ALANCO TECHNOLOGIES, INC.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
---
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2007
____TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________ to ____________
Commission file number 0-9347
ALANCO TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Arizona
(State or other jurisdiction of incorporation or organization)
86-0220694
(I.R.S. Employer Identification No.)
15575 N. 83rd Way, Suite 3, Scottsdale, Arizona 85260
(Address of principal executive offices) (Zip Code)
(480) 607-1010
(Issuer's telephone number)
----------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
As of February 5, 2008 there were 23,528,000 shares, net of treasury shares, of
common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes ___ No X
---
Forward-Looking Statements: Some of the statements in this Form 10-QSB Quarterly
Report, as well as statements by the Company in periodic press releases, oral
statements made by the Company's officials to analysts and shareholders in the
course of presentations about the Company, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Words or phrases denoting the anticipated results of future events such
as "anticipate," "believe," "estimate," "will likely," "are expected to," "will
continue," "project," "trends" and similar expressions that denote uncertainty
are intended to identify such forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. Such factors include,
among other things, (i) general economic and business conditions; (ii) changes
in industries in which the Company does business; (iii) the loss of market share
and increased competition in certain markets; (iv) governmental regulation
including environmental laws; and (v) other factors over which the company has
little or no control.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets December 31, 2007 (Unaudited)
and June 30, 2007.....................................................3
Condensed Consolidated Statements of Operations (Unaudited)
For the three months ended December 31, 2007 and 2006.................4
Condensed Consolidated Statements of Operations (Unaudited)
For the six months ended December 31, 2007 and 2006...................5
Condensed Consolidated Statements of Changes in Shareholders' Equity
(Unaudited) For the six months ended December 31, 2007................6
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the six months ended December 31, 2007 and 2006...................7
Notes to Condensed Consolidated Financial Statements (Unaudited)............9
Note A - Basis of Presentation and Recent Accounting Pronouncements
Note B - Stock Based Compensation
Note C - Inventories
Note D - Contracts in Process
Note E - Deferred Revenue
Note F - Loss per Share
Note G - Equity
Note H - Industry Segment Data
Note I - Related Party Transactions
Note J - Line of Credit and Term Loan
Note K - Litigation
Note L - Subsequent Events
Note M - Liquidity
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................17
Item 3. Controls and Procedures...........................................23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................23
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds........25
Item 4. Submission of Matters to a Vote of Security Holders...............25
Item 6. Exhibits..........................................................25
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2007 AND JUNE 30, 2007
Dec. 31, 2007 June 30, 2007
--------------- --------------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 420,100 $ 615,800
Accounts receivable, net 2,214,500 2,248,600
Notes receivable, current 29,600 29,600
Cost and estimated earnings
in excess of billing 24,400 122,000
Inventories, net 4,925,900 3,808,100
Prepaid expenses and other
current assets 471,200 382,800
-------------- --------------
Total current assets 8,085,700 7,206,900
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, NET 265,900 250,700
-------------- --------------
OTHER ASSETS
Goodwill, net 17,931,700 17,931,700
Other intangible assets, net 1,812,100 2,066,200
Other assets 696,500 427,400
-------------- --------------
Total other assets 20,440,300 20,425,300
-------------- --------------
TOTAL ASSETS $ 28,791,900 $ 27,882,900
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expense $ 3,810,500 $ 4,155,500
Notes payable, current 2,340,100 2,485,900
Deferred revenue, current 902,000 784,600
-------------- --------------
Total current liabilities 7,052,600 7,426,000
LONG TERM LIABILITIES
Notes payable, long term 4,622,000 4,814,100
Deferred revenue, long term 122,600 129,300
-------------- --------------
TOTAL LIABILITIES 11,797,200 12,369,400
-------------- --------------
Preferred Stock - Series B, 86,900 and
82,800 shares issued and outstanding,
respectively 856,700 815,000
-------------- --------------
SHAREHOLDERS' EQUITY
Preferred Stock - Series A Convertible,
3,984,100 and 3,759,800 shares issued
and outstanding, respectively 5,266,100 4,930,100
Common Stock - 22,728,500 and 20,223,100
shares outstanding, net of 200,000
Treasury Stock 92,565,700 87,595,100
Accumulated deficit (81,693,800) (77,826,700)
-------------- --------------
Total shareholders' equity 16,138,000 14,698,500
-------------- --------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 28,791,900 $ 27,882,900
============== ==============
See accompanying notes to the consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, (unaudited)
2007 2006
------------- -------------
NET SALES $ 3,770,200 $ 5,591,100
Cost of goods sold 2,604,000 3,734,100
------------- -------------
GROSS PROFIT 1,166,200 1,857,000
Selling, general and administrative
expense 3,005,500 2,261,900
------------- -------------
OPERATING LOSS (1,839,300) (404,900)
INTEREST EXPENSE AND OTHER INCOME
Interest expense, net (187,900) (253,300)
Other Income 21,400 17,800
------------- -------------
LOSS FROM CONTINUING OPERATIONS (2,005,800) (640,400)
(LOSS) INCOME FROM DISCONTINUED OPERATIONS - -
Preferred stock dividends - paid in kind (21,100) (19,100)
------------- -------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (2,026,900) $ (659,500)
============= =============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
- Net loss attributable to common
shareholders $ (0.09) $ (0.04)
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 21,890,100 15,680,700
============= =============
See accompanying notes to the consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, (unaudited)
2007 2006
------------- -------------
NET SALES $ 8,322,800 $ 10,692,200
Cost of goods sold 5,568,900 7,065,800
------------- -------------
GROSS PROFIT 2,753,900 3,626,400
Selling, general and administrative expense 5,882,300 4,820,700
------------- -------------
OPERATING LOSS (3,128,400) (1,194,300)
INTEREST EXPENSE AND OTHER INCOME
Interest expense, net (398,200) (339,400)
Other Income 37,600 39,600
------------- -------------
LOSS FROM CONTINUING OPERATIONS (3,489,000) (1,494,100)
(LOSS) INCOME FROM DISCONTINUED OPERATIONS - (83,400)
Preferred stock dividends - paid in kind (378,100) (317,000)
------------- -------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (3,867,100) $ (1,894,500)
============= =============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
- Net loss attributable to common
shareholders $ (0.17) $ (0.12)
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 22,403,100 15,871,600
============= =============
See accompanying notes to the consolidated financial statements
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2007 (unaudited)
SERIES A
COMMON STOCK PREFERRED STOCK TREASURY STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
------------------------ --------------------- -------------------- ------------- ------------
Balances, June 30, 2007 20,423,100 $87,970,200 3,759,800 $4,930,100 200,000 $ (375,100) $(77,826,700) $14,698,500
Shares issued for services 41,500 69,200 - - - - - 69,200
Shares issued for credit line
amendment 10,000 20,800 - - - - - 20,800
Value of stock based compensation - 161,900 - - - - - 161,900
Private offering, net of expenses 2,453,900 4,752,700 - - - - - 4,752,700
Preferred dividends, paid in
kind - A - - 224,300 336,400 - - (336,400) -
Preferred dividends, paid in
kind - B - - - - - - (41,700) (41,700)
NASDAQ listing fees and other (34,000) (400) (34,400)
Net loss - - - - - - (3,489,000) (3,489,000)
---------- ------------ ---------- ----------- -------- ----------- ------------- ------------
Balances, December 31, 2007 22,928,500 $92,940,800 3,984,100 $5,266,100 200,000 $ (375,100) $(81,693,800) $16,138,000
========== ============ ========== =========== ======== =========== ============= ============
See accompanying notes to the consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, (unaudited)
2007 2006
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations $ (3,489,000) $ (1,494,100)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 338,000 486,600
Gain on Sale - Data Storage Assets - (18,300)
Stock-based Compensation 161,900 84,700
Stock issued for services 69,200 5,500
Amortization of debt discount 45,000 45,000
Income from assets held for sale (37,600) (11,800)
(Loss) Income from discontinued operations - (83,400)
Changes in:
Accounts receivable, net 34,100 (1,159,900)
Inventories, net (1,117,800) (568,100)
Costs in excess of billings and estimated
earnings on uncompleted contracts 97,600 (273,100)
Prepaid expenses and other current assets (88,400) 110,200
Accounts payable and accrued expenses (324,200) (713,200)
Deferred revenue 110,700 663,200
Billings and estimated earnings in excess
of costs on uncompleted contracts - (43,500)
Customer Advances - (664,200)
Other assets (269,100) (260,700)
------------- -------------
Net cash used in operating activities (4,469,600) (3,895,100)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash from discontinued operations and
assets held for sale 37,600 484,600
Net cash forfeited in sale - (2,600)
Goodwill - (56,600)
Collection of notes receivable, net - 2,000
Purchase of property, plant and equipment (98,200) (111,500)
Patent renewal and other (1,000) (4,000)
------------- -------------
Net cash provided by (used in) investing
activities (61,600) 311,900
------------- -------------
See accompanying notes to the consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE SIX MONTHS ENDED DECEMBER 31, (continued)
2007 2006
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) advances on line of credit 475,000 500,000
Repayment on borrowings (857,800) 5,095,000
Proceeds from notes payable - (2,752,400)
Proceeds from sale of equity instruments 4,752,700 427,900
Other (34,400) -
------------ ------------
Net cash provided by financing activities 4,335,500 3,270,500
------------ ------------
NET INCREASE IN CASH (195,700) (312,700)
CASH AND CASH EQUIVALENTS, beginning of period 615,800 1,155,500
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 420,100 $ 842,800
============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Net cash paid during the period for interest $ 230,500 $ 185,200
============ ============
Non-Cash Activities:
Value of stocks and warrants issued for
services and prepayments $ 69,200 $ 392,000
============ ============
Common Shares issued for line of credit
amendment $ 20,800 $ -
============ ============
Series B preferred stock dividend, paid
in kind $ 41,700 $ 37,800
============ ============
Series A preferred stock dividend, paid
in kind $ 336,400 $ 279,200
============ ============
See accompanying notes to the consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2007
Note A - Basis of Presentation and Recent Accounting Pronouncements
Alanco Technologies, Inc., an Arizona corporation ("Alanco" or
"Company"), operates in three business segments: Data Storage, Wireless Asset
Management and RFID Technology.
The unaudited condensed consolidated financial statements presented
herein have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
in accordance with the instructions to Form 10-QSB. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. In our opinion, the accompanying condensed consolidated
financial statements include all adjustments necessary for a fair presentation
of such condensed consolidated financial statements. Such necessary adjustments
consist of normal recurring items and the elimination of all significant
intercompany balances and transactions.
These interim condensed consolidated financial statements should be
read in conjunction with the Company's June 30, 2007 Annual Report filed on Form
10-KSB. Interim results are not necessarily indicative of results for a full
year. Certain reclassifications have been made to conform prior period
financials to the presentation in the current reporting period. The
reclassifications had no effect on net loss.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
The Company announced on October 16, 2006 that the Board of Directors
had elected to effect a 2 for 5 reverse stock split effective October 16, 2006,
when the Company's common stock began trading on a post split-adjusted basis
under the interim trading symbol "ALAND" for a period of 20 days, after which
the Company's trading symbol returned to "ALAN." The Company had previously
received authority from its shareholders to effect a reverse split at a ratio
within a specified range, if and as determined by the Board of Directors, in
order to maintain its Nasdaq listing.
As a result of the reverse split, each five shares of the Company's
Class A Common Stock outstanding at the time of the reverse split was
automatically changed into two shares of common stock, and the total number of
common shares outstanding was reduced from approximately 38.7 million shares to
approximately 15.5 million shares post-split. No fractional shares were issued
in connection with the reverse stock split. Upon surrender of their stock
certificates, shareholders received cash in lieu of the fractional shares to
which they would otherwise be entitled. All per share amounts and outstanding
shares, including all common stock equivalents (stock options, warrants and
convertible securities) have been restated in the Condensed Consolidated
Financial Statements, the Notes to the Condensed Consolidated Financial
Statements and the loss per share for all periods presented to reflect the
reverse stock split.
The Company has stock-based compensation plans and effective July 1,
2006, the Company adopted the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment"
("SFAS 123R"), using the modified prospective transition method and therefore
have not restated results for prior periods. Under this transition method,
stock-based compensation expense for the six-month period ended December 31,
2007 and 2006 includes compensation expense for all stock-based compensation
awards granted during the period, or granted in a prior period if not fully
vested as of July 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-based Compensation" ("SFAS 123").
Stock-based compensation expense for all stock-based compensation awards granted
after July, 2006 is based on the grant date fair value estimated in accordance
with the provisions of SFAS 123R. The value of the compensation cost is
amortized on a straight-line basis over the requisite service periods of the
award (the option vesting term).
The Company estimates fair value using the Black-Scholes valuation
model. Assumptions used to estimate compensation expense are determined as
follows:
o Expected term is determined using a weighted average of the contractual
term and vesting period of the award;
o Expected volatility of award grants made under the Company's plans
is measured using the historical daily changes in the market price
of the Company's common stock over the expected term of the award;
o Risk-free interest rate is to approximate the implied yield on
zero-coupon U.S. Treasury bonds with a remaining maturity equal to
the expected term of the awards; and,
o Forfeitures are based on the history of cancellations of awards
granted by the Company and management's analysis of potential
forfeitures.
Prior to the adoption of SFAS 123R, the Company recognized stock-based
compensation expense in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APBO 25"). In March 2005, the
SEC issued Staff Accounting Bulletin No. 107 ("SAB 107") regarding the SEC's
interpretation of SFAS 123R and the valuation of share-based payments for public
companies. The Company has applied the provisions of SAB 107 in their adoption
of SFAS 123R.
Long-lived assets and intangible assets - The Company reviews carrying
values at least annually or whenever events or circumstances indicate the
carrying values may not be recoverable through projected discounted cash flows.
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities". SFAS No. 159 permits entities
to choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.
The Company has not yet determined whether it will elect the fair value option
for any of its financial instruments.
Note B - Stock-Based Compensation
The Company has several employee stock option and officer and director
stock option plans that have been approved by the shareholders of the Company.
The plans require that options be granted at a price not less than market on
date of grant and are more fully discussed in Form 10-KSB for the year ended
June 30, 2007.
The Company uses the Black-Scholes option pricing model to estimate
fair value of stock-based awards with the following assumptions for prior awards
of options:
Assumptions for awards of options granted during the six months ended
December 31, 2007 were:
Awards Granted
Six months ended
December 31, 2007
-----------------
Dividend yield 0%
Expected volatility 80%
Weighted-average volatility 80%
Risk-free interest rate 4 1/2%
Expected life of options (in years) 3.2 - 3.4
Weighted average grant-date fair value $2.16
The following table summarizes the Company's stock option activity
during the first six months of fiscal 2008:
Weighted Average
Weighted Average Remaining Aggregate Aggregate
Shares Exercise Price Contractual Fair Intrinsic
Per Share Term (1) Value Value(2)
Outstanding July 1, 2007 5,543,800 $1.97 4.95 $3,496,100
Granted 1,293,000 $2.16 - 1,000,800
Exercised - - - -
Forfeited or expired (98,600) $2.32 - (62,200)
Outstanding December 31, 2007 6,738,200 $2.00 4.50 $4,434,700 $208,120
============= ================= ================ ============== ==============
Exercisable December 31, 2007 4,721,900 $2.01 4.62 $3,107,500 $208,120
============= ================= ================ ============== ==============
(1) Remaining contractual term presented in years.
(2) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards
and the closing price of the Company's common stock as of December 31, 2007, for those awards that have an
exercise price currently below the closing price as of December 31, 2007 of $1.37.
Note C - Inventories
Inventories are recorded at the lower of cost or market. The
composition of inventories as of December 31, 2007 and June 30, 2007 are
summarized as follows:
December 31, June 30,
2007 2007
------------ ------------
(unaudited)
Raw materials and purchased parts $ 5,165,600 $ 4,160,400
Work-in-process 11,600 6,400
Finished goods 62,100 70,900
------------ ------------
5,239,300 4,237,700
Less reserves for obsolescence (313,400) (429,600)
------------ ------------
$ 4,925,900 $ 3,808,100
============ ============
Note D - Contracts In Process
Costs incurred and estimated earnings and billings in the RFID
Technology segment related to contracts for the installation of TSI PRISM
systems in process at December 31, 2007 and June 30, 2007 consist of the
following:
December 31, June 30,
2007 2007
------------ ------------
unaudited)
Costs incurred on uncompleted contracts $ 603,600 $ 242,100
Estimated gross profit earned to date 172,700 161,900
------------ ------------
Revenue earned to date 776,300 404,000
Less: Billings to date (751,900) (282,000)
------------ ------------
Costs and estimated earnings/(billings)
in excess of billings/(costs and estimated
earnings) $ 24,400 $ 122,000
============ ============
Note E - Deferred Revenue
Deferred Revenues at December 31, 2007 and June 30, 2007 consist of the
following:
December 31, June 30,
2007 2007
------------ -----------
(unaudited)
Extended warranty revenue $ 1,024,600 $ 913,900
Less - current portion (902,000) (784,600)
------------ -----------
Deferred revenue - long term $ 122,600 $ 129,300
============ ===========
Note F - Loss Per Share
Basic and diluted loss per share of common stock was computed by
dividing net loss by the weighted average number of shares of common stock
outstanding.
Diluted earnings per share are computed based on the weighted average
number of shares of common stock and dilutive securities outstanding during the
period. Dilutive securities are options and warrants that are freely exercisable
into common stock at less than the prevailing market price. Dilutive securities
are not included in the weighted average number of shares when inclusion would
increase the earnings per share or decrease the loss per share. As of December
31, 2007 there were 1,097,000 potentially dilutive securities outstanding.
Note G - Equity
During the six months ended December 31, 2007, the Company issued a
total of 2,505,400 shares of the Company's Class A Common Stock. Included were
41,500 shares issued for services valued at $69,200 and 10,000 shares, valued at
$20,800, issued as partial consideration for an amendment to the Company's line
of credit agreement. In addition, the Company completed the sale, in August
2007, of a private offering to qualified investors, of 2,453,900 units
consisting of one share of its Class A Common Stock together with a 3-year
warrant to purchase .4 of a share of the Company's Class A Common Stock at a
price of $3.00 per share. The Company received $4,752,700, net of commissions of
$172,300, from the offering.
The value of employee stock-based compensation recognized for the six
months ended December 31, 2007 amounted to $161,900, compared to $84,700
recognized in the same period of the prior fiscal year when the Company
initiated the expensing of stock-based compensation on July 1, 2006. See Note A
- Basis of Presentation and Recent Accounting Pronouncements for additional
discussion of the Company's policies related to employee stock-based
compensation.
The Company declared and paid dividends-in-kind on the Company's
preferred shares through the issuance of 224,300 shares of Series A Preferred
Stock valued at $336,400 and 4,100 shares of Series B Preferred Stock valued at
$41,700. The Preferred Stocks are more fully discussed in the Form-10KSB for the
year ended June 30, 2007.
Note H -Industry Segment Data
Information concerning operations by industry segment follows (unaudited):
Six Months ended 12/31 Three Months ended 12/31
2007 2006 2007 2006
-------------------------------- ----------------------------------
Revenue
Data Storage $ 2,062,600 $ 2,681,500 $ 939,800 $ 1,857,000
Wireless Asset Management 5,580,100 7,307,700 2,453,000 3,267,800
RFID Technology 680,100 703,000 377,400 466,300
-------------- -------------- -------------- ---------------
Total Revenue $ 8,322,800 $ 10,692,200 $ 3,770,200 $ 5,591,100
============== ============== ============== ===============
Gross Profit
Data Storage $ 564,900 $ 712,500 $ 265,400 $ 528,200
Wireless Asset Management 2,125,900 2,693,400 896,200 1,158,300
RFID Technology 63,100 220,500 4,600 170,500
-------------- -------------- -------------- ---------------
Total Gross Profit $ 2,753,900 $ 3,626,400 $ 1,166,200 $ 1,857,000
============== ============== ============== ===============
Gross Margin
Data Storage 27.4% 26.6% 28.2% 28.4%
-------------- -------------- -------------- ---------------
Wireless Asset Management 38.1% 36.9% 36.5% 35.4%
-------------- -------------- -------------- ---------------
RFID Technology 9.3% 31.4% 1.2% 36.6%
-------------- -------------- -------------- ---------------
Overall Gross Margin 33.1% 33.9% 30.9% 33.2%
============== ============== ============== ===============
Selling, General and Administrative Expense
Data Storage $ 831,500 $ 749,800 $ 383,300 $ 407,300
Wireless Asset Management 3,241,900 2,579,800 1,677,800 1,235,100
RFID Technology 1,150,500 1,006,300 586,800 498,600
-------------- -------------- -------------- ---------------
Total Segment Operating Expense $ 5,223,900 $ 4,335,900 $ 2,647,900 $ 2,141,000
============== ============== ============== ===============
Operating Profit (Loss)
Data Storage $ (266,600) $ (37,300) $ (117,900) $ 120,900
Wireless Asset Management (1,116,000) 113,600 (781,600) (76,800)
RFID Technology (1,087,400) (785,800) (582,200) (328,100)
Corporate Expense, net (658,400) (484,800) (357,600) (120,900)
-------------- -------------- -------------- ---------------
Operating Loss $ (3,128,400) $ (1,194,300) $ (1,839,300) $ (404,900)
============== ============== ============== ===============
Depreciation and Amortization
Data Storage $ 15,100 $ 10,800 $ 7,400 $ 5,400
Wireless Asset Management 228,500 322,600 114,800 161,300
RFID Technology 93,900 151,300 45,900 62,500
Corporate 500 1,400 300 700
-------------- -------------- -------------- ---------------
Total Depreciation and Amortization $ 338,000 $ 486,100 $ 168,400 $ 229,900
============== ============== ============== ===============
Dec. 31, 2007 June 30, 2007
-------------- --------------
Accounts Receivable
Data Storage $ 522,600 $ 327,300
Wireless Asset Management 1,120,400 1,561,300
RFID Technology 553,900 342,400
Corporate 17,600 17,600
-------------- --------------
Total Accounts Receivable $ 2,214,500 $ 2,248,600
============== ==============
Inventories
Data Storage $ 1,012,300 $ 859,600
Wireless Asset Management 2,228,300 1,669,400
RFID Technology 1,685,300 1,279,100
-------------- --------------
Total Inventories $ 4,925,900 $ 3,808,100
============== ==============
Note I - Related Party Transactions
The Company has a $2.0 million line of credit agreement ("Agreement"),
more fully discussed in the Company's Form 10-KSB for the year ended June 30,
2007, with a private trust controlled by Mr. Donald Anderson, a greater than
five percent stockholder of the Company and member of the Company's Board of
Directors. During December 2007, the Agreement was amended whereby its maturity
date was extended to December 31, 2009. As consideration for the amendment, the
Company agreed to a minimum borrowing balance under the Agreement (effective
January 1, 2008) of $2 million.
Note J - Line of Credit and Term Loan
At December 31, 2007, the Company had an outstanding balance under the
line of credit agreement of $1,975,000. The balance is under a $2.0 million line
of credit agreement with a private trust ("Lender"), entered into in June 2002
and last modified in December 2007. Under the Agreement, the Company must
maintain a minimum balance (effective January 1, 2008) under the Agreement of $2
million through the December 31, 2009 maturity date. At December 31, 2007, the
Company had $25,000 available under the line of credit agreement.
During July and December 2007, the Company amended its 2006 term loan
agreement with ComVest Capital LLC reducing the prepayment requirements and
delaying the monthly installment payments in the event the Company raised
additional equity capital. Under the amended agreement, the prepayment
requirement was reduced to approximately 17.5% of the net equity raised in
excess of $1.25 million through January 2008 and the monthly installment
payments were delayed by approximately 9 months. The amended agreement also
provided for approximately $1.7 million of the outstanding term loan balance to
be convertible into Class A Common Stock at $1.69 per share and approximately
$600,000 at $3 per share. The Company paid approximately $28,000 in fees related
to the transactions.
Note K - Litigation
The Company is a plaintiff in litigation initiated by its
subsidiary, StarTrak Systems, LLC, against former employees and others for
violation of certain non-disclosure covenants and for misappropriation of trade
secrets. The actions are more fully described below. The Company is also a party
to litigation that relates to the acquisition, in May of 2002, of substantially
all the assets of Technology Systems International, Inc., a Nevada Corporation
("TSIN") and to litigation arising from an expired property lease between the
Company's former subsidiary, Arraid, Inc., and Arraid Property L.L.C., an
Arizona limited liability company.
StarTrak Systems Litigation - On July 12, 2007, the Company's
subsidiary, StarTrak Systems, LLC, commenced a lawsuit against Brian Hester,
Satamatics, Ltd., Satamatics, Inc., and Farruhk Shahzad in the United States
District Court, District of New Jersey, as case number 07-3203(DRD), for
misappropriation of trade secrets, violation of confidentiality agreements and
contempt for violation of a previously issued court order concerning such trade
secrets issued to Brian Hester. Brian Hester and Farruhk Shahzad are previous
employees of StarTrak, and the Company believes that they have employed and/or
are attempting to employ trade secrets of StarTrak in connection with their
association with Satamatics in direct competition with StarTrak. The Company is
seeking injunctive relief and damages from the defendants.
TSIN Litigation - On January 30, 2003, a shareholder of TSIN
filed a derivative suit naming as defendants the Company and its wholly owned
subsidiary, ATSI. The venue for this action is the Arizona Superior Court in and
for Maricopa County, Arizona, as case number CV2003-001937. The complaint sets
forth various allegations and seeks damages arising out of the Company's
acquisition of substantially all of the assets of TSIN. This derivative suit was
terminated and the action converted into a direct action by TSIN by stipulation
and court order in July 2003.
TSIN is currently in Chapter 7 bankruptcy. The Chapter 7
Trustee failed to prosecute the action timely and the state court dismissed the
action for lack of prosecution, but allowed the Trustee to restart the action,
which the Trustee has done as case number CV2006-007398. The Company is seeking
its attorney's fees with respect to the dismissed action, and has appealed the
court's order allowing the Trustee to restart the action.
The parties to the lawsuit have entered into a Settlement Agreement,
which was attached as an exhibit to Form 8-K filed on September 21, 2007. In
place of the litigation, the Settlement Agreement provides for a valuation
procedure, conducted by an independent third party valuation expert, to value
(i) the assets transferred by TSIN to Alanco and TSIA in connection with the
Acquisition Agreement ("Business Value"), and (ii) the consideration paid by
Alanco to TSIN ("Consideration Value "). If the appraiser determines that the
Consideration Value is within 15% of the Business Value, neither party shall be
entitled to any damages or claims. If the Consideration Value is less than 85%
of the Business Value, Alanco shall pay to the TSIN's bankruptcy estate the full
difference in the values, plus interest thereon, plus the sum of $300,000 for
attorneys' fees incurred by TSIN in prosecuting the various related litigation
matters. Alanco's payment may be made, at Alanco's option, in cash or by an
equivalent market value of additional Alanco Class A Common Stock (subject to
certain conditions set forth in the Settlement Agreement). If the Consideration
Value is greater than 115% of the Business Value, TSIN shall immediately pay
Alanco the sum of $300,000 for Alanco's attorneys' fees and costs incurred in
connection with the various litigation matters. The Settlement Agreement was
approved by the bankruptcy court following a hearing for the same on September
19, 2007, and the parties are beginning the appraisal process. All of the
pending litigation matters have been dismissed by the parties. The Company
anticipates that the appraisal will be accomplished and the matter entirely
resolved over the next few months.
Arraid Litigation - On July 18, 2003, Arraid Property L.L.C.,
an Arizona Limited Liability Company ("Arraid LLC"), filed a complaint in the
Arizona Superior Court in and for Maricopa County, Arizona (case number CV
2003-13999) against the Company and its wholly owned subsidiary, Arraid, Inc.,
alleging breach of lease and seeking substantial monetary damages in excess of
$3 million. The suit relates to an expired lease agreement for property
previously leased by Arraid. Following a trial, the Court found in favor of
Arraid LLC against the Company with respect to certain factual findings
resulting in damages owed by the Company in an amount of approximately $35,000,
less than one percent of the amount sought by the plaintiff. The court
determined that the plaintiff was the prevailing party, and awarded the
plaintiff approximately $95,000 in attorney's fees and costs. The Company's
management, in consultation with legal counsel, has determined to appeal the
decision of the court.
The Company may also, from time to time, be involved in litigation
arising from the normal course of business. As of December 31, 2007, there
was no such litigation pending deemed material by the Company.
Note L - Subsequent Events
The Company completed a private offering to accredited investors on
January 22, 2008, of 1,425,500 Units at a unit price of $1.50, each unit
consisting of one share of its Series A Convertible Preferred Stock together
with a 5-year warrant to purchase one share of the Company's Class A Common
Stock at a price of $1.75 per share. The Series A Convertible Preferred Stock is
convertible into 1.2 shares of the Company's Class A Common Stock. The Company
received $2,108,200, net of expenses, from the offering.
On February 11, 2008 the Company amended a $1.5 million term loan
agreement with Tenix Holding, Inc. whereby $1 million of the $1.5 million term
loan balance was immediately converted into 800,000 shares of Class A Common
Stock ($1.25 per share). Payment terms for the remaining $500,000 balance
require monthly installments of $20,000, commencing May 1, 2008 and continuing
through November 2008 with the remaining $360,000 balance due on December 1,
2008. A $50,000 fee was paid as consideration for the transaction and as
interest on the remaining $500,000.
Note M - Liquidity
During the six months ended December 31, 2007, the Company reported a
loss from continuing operations of approximately $3.5 million. During Fiscal
year ended June 30, 2007 the Company reported losses from continuing operations
of approximately $5.1 million. Although the Company raised approximately $4.7
million during the six months ended December 31, 2007 and an additional $2.1
million in January 2008 through the sale of equity, the significant losses raise
doubt about the ability of the Company to continue as a going concern. During
fiscal 2008, the Company expects to meet its working capital and other cash
requirements with its current cash reserves, cash generated from operations, its
borrowing capacity under its credit facility, and other financing as required.
While the Company believes that it will succeed in attracting additional capital
and generate capital from operations from its StarTrak acquisition, there can be
no assurance that the Company's efforts will be successful. The Company's
continued existence is dependent upon its ability to achieve and maintain
profitable operations. As a result, the Company's independent registered public
accountants have issued a going concern opinion on the consolidated financial
statements of the Company for the fiscal year ended June 30, 2007. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Except for historical information, the statements contained herein are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. All such forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed or implied by those
statements. These risks and uncertainties include, but are not limited to, the
following factors: general economic and market conditions; reduced demand for
information technology equipment; competitive pricing and difficulty managing
product costs; development of new technologies which make the Company's products
obsolete; rapid industry changes; failure by the Company's suppliers to meet
quality or delivery requirements; the inability to attract, hire and retain key
personnel; failure of an acquired business to further the Company's strategies;
the difficulty of integrating an acquired business; undetected problems in the
Company's products; the failure of the Company's intellectual property to be
adequately protected; unforeseen litigation; the ability to maintain sufficient
liquidity in order to support operations; the ability to maintain satisfactory
relationships with lenders and to remain in compliance with financial loan
covenants and other requirements under current banking agreements; and the
ability to maintain satisfactory relationships with suppliers and customers.
General
Information on industry segments is incorporated by reference from Note
H - Industry Segment Data to the Condensed Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results
of operations are based upon the condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of our financial
statements requires the use of estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent liabilities. On an ongoing basis, estimates are revalued, including
those related to areas that require a significant level of judgment or are
otherwise subject to an inherent degree of uncertainty. These areas include
allowances for doubtful accounts, inventory valuations, carrying value of
goodwill and intangible assets, estimated profit on uncompleted contracts in
process, stock-based compensation, income and expense recognition, income taxes,
ongoing litigation, and commitments and contingencies. Our estimates are based
upon historical experience, observance of trends in particular areas,
information and/or valuations available from outside sources and on various
other assumptions that we believe to be reasonable under the circumstances and
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual amounts
may differ from these estimates under different assumptions and conditions.
Accounting policies are considered critical when they are significant
and involve difficult, subjective or complex judgments or estimates. We
considered the following to be critical accounting policies:
Principles of consolidation - The condensed consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
Revenue recognition - The Company recognizes revenue from the Data
Storage Segment, net of anticipated returns, at the time products are shipped to
customers, or at the time services are provided. Revenue from material long-term
contracts (in excess of $250,000 and not completed in the reporting period) in
all business segments are recognized on the percentage-of-completion method for
individual contracts, commencing when significant costs are incurred and
adequate estimates are verified for substantial portions of the contract to
where experience is sufficient to estimate final results with reasonable
accuracy. Revenues are recognized in the ratio that costs incurred bear to total
estimated costs. Changes in job performance, estimated profitability and final
contract settlements would result in revisions to cost and income, and are
recognized in the period in which the revisions were determined. Contract costs
include all direct materials, subcontracts, labor costs and those direct and
indirect costs related to contract performance. General and administrative costs
are charged to expense as incurred. At the time a loss on a contract is known,
the entire amount of the estimated ultimate loss is accrued.
Long-lived assets and intangible assets - The Company reviews carrying
values at least annually or whenever events or circumstances indicate the
carrying values may not be recoverable through projected discounted cash flows.
Results of Operations
(A) Three months ended December 31, 2007 versus December 31, 2006
Net Sales
Consolidated net sales for the three months ended December 31, 2007
were $3,770,200, a decrease of $1,820,900, or 32.6%, compared to sales of
$5,591,100 for the same period of the prior year. The sales decrease resulted
from decreases in all three business segments. The Company's Data Storage
segment reported decreased sales of $917,200, or 49.4% due to an unusually large
sale (approximately $945,000) recorded in the comparable quarter of the prior
year that was not duplicated in the current quarter. The Company's Wireless
Asset Management segment reported a sales decrease of $814,800, or 24.9%, due to
its inability to duplicate a contract with a major customer that accounted for
$1.68 million in sales for the quarter ended December 31, 2006 versus $540,000
of sales in the current quarter. In addition, the sales decrease was impacted by
delays in new product introductions targeted at the refrigerated truck/trailer
market that had been planned for the current quarter. Sales for the RFID
Technologies segment decreased by $88,900, or 19.1%, when compared to the same
quarter of the previous year due to delays in system sales.
Gross Profit
Gross profit reported for the quarter amounted to $1,166,200, a
decrease of $690,800, or 37.2%, when compared to $1,857,000 reported for the
comparable quarter of the prior year. 76%, or $524,900, of the decreased gross
profit resulted from sales decreases in the Company's Data Storage and Wireless
Asset Management segments as discussed above. The balance of the reduction in
gross profit was reported in the RFID Technology segment, accounting for
$165,900, or 24%, of the decrease. The reduced gross profit of the RFID
Technology segment resulted from reductions in both system sales, as discussed
above, and reduced gross margins. The reduced gross margins resulted primarily
from the Company's strategic decision to install a system at a low margin in an
attempt to develop a lower cost RFID system designed for a new market.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the current
quarter, excluding corporate expenses, increased 23.7% to $2,647,900, an
increase of $506,900 compared to $2,141,000 reported for the comparable quarter
of the prior year. The increase was due primarily to increases in SG&A of the
Company's Wireless Asset Management segment which added $442,700 in SG&A
expense, 87.3% of the Company's increase, in the period to complete new product
development costs necessary to commercialize the Company's new product line
targeted at the truck/trailer market. The RFID Technology segment's SG&A
increased $88,200, or 17.7%, from $498,600 to $586,800 in the comparable quarter
of the prior year due to additional engineering investment. The Data Storage
segment reported a decrease in SG&A expense of 5.9%, or $24,000, due primarily
to reduced sales commissions.
Operating Loss
The Operating Loss for the quarter was ($1,839,300) compared to a loss
of ($404,900) for the same quarter of the prior year, an increase of
($1,434,400), or 354.3%. The increase in Operating Loss is due primarily to the
reported operating loss of the Wireless Asset Management segment of ($781,600),
an increase of ($704,800) compared to operating loss of ($76,800) reported for
the comparable quarter of the prior fiscal year. The Data Storage segment
reported an operating loss of ($117,900) compared to an operating profit of
$120,900 reported in the comparable quarter of the prior year. The RFID
Technology segment operating loss increased to ($582,200), an increase of
($254,100), or 77.4%, compared to ($328,100) reported for the comparable period
of the prior year. Corporate expense increased to ($357,600) from ($120,900)
reported in the three months ended December 31, 2006. The prior year corporate
expenses were reduced by a $300,000 insurance settlement related to the TSIN
Litigation. See Note K - Litigation for a discussion of the TSIN Litigation.
Other Income and Expense
Net interest expense for the quarter decreased to $187,900, a decrease
of $65,400, or 25.8% compared to $253,300 reported for the same quarter in the
prior year. The decrease was due to a reduction in net borrowings and a
reduction in the average prime rate. The Loss From Continuing Operations of
($2,005,800) increased by ($1,365,400) compared to ($640,400) reported for the
quarter ended December 31, 2006.
(Loss) Earnings before Interest Taxes, Depreciation & Amortization (EBITDA)
The Company believes that (loss) earnings before taxes net interest
expense, depreciation, and amortization of intangible assets, (EBITDA), is an
important measure used by management to measure performance. EBITDA may also be
used by certain investors to compare and analyze our operating results between
accounting periods. However, EBITDA should not be considered in isolation or as
a substitute for net income, cash flows or other financial statement data
prepared in accordance with US GAAP or as a measure of our performance or
liquidity. EBITDA for Alanco's 2008 fiscal year second quarter represents a loss
of ($1,649,500) compared to a loss of ($157,200) for the same quarter in the
prior year. A reconciliation of EBITDA to Loss from Continuing Operations for
the quarters ended December 31, 2007 and 2006 is presented below:
EBITDA RECONCILIATION to LOSS FROM CONTINUING OPERATIONS
3 months ended 3 months ended
December 31, December 31,
2007 2006
-------------- -------------
EBITDA $ (1,649,500) $ (157,200)
Net interest expense (187,900) (253,300)
Depreciation and amortization (168,400) (229,900)
-------------- -------------
LOSS FROM CONTINUING OPERATIONS $ (2,005,800) $ (640,400)
============== =============
Dividends
The Company paid quarterly in-kind Series B Preferred Stock dividends
with values of $21,100 and $19,100 in the quarters ended December 31, 2007 and
2006, respectively.
Net Loss Attributable to Common Stockholders
Net Loss Attributable to Common Stockholders for the quarter ended
December 31, 2007 amounted to ($2,026,900), or ($.09) per share, compared to a
loss of ($659,500), or ($.04) per share, in the comparable quarter of the prior
year. The Company anticipates improved future operating results in all business
segments. However, actual results in the Wireless Asset Management segment, Data
Storage segment and the RFID Technology segment may be affected by unfavorable
economic conditions and reduced capital spending budgets. If the economic
conditions in the United States deteriorate or if a wider global economic
slowdown occurs, Alanco may experience a material adverse impact on its
operating results and business conditions.
(B) Six months ended December 31, 2007 versus December 31, 2006
Net Sales
Consolidated net sales for the six months ended December 31, 2007 were
$8,322,800, a decrease of $2,369,400, or 22.2%, compared to sales of $10,692,200
for the same period of the prior year. The sales decrease resulted from
decreases in all three business segments. The Company's Data Storage segment
reported decreased sales of $618,900, or 23.1%, due to an unusually large sale
(approximately $945,000) recorded in the second quarter of the prior year that
was not duplicated in the current period. The Company's Wireless Asset
Management segment incurred a sales decrease of $1,727,600, or 23.6%, when
compared to the six months ended December 31, 2006 due to a contract with a
major customer that accounted for sales of approximately $3.1 million in the six
months ended December 31, 2006 compared to approximately $1.8 million in sales
in the current six-month period, representing a sales decrease of approximately
$1.3 million. In addition, delays in new product introductions targeted at the
refrigerated truck/trailer market contributed to the Wireless Asset Management
segment sales decrease. Sales for the RFID Technologies segment decreased by
$22,900, or 3.3%, when compared to the same period of the previous year due to
delays in system sales.
Gross Profit
Gross profit reported for the six-month period amounted to $2,753,900,
a decrease of $872,500, or 24.1%, when compared to $3,626,400 reported for the
comparable period of the prior year. 82%, or $715,100, of the decreased gross
profit resulted from sales decreases in the Company's Data Storage and Wireless
Asset Management segments as discussed above. The balance of the reduction in
gross profit was reported in the RFID Technology segment, accounting for
$157,400, or 18%, of the decrease. The reduced gross profit of the RFID
Technology segment resulted from reductions in both system sales, as discussed
above, and reduced gross margins. The reduced gross margins resulted primarily
from the Company's strategic decision to install a system at a low margin in an
attempt to develop a new lower cost RFID system designed for a new market.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the current
quarter, excluding corporate expenses, increased 20.5% to $5,223,900, an
increase of $888,000 compared to $4,335,900 reported for the comparable quarter
of the prior year. The increase was due primarily to increases in SG&A of the
Company's Wireless Asset Management segment which added $662,100 in SG&A
expense, 74.6% of the Company's increase, in the period to complete product
development necessary to commercialize the Company's new product line targeted
at the truck/trailer market. The RFID Technology segment's SG&A increased
$144,200, or 14.3%, from $1,006,300 to $1,150,500 in the comparable period of
the prior year due to additional engineering investment. The Data Storage
segment reported a decrease in SG&A expense of 10.9%, or $81,700, due primarily
to reduced sales commissions.
Operating Loss
The Operating Loss for the six-month period was ($3,128,400) compared
to a loss of ($1,194,300) for the same quarter of the prior year, an increase of
($1,934,100), or 161.9%. The increase in Operating Loss is due primarily to the
operating loss incurred by the Wireless Asset Management segment of
($1,116,000), an increase of ($1,229,600) compared to operating profit of
$113,600 reported for the comparable period of the prior fiscal year. The Data
Storage segment incurred an operating loss of ($266,600) compared to an
operating loss of ($37,300) reported in the comparable six-month period of the
prior year. The RFID Technology segment operating loss increased to
($1,087,400), an increase of ($301,600), or 38.4%, compared to ($785,800)
reported for the comparable period of the prior year. Corporate expense
increased to ($658,400) from ($484,800) reported in the six months ended
December 31, 2006. The prior year corporate expenses were reduced by a $300,000
one-time insurance settlement related to the TSIN Litigation. See Note K -
Litigation for a discussion of the TSIN Litigation.
Other Income and Expense
Net interest expense for the six months ended December 31, 2007
increased to $398,200, an increase of $58,800, or 17.3%, compared to $339,400
reported for the same period in the prior year. The increase was due to an
increase in net borrowings compared to the prior year. The Loss From Continuing
Operations of ($3,489,000) increased by ($1,994,900) compared to ($1,494,100)
reported for the six months ended December 31, 2006.
(Loss) Earnings before Interest Taxes, Depreciation & Amortization (EBITDA)
The Company believes that (loss) earnings before taxes, net interest
expense, depreciation, and amortization of intangible assets, (EBITDA), is an
important measure used by management to measure performance. EBITDA may also be
used by certain investors to compare and analyze our operating results between
accounting periods. However, EBITDA should not be considered in isolation or as
a substitute for net income, cash flows or other financial statement data
prepared in accordance with US GAAP or as a measure of our performance or
liquidity. EBITDA for Alanco's first six months ended December 31, 2007
represents a loss of ($2,752,800) compared to a loss of ($668,600) for the same
period of the prior year. A reconciliation of EBITDA to Loss from Continuing
Operations for the six months ended December 31, 2007 and 2006 is presented
below:
EBITDA RECONCILIATION to LOSS FROM CONTINUING OPERATIONS
6 months ended 6 months ended
December 31, December 31,
2007 2006
-------------- -------------
EBITDA $ (2,752,800) $ (668,600)
Net interest expense (398,200) (339,400)
Depreciation and amortization (338,000) (486,100)
-------------- -------------
LOSS FROM CONTINUING OPERATIONS $ (3,489,000) $ (1,494,100)
============== =============
Dividends
The Company paid quarterly in-kind Series A and Series B Preferred
Stock dividends with values of $378,100 and $317,000 in the six months ended
December 31, 2007 and 2006, respectively.
Net Loss Attributable to Common Stockholders
Net Loss Attributable to Common Stockholders for the quarter ended
December 31, 2007 amounted to ($3,867,100), or ($.17) per share, compared to a
loss of ($1,894,500), or ($.12) per share, in the comparable quarter of the
prior year. The Company anticipates improved future operating results in all
business segments. However, actual results in the Wireless Asset Management
segment, Data Storage segment and the RFID Technology segment may be affected by
unfavorable economic conditions and reduced capital spending budgets. If the
economic conditions in the United States deteriorate or if a wider global
economic slowdown occurs, Alanco may experience a material adverse impact on its
operating results and business conditions.
Liquidity and Capital Resources
The Company's current assets at December 31, 2007 exceeded current
liabilities by $1,033,100, resulting in a current ratio of 1.15 to 1. The
comparable working capital at June 30, 2007 was negative with current
liabilities exceeding current assets by ($219,100) and reflecting a current
ratio of .97 to 1. The improvement in current ratio at December 31, 2007 versus
June 30, 2007 resulted from the completion of a private offering to accredited
investors whereby the Company issued 2,453,900 shares and granted 3-year
warrants to purchase approximately 981,600 common shares at a price of $3.00,
raising approximately $4.7 million.
Accounts receivable of $2,214,500 at December 31, 2007 reflects a
decrease of $34,100, or 1.5%, when compared to the $2,248,600 reported as
consolidated accounts receivable at June 30, 2007. The accounts receivable
balance at December 31, 2007 for the Data Storage segment represents forty-six
days' sales in receivables, an increase compared to twenty-seven days' sales at
June 30, 2007. The increase was due to a decrease in the proportion of credit
card sales. The days' sales calculation of the Data Storage segment can be
significantly affected by the proportion of credit card sales in the last month
of the reporting period and therefore, the increase in days' sales for the Data
Storage segment is not considered a trend.
The accounts receivable balance for the Wireless Asset Management
segment at December 31, 2007 was $1,120,400 compared to $1,561,300 at June 30,
2007, a decrease of $440,900, or 28.2%. Days' sales in receivables for the
Wireless Asset Management decreased to thirty-seven from forty-four days' sales
in receivables reported at June 30, 2007. The decrease was due to a reduction in
past due balances.
The RFID Technology segment accounts receivable balance at December 31,
2007 of $553,900 represents one hundred and forty-nine days' sales in
receivables as compared to one hundred and sixteen days' sales in receivables at
June 30, 2007. Days' sales in receivables for the RFID Technology segment are
distorted at both December 31, 2007 and June 30, 2007 due to the Company's
accounting method of recognizing contract revenue on a percentage of completion
method, whereby accounts receivable balances may be deferred and excluded from
reported revenue.
Consolidated inventories at December 31, 2007 amounted to $4,925,900,
an increase of $1,117,800, or 29.4%, when compared to $3,808,100 at June 30,
2007. The inventory balance at December 31, 2007 for the Data Storage segment of
$1,012,300 reflects an inventory turnover of 3.0 compared to an inventory
turnover of 3.9 at June 30, 2007. The inventory balance for the Wireless Asset
Management segment at December 31, 2007 was $2,228,300 compared to $1,669,400 at
June 30, 2007, an increase of $558,900, or 33.5%. The inventory balance at
December 31, 2007 for the Wireless Asset Management segment represents an
inventory turnover of 3.1 compared to 5.1 as of June 30, 2007. The inventory
balance of the RFID Technology segment at December 31, 2007 of $1,685,300
represents an inventory turnover of .73 as compared to .58 at June 30, 2007.
At December 31, 2007, the Company had an outstanding balance of
$1,975,000 under a $2.0 million formula-based revolving line of credit agreement
with interest calculated at prime plus 3%. The line of credit formula is based
upon current asset values and is used to finance working capital. At December
31, 2007, the Company had $25,000 available under the line of credit. See Line
of Credit and Term Loan Footnote J for additional discussion of the existing
line of credit agreement.
Cash used in operations for the six-month period ended December 31,
2007 was $4,469,600, an increase of $574,500, or 14.7%, when compared to cash
used in operations of $3,895,100 for the comparable period ended December 31,
2006. The increase during the six-month period resulted primarily from an
increase in Loss from Continuing Operations and inventories during the current
period offset by a significant increase in accounts receivable during the
comparable period.
During the six months ended December 31, 2007, the Company reported
cash used in investing activities of $61,600, compared to cash flow provided by
investing activities of $311,900 reported for the same period in the prior
fiscal year. The decrease is the result of cash generated from the sale of
assets in the prior fiscal year six months ended December 31, 2006 when the
Company sold one of its Data Storage segment companies. In addition, purchases
of property, plant and equipment decreased slightly to $98,200 during the
current period compared to $111,500 in the comparable six-month period of the
prior year.
Cash provided by financing activities for the six months ended December
31, 2007 amounted to $4,335,500, an increase of $1,065,000 compared to the
$3,270,500 provided by financing activities for the six months ended December
31, 2006. The increase resulted primarily from $4.7 million in proceeds from the
sale of equity instruments during the current six-month period compared to net
borrowing during the same period of the prior year.
The Company believes that additional cash resources may be required for
working capital to achieve planned operating results for fiscal year 2008 and,
if working capital requirements exceed current availability, the Company
anticipates raising capital through additional borrowing, the exercise of stock
options and warrants and/or the sale of stock in a private placement. The
additional capital would supplement the projected cash flows from operations and
the line of credit agreement in place at December 31, 2007. If additional
working capital is required and the Company is unable to raise the required
additional capital, it may materially affect the ability of the Company to
achieve its financial plan. The Company has raised a significant amount of
capital in the past and believes it has the ability, if needed, to raise the
additional capital to fund the planned operating results for fiscal year 2008.
While the Company believes that it will succeed in attracting additional capital
and generate capital from operations from its StarTrak acquisition, there can be
no assurance that the Company's efforts will be successful. The Company's
continued existence is dependent upon its ability to achieve and maintain
profitable operations. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
Item 3 - Controls and Procedures.
An evaluation as of the end of the first six months of fiscal year 2008
was carried out under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities
Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that those disclosure controls and
procedures were effective in providing reasonable assurance that information
required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the Commission's rules and
forms and that such information is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
addition, there has been no change in our internal control over financial
reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934) that occurred during the period covered by this report
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
The Company also maintains a system of internal controls to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that: (1) Pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of the
assets of the issuer; (2) Provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the issuer are being made only in accordance with authorizations
of management and directors of the issuer; and (3) Provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the issuer's assets that could have a material effect on the
financial statements.
It should be noted that any system of controls, however well designed
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the system are met. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control systems, there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions, regardless of how remote.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is a plaintiff in litigation initiated by its
subsidiary, StarTrak Systems, LLC, against former employees and others for
violation of certain non-disclosure covenants and for misappropriation of trade
secrets. The actions are more fully described below. The Company is also a party
to litigation that relates to the acquisition, in May of 2002, of substantially
all the assets of Technology Systems International, Inc., a Nevada Corporation
("TSIN") and to litigation arising from an expired property lease between the
Company's former subsidiary, Arraid, Inc., and Arraid Property L.L.C., an
Arizona limited liability company.
StarTrak Systems Litigation - On July 12, 2007, the Company's
subsidiary, StarTrak Systems, LLC, commenced a lawsuit against Brian Hester,
Satamatics, Ltd, Satamatics, Inc., and Farruhk Shahzad in the United States
District Court, District of New Jersey, as case number 07-3203(DRD), for
misappropriation of trade secrets, violation of confidentiality agreements and
contempt for violation of a previously issued court order concerning such trade
secrets issued to Brian Hester. Brian Hester and Farruhk Shahzad are previous
employees of StarTrak, and the Company believes that they have employed and/or
are attempting to employ trade secrets of StarTrak in connection with their
association with Satamatics in direct competition with StarTrak. The Company is
seeking injunctive relief and damages from the defendants.
TSIN Litigation - On January 30, 2003, a shareholder of TSIN
filed a derivative suit naming as defendants the Company and its wholly owned
subsidiary, ATSI. The venue for this action is the Arizona Superior Court in and
for Maricopa County, Arizona, as case number CV2003-001937. The complaint sets
forth various allegations and seeks damages arising out of the Company's
acquisition of substantially all of the assets of TSIN. This derivative suit was
terminated and the action converted into a direct action by TSIN by stipulation
and court order in July 2003.
TSIN is currently in Chapter 7 bankruptcy. The Chapter 7
Trustee failed to prosecute the action timely and the state court dismissed the
action for lack of prosecution, but allowed the Trustee to restart the action,
which the Trustee has done as case number CV2006-007398. The Company is seeking
its attorney's fees with respect to the dismissed action, and has appealed the
court's order allowing the Trustee to restart the action.
The parties to the lawsuit have entered into a Settlement
Agreement, which was attached as an exhibit to Form 8-K filed on September 21,
2007. In place of the litigation, the Settlement Agreement provides for a
valuation procedure, conducted by an independent third party valuation expert,
to value (i) the assets transferred by TSIN to Alanco and TSIA in connection
with the Acquisition Agreement ("Business Value"), and (ii) the consideration
paid by Alanco to TSIN ("Consideration Value "). If the appraiser determines
that the Consideration Value is within 15% of the Business Value, neither party
shall be entitled to any damages or claims. If the Consideration Value is less
than 85% of the Business Value, Alanco shall pay to the TSIN's bankruptcy estate
the full difference in the values, plus interest thereon, plus the sum of
$300,000 for attorneys' fees incurred by TSIN in prosecuting the various related
litigation matters. Alanco's payment may be made, at Alanco's option, in cash or
by an equivalent market value of additional Alanco Class A Common Stock (subject
to certain conditions set forth in the Settlement Agreement). If the
Consideration Value is greater than 115% of the Business Value, TSIN shall
immediately pay Alanco the sum of $300,000 for Alanco's attorneys' fees and
costs incurred in connection with the various litigation matters. The Settlement
Agreement was approved by the bankruptcy court following a hearing for the same
on September 19, 2007, and the parties are beginning the appraisal process. All
of the pending litigation matters have been dismissed by the parties. The
Company anticipates that the appraisal will be accomplished and the matter
entirely resolved over the next few months.
Arraid Litigation - On July 18, 2003, Arraid Property L.L.C.,
an Arizona Limited Liability Company ("Arraid LLC"), filed a complaint in the
Arizona Superior Court in and for Maricopa County, Arizona (case number CV
2003-13999) against the Company and its wholly owned subsidiary, Arraid, Inc.,
alleging breach of lease and seeking substantial monetary damages in excess of
$3 million. The suit relates to an expired lease agreement for property
previously leased by Arraid. Following a trial, the Court found in favor of
Arraid LLC against the Company with respect to certain factual findings
resulting in damages owed by the Company in an amount of approximately $35,000,
less than one percent of the amount sought by the plaintiff. The court
determined that the plaintiff was the prevailing party, and awarded the
plaintiff approximately $95,000 in attorney's fees and costs. The Company's
management, in consultation with legal counsel, has determined to appeal the
decision of the court.
The Company may also, from time to time, be involved in
litigation arising from the normal course of business. As of December 31, 2007,
there was no such litigation pending deemed material by the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the six months ended December 31, 2007, the Company issued
224,300 shares of Series A Preferred Stock and 4,100 Shares of Series B
Preferred Stock as dividend in-kind payments, and a total of 2,505,400 shares of
Class A Common Stock; including 10,000 shares as consideration for an amendment
to the Company's line of credit agreement, 41,500 shares for services rendered,
2,453,900 in a private offering to accredited investors.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Shareholders held on January 18, 2008, the following
proposal was voted upon and approved by the stockholders.
Proposal #1 Election of Directors
For Withhold Total Voting
--- -------- ------------
Harold S. Carpenter 17,216,341 403,744 17,620,085
Robert R. Kauffman 17,950,147 929,938 18,880,085
James T. Hecker 16,658,402 961,683 17,620,085
Thomas C. LaVoy 16,519,808 1,100,277 17,620,085
John A. Carlson 16,630,198 989,887 17,620,085
Donald E. Anderson 17,456,099 903,172 18,359,271
Timothy P. Slifkin 17,210,249 409,836 17,620,085
Item 6. Exhibits.
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer and Chief Financial Officer
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
ALANCO TECHNOLOGIES, INC.
(Registrant)
/s/ John A. Carlson
John A. Carlson
Executive Vice President and
Chief Financial Officer
EXHIBIT 31.1
Certification of
Chairman and Chief Executive Officer
of Alanco Technologies, Inc.
I, Robert R. Kauffman, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Alanco
Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the period presented in this report;
4. The small business issurer's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: February 14, 2008
/s/ Robert R. Kauffman
---------------------
Robert R. Kauffman
Chairman and Chief Executive Officer
EXHIBIT 31.2
Certification of
Vice President and Chief Financial Officer
of Alanco Technologies, Inc.
I, John A. Carlson, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Alanco
Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the period presented in this report;
4. The small business issuer's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: February 14, 2008
/s/ John A. Carlson
---------------------
John A. Carlson
Executive Vice President and Chief Financial Officer
EXHIBIT 32.1
Certification of
Chief Executive Officer and Chief Financial Officer
of Alanco Technologies, Inc.
This certification is provided pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and accompanies this quarterly report of Form 10-QSB
(the "Report") for the period ended December 31, 2007 of Alanco Technologies,
Inc. (the "Issuer").
Each of the undersigned, who are the Chief Executive Officer and Chief
Financial Officer, respectively, of Alanco Technologies, Inc., hereby certify
that, to the best of each such officer's knowledge:
(i) the Report fully complies with the requirements of Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or
78o(d)); and
(ii) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Issuer.
Dated: February 14, 2008
/s/ Robert R. Kauffman
----------------------
Robert R. Kauffman
Chief Executive Officer
/s/ John A. Carlson
----------------------
John A. Carlson
Chief Financial Officer