09Totals


3,282,529

7.1 years

$
1.31



2,439,529


$
1.46




98,363 stock options were exercised during 2010, which resulted in gross proceeds to the Company of $40,325.




As of December 31, 2010, there was approximately $490,456 of total unrecognized compensation costs related to non-vested share based compensation agreements granted to the Company’s executives and employees.   The weighted average period in which the unrecognized compensation costs will be recognized into income is 1.63 years.




41




Common Stock Warrants




Warrants to purchase shares of common stock were granted, exercised, forfeited and outstanding at December 31, 2010 and 2009 as follows:




Warrants (b)

Non-Related

Party


Related Party

(a)


Total


Weighted Average

Exercise PriceOutstanding  and excercisable at December 31, 2008


1,212,156



2,332,379



3,544,535


$
3.65Granted


-



-



-



-Excercised


-



-



-



-Forfeited


(1,212,156
)


(105,292
)


(1,317,448
)

$
4.10Outstanding  and excercisable at December 31, 2009


-



2,227,087



2,227,087


$
3.38Granted


-



-



-



-Excercised


-



-



-



-Forfeited


-



(1,547,519
)


(1,547,519
)

$
3.70Outstanding  and excercisable at December 31, 2010


-



679,568



679,568


$
2.63




(a) Held by Mykonos 6420 LP


(b) Does not include 6,287,045 warrants issued to Mykonos 6420 LP in connection with the Convertible Preferred Stock




A further summary about warrants outstanding at December 31, 2010, is as follows:




Number Outstanding

Weighted Average

Weighted AverageRange of Exercise Prices

and Exercisable

Remaining Life

Exercise Price$2.00 to 3.00


554,150

1.45 years

$
2.53$3.01 to 4.00


125,418

0.39 years


3.09Total


679,568

1.25 years

$
2.63




Benefit Plan





The “iSECUREtrac Corporation Retirement Plan” offers all regular full-time employees, 21 years of age and older, to participate in a 401k savings plan.  The plan offers either a pre-tax contribution option or the Roth, after-tax contribution option.   iSECUREtrac provides a match of 25% up to 10% of the employee’s contribution, with a maximum match of $2,500.  The employer contribution vests over a 4-year graded schedule.  The total expense related to the plan was $31,482 and $39,192 for the years ended December 31, 2010 and 2009, respectively.




Note 7.  Convertible Preferred Stock





The Company is authorized to issue up to 5,000,000 shares of preferred stock from time to time with such rights and privileges as the Board of Directors may determine.  The Company has issued the following shares of preferred stock:





Series C Exchangeable Preferred Stock





On June 27, 2005, the Company issued 1,000,000 shares of its $0.01 par value Series C 8% Cumulative Compounding Exchangeable Preferred Stock (the “Series C Preferred Stock”). The Series C Preferred Stock is exchangeable for 4,782,609 shares of Common Stock and warrants to acquire 6,287,045 shares of Common Stock at an exercise price of $2.30 per share.




42




If, after June 27, 2010, the closing price of the common stock exceeds $20.00 per share for at least 120 consecutive trading days, the Company can require the conversion of the Series C Preferred Stock into Common Stock in accordance with the above exchange provisions.




The Series C Preferred Stock is redeemable on the tenth anniversary of the original issue date.  The redemption price per share of the Series C Preferred Stock will equal the per share original issue price ($11.00 per share) plus an amount equal to all accrued but unpaid dividends thereon (and any interest payable thereon).  At the date of issuance, the proceeds of $11 million were allocated between the Series C Preferred Stock and the value of the warrants, creating an original discount of $2 million on the Preferred Stock.  The interest method will be utilized to accrete the carrying amount of the Series C Preferred Stock over the ten year period to the earliest redemption date so that the carrying amount will equal the redemption amount at the earliest possible redemption
date.  Due to the accumulated deficit position of the Company, the periodic accretion is charged to Additional Paid-In Capital.





As of December 31, 2010, the Company had accrued Series C Preferred Stock dividends totaling $5,828,079 and accretion to redemption value of the Series C Preferred Stock totaling $1,049,051.  Of these amounts, $1,246,524 and $196,459, respectively, were the amounts accrued and accreted in 2010.





Upon any liquidation of the Company, which may include a merger or sale transaction, no distribution shall be made to the holders of shares of Common Stock or other stock ranking junior to the Series C Preferred Stock unless, prior thereto, the holders of shares of Series C Preferred Stock shall have received an amount per share equal to the per share Original Issue Price plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, multiplied by a factor of 105%.




Except as otherwise required by law, the holders of shares of Series C Preferred Stock vote together with the holders of shares of the Common Stock of the Company on all matters submitted to the stockholders of the Company and not as a separate class, and each share of Series C Preferred Stock entitles the holder thereof to 11 votes or the equivalent amount of voting power thereof as determined by the Board of Directors.  In addition, until such time that less than 500,000 shares of Series C Preferred Stock are outstanding, the Series C Preferred Stock holders have the ability to appoint a majority of the Company’s directors.




Note 8.  Income Taxes




Net deferred tax asset includes the following components as of December 31, 2010 and 2009:




2010


2009Deferred tax assets (liabilities):Net operating loss carryforward

$
27,488,000


$
27,089,000Allowance for doubtful accounts


267,000



267,000Book / tax difference in depreciable assets


121,000



81,000Stock option expense


668,000



592,000Accrued expenses


63,000



174,000Deferred revenue


28,000



39,000Subtotal


28,635,000



28,242,000Valuation Allowance


(28,635,000
)


(28,242,000
)$
-


$
-




43




The income tax provision differs from the amount of income tax determined by applying the statutory federal income tax rate to pretax loss for the years ended December 31, 2010, and 2009 due to the following:




2010


2009Compted Federal "expected" tax benefit

$
(343,000
)

$
(655,000
)Increase (decrease) in income taxes resulting from:Benefit from state taxes


(60,000
)


(115,000
)Nondeductible expenses


10,000



20,000Expiration of net operating loss carryforwards


-



-Other timing differences


-



-Increase (decrease) in valuation allowance


393,000



750,000$
-


$
-




As of December 31, 2010, the Company had available federal net operating loss carryforwards of approximately $69,000,000 for future tax purposes that expire from 2011 to 2028.  The Company believes that Section 382 of the Internal Revenue Code and the associated U.S. Treasury Regulations will significantly limit the amount of net operating loss carryforward that the Company will be able to utilize in any tax year.  All losses incurred prior to the Company’s change of ownership event on June 27, 2005 totaled approximately $48,000,000.  The utilization of these losses is limited (by Internal Revenue Code Section 382) to approximately $950,000 per year through 2025.




A valuation allowance was established due to the uncertainty relating to the future utilization of net operating loss carryforwards.  The amount of the deferred tax assets considered realizable could be adjusted in the future based upon changes in circumstances that result in a change in our assessment of our ability to realize those deferred tax assets through the generation of taxable income or other tax events.




The Company accounts for all income taxes in accordance ASC 740 – Income Taxes which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  It requires that we recognize in our consolidated financial statements, only those tax positions that are “more-likely-than-not” of being sustained as of the adoption date, based on the technical merits of the position.  There are no unrecognized tax benefits in the Company’s financial statements as of December 31, 2010 and 2009.




The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. As the Company has a federal Net Operating Loss carryforward from the year ended December 31, 1995 forward, all tax years from 1995 forward are subject to examination. As states have varying carryforward periods, and the Company has recently entered into additional states, the Company is generally subject to examination by the states for the previous 15 years or less.





The Company recognizes interest accrued, net of tax and penalties, related to unrecognized tax benefits as components of income tax provision as applicable. As of December 31, 2010, the Company did not have any accrued interest or penalties.




Note 9.  Related Party Transactions





The Company has incurred debt with related parties through several lending arrangements as further described in Note 4 Credit Agreements and Note 5 Long-Term Debt and Lease Obligations.




44




Note 10.  Concentrations





The Company maintains cash in excess of the Federal Deposit Insurance Corporation limit of $250,000.  The Company has not experienced and does not anticipate such losses in these accounts.





The Company has one customer which accounted for 22.1% and 18.8% of its total revenues for the year ended December 31, 2010 and 2009, respectively.  The receivable balance for this customer at December 31, 2010 and 2009 was $213,313 and 178,792, respectively.




Note 11.  Legal Proceedings





The Company is not currently involved in any material pending legal proceedings but may, from time to time, be involved in ordinary routine litigation incidental to the business.





Note 12. Subsequent Events





The Company evaluates all subsequent events and transactions for potential recognition or disclosure in our consolidated financial statements.  There are no matters which require disclosure.




Note 13.  Fair Value of Financial Instruments





The following methods and assumptions were used to estimate fair value of each class of financial instruments for which it is practicable to estimate that value:





Accounts receivable:  The carrying amount approximates fair value.





Long-term debt:  Based on the borrowing rates available to the Company for bank loans with similar terms and maturities, the carrying value approximates fair value due to the refinancing at December 31, 2010.





Accounts payable and accrued expenses:  The carrying amount approximates fair value.





Redeemable Exchangeable Series C Preferred Stock:  The Company does not believe a fair value is determinable at this time based on the duration from the securities original issuance and the lack of a ready market through which the holder may liquidate such security.




Item 9.  Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.




None.




Item 9A.  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 chief executive officer and chief 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 upon that evaluation, the chief executive officer and the chief financial officer concluded that, as of the Evaluation Date, the Company's disclosure, controls and procedures are effective, providing them with
information relating to the Company as required to be disclosed in the reports the Company files or submits under the Exchange Act on a timely basis.




45




Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Accounting Principles Generally Accepted in the U.S. and includes those policies and procedures that:


·
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
  ·
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and Directors of the Company; and
  ·
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
  The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010.  In making this assessment, the Company’s management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.  Based on its assessment, the Company’s management believes that, as of December 31, 2010, the Company’s internal control over financial reporting was effective based on that criteria.
  This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.


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.




Item 9B.  Other Information.




None




46




PART III




Item 10.  Directors, Executive Officers and Corporate Governance




The discussion under the headings “Election of Directors”, “Certain Relationships and Related Transactions”, “The Board of Directors and its Committees”, “Named Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement relating to the Company’s 2011 Annual Meeting of Stockholders (the ”Proxy Statement”) are incorporated herein by reference.




Item 11.  Executive Compensation.




The discussion under the headings “Executive Compensation” and “Director Compensation” in the Proxy Statement are incorporated herein by reference.




Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters




The discussion under the heading “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement is incorporated herein by reference.




Equity Compensation Plan Information.Information regarding shares of the Company’s common stock under equity compensation plans and executive employment agreements maintained by the Company as of December 31, 2010 is set forth in the following table:




Number of securities remainingNumber of securities to be issued


Weighted average exercise price


available for future issuanceupon exercise of outstanding


of outstanding options, warrants


under equity compensation plansPlan category

options, warrants and rights


and rights


*(a)


(b)


(c)Equity compensation plans approved by security holders


2,663,511


$
0.99



367,364Equity compensation plans not approved by security holders


619,018


$
2.66



0Total


3,282,529


$
1.31



367,364




*Excludes securities reflected in column (a).




Equity compensation plans approved by security holders consist of our 2006 Omnibus Equity Incentive Plan and 2001 Omnibus Equity Incentive Plan.  The exercise prices for options issued under these plans range from $0.20 to $2.75 per share.  Equity compensation plans not approved by security holders consist of options issued to employees per their employment agreements or performance bonuses.  Exercise prices for these options range from $2.30 to $3.15 per share.




Item 13.  Certain Relationships, and Related Transactions and Director Independence.




The discussion under the heading “Certain Relationships and Related Transactions” and “The Board of Directors and its Committees” in the Proxy Statement is incorporated herein by reference.




Item 14.  Principal Accountant Fees and Services




The discussion under the heading “Principal Accounting Fees and Services” in the Proxy Statement is incorporated herein by reference.




47




PART IV




Item 15.  Exhibits and Financial Statement Schedules




(a)      The following documents are filed as part of this report:




1.
Financial Statements of the Company.




2.
Exhibits.


3.01
Amended and Restated Certificate of Incorporation of the Company, as amended (13)3.02
Restated Bylaws of the Company (1)3.03
Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock of the Company (3)3.04
Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock of the Company (9)3.05
Certificate of Designations, Preferences and Rights of Series C Exchangeable Preferred Stock of the Company (12)4.01
Form of Common Stock Certificate (1)10.01
License Agreement with SiRF Technology, Inc. (1)10.02
ADT Distribution Agreement (3)10.03
ADT Hosting Agreement (3)10.04
Preferred Distributor Agreement with Premier Geografix LTD. (7)10.05
Employment Agreement between the Company and David G. Vana (5)10.06
Employment Agreement between the Company and Edward J. Sempek (5)10.07
Employment Agreement between the Company and David G. Sempek (5)10.08
Employment Agreement between the Company and Peter A. Michel (17)10.09
Agreement Among Noteholders (10)10.10
Debt Conversion between the Company and Roger Kanne (11)10.11
Debt Conversion between the Company and Martin Halbur (11)10.12
Debt Conversion between the Company and Kenneth Macke (11)10.13
Debt Conversion between the Company and Buckshot Capital, LLC (11)10.14
Business Office Lease (11)10.15
Business Office Lease Amendment (20)10.16
Securities Purchase Agreement (14)10.17
Registration Rights Agreement (15)10.18
Warrant Agreement (16)10.19
2001 Omnibus Equity Incentive Plan (4)10.20
2006 Omnibus Equity Incentive Plan (18)10.21
Indemnification Agreement in favor of AHK Leasing, LLC (19)10.22
Credit and Security Agreement in favor of Crestpark LP, Inc. (21)
  48
  10.23
First Amendment to Credit and Security Agreement in favor of Crestpark LP, Inc. (22)10.24
Amended and Restated Promissory Note in favor of Crestpark LP, Inc. (22)10.25
Employment Agreement between the Company and Lincoln Zehr (24)10.26
Employment Agreement between the Company and Robert Bierman (24)10.27
Confidential Settlement Agreement (24)10.28
Second Amendment to Credit and Security Agreement10.29
Third Amendment to Credit and Security Agreement10.30
Fourth Amendment to Loan Agreement10.31
Termination and Release Agreement10.32
Amended and Restated Promissory Note21.01
Subsidiaries of the Company23
Consent of McGladrey & Pullen, LLP, Independent Registered Public Accounting Firm24
Powers of Attorney31.1
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
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1)
Incorporated by reference from the registrant’s registration statement under Form 10-SB, filed on June 22, 1999 (Commission File No. 0-26455).(2)
Not Used(3)
Incorporated by reference from the registrant’s registration statement under Form SB-2 filed on November 30, 2001 (Commission File No. 333-74762).(4)
Incorporated by reference from the Notice of Annual Meeting of Stockholders and Proxy Statement contained in Registrant’s Definitive Proxy Statement under Schedule 14A, filed with the SEC on May 14, 2001 (Commission File No. 0-26455).(5)
Incorporated by reference from the registrant’s registration statement under Form S-8 filed on May 22, 2002 (Commission File No. 333-88798).(6)
Incorporated by reference from the registrant’s registration statement under Form S-8 filed on April 16, 2004 (Commission File No. 333-114513).(7)
Incorporated by reference from the registrant’s current report under Form 8-K filed on March 18, 2003 (Commission File No. 0-26455).(8)
Not Used(9)
Incorporated by reference from the registrant’s registration statement under Form SB-2 filed on August 11, 2004 (Commission File No. 333-118135).(10)
Incorporated by reference from the registrant’s current report under Form 8-K filed on February 10, 2005 (Commission File No. 0-26455)(11)
Incorporated by reference from the registrant’s annual report under Form 10-KSB filed on March 31, 2005 (Commission File No. 0-26455).
  49
  (12)
Incorporated by reference from the registrant’s current report under Form 8-K filed on June 23, 2005. (Commission File No. 0-26455).(13)
Incorporated by reference from the registrant’s current report under Form 8-K filed on December 14, 2006. (Commission File No. 0-26455).(14)
Incorporated by reference from the registrant’s current report under Form 8-K filed on June 23, 2005. (Commission File No. 0-26455).(15)
Incorporated by reference from the registrant’s current report under Form 8-K filed on June 29, 2005. (Commission File No. 0-26455).(16)
Incorporated by reference from the registrant’s current report under Form 8-K filed on June 29, 2005. (Commission File No. 0-26455).(17)
Incorporated by reference from the registrant’s current report under Form 8-K filed August 8, 2006 (Commission File No. 0-26455).(18)
Incorporated by reference from the registrant’s quarterly report under Form 10-QSB filed on August 11, 2006. (Commission File No. 0-26455).(19)
Incorporated by reference from the registrant’s current report under Form 8-K filed February 22, 2007 (Commission File No. 0-26455).(20)
Incorporated by reference from the registrant’s annual report under Form 10-KSB filed on March 12, 2006 (Commission File No. 0-26455).(21)
Incorporated by reference from the registrant’s current report under Form 8-K filed on November 2, 2007 (Commission File No. 0-26455).(22)
Incorporated by reference from the registrant’s current report under Form 8-K filed on December 20, 2007 (Commission File No. 0-26455).(23)
Incorporated by reference from the registrant’s current report under Form 8-K filed on November 12, 2008 (Commission File No. 0-26455).(24)
Incorporated by reference from the registrant’s annual report under Form 10-KSB filed on March 19, 2008 (Commission File No. 0-26455).




50


SIGNATURES
 
 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 iSecureTrac Corp.By:
/s/ Peter A. MichelPeter A. MichelChief Executive OfficerDated: March 16, 2011
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
 Signature

Title

Date/s/ Roger J. Kanne *

Chairman of the Board of Directors,

March 16, 2011Roger J. Kanne

Director/s/ Peter A. Michel

President, Chief Executive Officer, Director

March 16, 2011Peter A. Michel

(Principal Executive Officer)/s/ Lincoln Zehr

Chief Financial Officer

March 16, 2011Lincoln Zehr

(Principal Financial and Accounting Officer)/s/ Joseph A. Ethridge *

Director

March 16, 2011Joseph A. Ethridge/s/ Robert W. Korba *

Director

March 16, 2011Robert W. Korba/s/ Ravi Nath *

Director

March 16, 2011Ravi Nath/s/ Derek Claybrook *

Director

March 16, 2011Derek Claybrook
 * Peter A. Michel, by signing his name hereto, signs this annual report on behalf of each person indicated. A Power-of-Attorney authorizing Peter A. Michel to sign this annual report on Form 10-K on behalf of each of the indicated Directors of iSECUREtrac Corp. has been filed herein as Exhibit 24.


By:/s/ Peter A. MichelPeter A. MichelAttorney-In-Fact
  51