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 March 31, 2008
____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 May 5, 2008 there were
23,538,000 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 March 31, 2008 (Unaudited)
and June 30, 2007....................................................3
Condensed Consolidated Statements of Operations (Unaudited)
For the three months ended March 31, 2008 and 2007...................4
Condensed Consolidated Statements of Operations (Unaudited)
For the nine months ended March 31, 2008 and 2007....................5
Condensed Consolidated Statements of Changes in Shareholders'
Equity (Unaudited) For the nine months ended March 31, 2008..........6
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended March 31, 2008 and 2007....................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............................................16
Item 3. Controls and Procedures..........................................22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................23
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds.......24
Item 4. Submission of Matters to a Vote of Security Holders..............24
Item 6. Exhibits.........................................................24
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2008 AND JUNE 30, 2007
March 31, 2008 June 30, 2007
-------------- -------------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 1,116,400 $ 615,800
Accounts receivable, net 2,032,400 2,248,600
Notes receivable, current 29,600 29,600
Cost and estimated earnings in excess
of billing - 122,000
Inventories, net 5,561,900 3,808,100
Prepaid expenses and other current assets 449,500 382,800
------------- -------------
Total current assets 9,189,800 7,206,900
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, NET 262,100 250,700
------------- -------------
OTHER ASSETS
Goodwill, net 17,931,700 17,931,700
Other intangible assets, net 1,684,600 2,066,200
Other assets 647,400 427,400
------------- -------------
Total other assets 20,263,700 20,425,300
------------- -------------
TOTAL ASSETS $ 29,715,600 $ 27,882,900
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expense $ 4,163,200 $ 4,155,500
Notes payable, current 1,524,700 2,485,900
Billings in excess of cost & estimated
earnings 28,100 -
Deferred revenue, current 882,000 784,600
------------- -------------
Total current liabilities 6,598,000 7,426,000
LONG TERM LIABILITIES
Notes payable, long term 4,313,700 4,814,100
Deferred revenue, long term 122,600 129,300
------------- -------------
TOTAL LIABILITIES 11,034,300 12,369,400
------------- -------------
Preferred Stock - Series B, 89,100 and
82,800 shares issued and outstanding,
respectively 878,300 815,000
------------- -------------
SHAREHOLDERS' EQUITY
Preferred Stock - Series A Convertible,
5,647,200 and 3,759,800 shares issued
and outstanding, respectively 7,359,500 4,930,100
Common Stock - 23,528,500 and 20,223,100
shares outstanding, net of 200,000
Treasury Stock 94,337,300 87,595,100
Accumulated deficit (83,893,800) (77,826,700)
------------- -------------
Total shareholders' equity 17,803,000 14,698,500
------------- -------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 29,715,600 $ 27,882,900
============= =============
See accompanying notes to the consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, (unaudited)
2008 2007
------------- -------------
NET SALES $ 4,167,900 $ 4,422,800
Cost of goods sold 2,863,200 3,106,200
------------- -------------
GROSS PROFIT 1,304,700 1,316,600
Selling, general and administrative expense 2,735,400 2,568,800
------------- -------------
OPERATING LOSS (1,430,700) (1,252,200)
INTEREST EXPENSE AND OTHER INCOME
Interest expense, net (166,300) (211,800)
Other Income 39,100 17,200
------------- -------------
LOSS FROM CONTINUING OPERATIONS (1,557,900) (1,446,800)
(LOSS) INCOME FROM DISCONTINUED OPERATIONS - -
Preferred stock dividends (642,100) (335,700)
------------- -------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (2,200,000) $ (1,782,500)
============= =============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
- Net loss attributable to common
shareholders $ (0.09) $ (0.10)
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 23,453,000 17,968,300
============= =============
See accompanying notes to the consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, (unaudited)
2008 2007
------------- -------------
NET SALES $ 12,490,700 $ 15,115,000
Cost of goods sold 8,432,100 10,172,100
------------- -------------
GROSS PROFIT 4,058,600 4,942,900
Selling, general and administrative expense 8,617,700 7,389,500
------------ -------------
OPERATING LOSS (4,559,100) (2,446,600)
INTEREST EXPENSE AND OTHER INCOME
Interest expense, net (564,600) (551,100)
Other Income 76,800 56,800
------------ -------------
LOSS FROM CONTINUING OPERATIONS (5,046,900) (2,940,900)
(LOSS) INCOME FROM DISCONTINUED OPERATIONS - (83,200)
Preferred stock dividends (1,020,200) (652,900)
------------ -------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (6,067,100) $ (3,677,000)
============= =============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
- Net loss attributable to common
shareholders $ (0.27) $ (0.22)
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 22,749,800 16,441,500
============= =============
See accompanying notes to the consolidated financial statements
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2008 (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 - 298,500 - - - - - 298,500
Shares issued for conversion of debt 800,000 1,000,000 1,000,000
Private offering, net of expenses 2,453,900 5,123,700 1,425,500 1,736,500 - - - 6,860,200
Value of special Series A Preferred
Stock dividend 264,000 (264,000)
Preferred dividends, paid in kind - A - - 461,900 692,900 - - (692,900) -
Preferred dividends, paid in kind - B - - - - - - (63,300) (63,300)
NASDAQ listing fees and other (34,000) - (34,000)
Net loss - - - - - - (5,046,900) (5,046,900)
---------- ------------ --------- ---------- ------- ---------- ------------- ------------
Balances, March 31, 2008 23,728,500 $94,712,400 5,647,200 $7,359,500 200,000 $(375,100) $(83,893,800) $17,803,000
========== ============ ========= ========== ======= ========== ============= ============
See accompanying notes to the consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, (unaudited)
2008 2007
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations $ (5,046,900) $ (2,940,900)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 499,300 733,300
Gain on Sale - Data Storage Assets - (18,300)
Stock-based Compensation 298,500 127,100
Stock issued for services 69,200 5,500
Income from assets held for sale (59,200) (29,000)
(Loss) from discontinued operations - (83,200)
Changes in:
Accounts receivable, net 216,200 (1,324,100)
Inventories, net (1,753,800) (1,082,400)
Costs and estimated earnings in excess
of billings 122,000 (106,600)
Prepaid expenses and other current assets (66,700) 192,800
Accounts payable and accrued expenses 28,500 (439,000)
Deferred revenue 90,700 935,800
Billings in excess of costs and estimated
earnings 28,100 (43,500)
Customer Advances - (1,001,100)
Other assets (220,000) (222,700)
------------- -------------
Net cash used in operating activities (5,794,100) (5,296,300)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash from discontinued operations and
assets held for sale 59,200 806,200
Net cash forfeited in sale - (2,600)
Goodwill - (56,600)
Collection of notes receivable, net - 2,000
Purchase of property, plant and equipment (128,100) (158,100)
Patent renewal and other (1,000) (4,100)
------------- -------------
Net cash provided by (used in) investing
activities (69,900) 586,800
------------- -------------
See accompanying notes to the consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE NINE MONTHS ENDED MARCH 31, (continued)
2008 2007
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) advances on line of credit 500,000 850,000
Repayment on borrowings (961,600) (2,747,400)
Proceeds from notes payable - 5,117,500
Proceeds from sale of equity instruments 6,860,200 453,700
Other (34,000) -
----------- ------------
Net cash provided by financing activities 6,364,600 3,673,800
----------- ------------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 500,600 (1,035,700)
CASH AND CASH EQUIVALENTS, beginning of period 615,800 1,155,500
----------- ------------
CASH AND CASH EQUIVALENTS, end of period $1,116,400 $ 119,800
=========== ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Net cash paid during the period for interest $ 398,500 $ 185,200
=========== ============
Non-Cash Activities:
Value of stocks and warrants issued for
services and prepayments $ 69,200 $ 519,100
=========== ============
Value of shares issued - StarTrak Deferred
stock payment $ - $ 5,715,400
=========== ============
Value of Stock issued for line of credit
amendment $ 20,800 $ -
=========== ============
Value of Stock issued for note payable
conversion $1,000,000 $ 107,000
=========== ============
Series B preferred stock dividend,
paid in kind $ 63,300 $ 57,500
=========== ============
Series A preferred stock dividend,
paid in kind $ 692,900 $ 595,400
=========== ============
Value of special Series A preferred
stock dividend $ 264,000 $ -
=========== ============
See accompanying notes to the consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 2008
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 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 nine-month period ended March 31, 2008
and 2007 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 September 2006, the FASB issued SFAS 157 "Fair Value Measurements",
which establishes how companies should measure fair value when they are required
to use a fair value measure for recognition or disclosure purposes under GAAP.
This Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those years. The
provisions of SFAS 157 are effective for the Company in July 2008. The Company
is currently evaluating the impact of this Statement on our consolidated
financial statements, but we do not expect SFAS 157 to have a material effect.
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 nine months ended
March 31, 2008 were:
Awards Granted
Nine months ended
March 31, 2008
-----------------
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 nine months of fiscal 2008:
Weighted Weighted
Average Average
Exercise Remaining Aggregate Aggregate
Price Contractual Fair Intrinsic
Shares 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 (140,800) $2.37 - (88,800)
---------- -------- -----------
Outstanding March 31, 2008 6,696,000 $2.00 4.25 $4,408,100 $5,000
========== ======== =========== =========== ==========
Exercisable March 31, 2008 4,695,500 $2.01 4.38 $3,091,100 $5,000
========== ======== =========== =========== ==========
(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 March 31, 2008, for those awards that have an
exercise price currently below the closing price as of March 31, 2008 of $0.94.
Note C - Inventories
Inventories are recorded at the lower of cost or market. The
composition of inventories as of March 31, 2008 and June 30, 2007 are summarized
as follows:
March 31, June 30,
2008 2007
-------------- --------------
(unaudited)
Raw materials and purchased parts $ 5,902,900 $ 4,160,400
Work-in-process 11,600 6,400
Finished goods 86,300 70,900
-------------- --------------
6,000,800 4,237,700
Less reserves for obsolescence (438,900) (429,600)
-------------- --------------
$ 5,561,900 $ 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 March 31, 2008 and June 30, 2007 consist of the following:
March 31, June 30,
2008 2007
----------- -----------
(unaudited)
Costs incurred on uncompleted contracts $ 691,800 $ 242,100
Estimated gross profit earned to date 201,300 161,900
----------- -----------
Revenue earned to date 893,100 404,000
Less: Billings to date (921,200) (282,000)
----------- -----------
Costs and estimated earnings/(billings)
in excess of billings/(costs and
estimated earnings) $ (28,100) $ 122,000
=========== ===========
Note E - Deferred Revenue
Deferred Revenues at March 31, 2008 and June 30, 2007 consist of the
following:
March 31, June 30,
2008 2007
-------------- ------------
(unaudited)
Extended warranty revenue $ 1,004,600 $ 913,900
Less - current portion (882,000) (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 March 31,
2008 there were 248,000 potentially dilutive securities outstanding.
Note G - Equity
During the nine months ended March 31, 2008, the Company issued a total
of 3,305,400 shares of the Company's Class A Common Stock. Included were 800,000
shares issued for conversion of debt valued at $1,000,000, 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 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 nine
months ended March 31, 2008 amounted to $298,500, compared to $127,100
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 completed an offering to accredited investors during the
quarter ended March 31, 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 warrants included a redemption
feature that effectively forces the warrant to be exercised in the event the
market price of the Company's Common Stock reached $3.50 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 $2,107,500, net of expense, from the
offering.
The Series A Preferred Stock offering has been recorded giving
consideration to the value of the underlying common shares into which the
Preferred A is convertible and to a Black Scholes value for the related
warrants. The Company allocated the proceeds of the offering based upon relative
fair values. The Black Scholes method does not consider the effect of the
warrant's force conversion feature. Based upon the implied value of warrants,
utilizing a volatility of 62 based on weekly weighted average changes in the
market price and an assumed time to expiration of 912 days, a beneficial
conversion feature of $264,000 was determined and is recorded as a special
Series A Preferred Stock dividend for the current quarter. The implied value for
the warrant has been credited to Common Stock as of March 31, 2008. The
recording of the Series A Preferred Stock beneficial conversion feature under
this methodology increases the Net Loss Attributable to Common Shareholders by
the amount of the special dividend but has no effect on cash or equity.
The Company declared and paid dividends-in-kind on the Company's
preferred shares through the issuance of 461,900 shares of Series A Preferred
Stock valued at $692,900 and 6,300 shares of Series B Preferred Stock valued at
$63,300. 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):
Nine Months ended 3/31 Three Months ended 3/31
2008 2007 2008 2007
--------------------------- ---------------------------
Revenue
Data Storage $ 2,982,800 $ 3,556,900 $ 920,200 $ 875,400
Wireless Asset Management 8,592,700 10,708,600 3,012,600 3,400,900
RFID Technology 915,200 849,500 235,100 146,500
------------- ------------- ------------- -------------
Total Revenue $ 12,490,700 $ 15,115,000 $ 4,167,900 $ 4,422,800
============= ============= ============= =============
Gross Profit
Data Storage $ 859,800 $ 814,500 $ 294,900 $ 101,900
Wireless Asset Management 3,100,000 3,866,000 974,100 1,172,700
RFID Technology 98,800 262,400 35,700 42,000
------------- ------------- ------------- -------------
Total Gross Profit $ 4,058,600 $ 4,942,900 $ 1,304,700 $ 1,316,600
============= ============= ============= =============
Gross Margin
Data Storage 28.8% 22.9% 32.0% 11.6%
------------- ------------- ------------- -------------
Wireless Asset Management 36.1% 36.1% 32.3% 34.5%
------------- ------------- ------------- -------------
RFID Technology 10.8% 30.9% 15.2% 28.7%
------------- ------------- ------------- -------------
Overall Gross Margin 32.5% 32.7% 31.3% 29.8%
============= ============= ============= =============
Selling, General and Administrative Expense
Data Storage $ 1,188,300 $ 1,082,900 $ 356,800 $ 333,100
Wireless Asset Management 4,766,700 3,767,900 1,524,800 1,188,000
RFID Technology 1,677,700 1,603,300 527,200 597,000
------------- ------------- ------------- -------------
Total Segment Operating Expense $ 7,632,700 $ 6,454,100 $ 2,408,800 $ 2,118,100
============= ============= ============ =============
Operating Profit (Loss)
Data Storage $ (328,500) $ (268,400) $ (61,900) $ (231,200)
Wireless Asset Management (1,666,700) 98,100 (550,700) (15,300)
RFID Technology (1,578,900) (1,340,900) (491,500) (555,000)
Corporate Expense, net (985,000) (935,400) (326,600) (450,700)
------------- ------------- ------------- -------------
Operating Loss $ (4,559,100) $ (2,446,600) $(1,430,700) $ (1,252,200)
============= ============== ============= ============
Depreciation and Amortization
Data Storage $ 20,500 $ 16,200 $ 5,400 $ 5,900
Wireless Asset Management 340,600 482,500 112,000 159,900
RFID Technology 137,400 232,500 43,500 81,200
Corporate 800 2,100 300 700
------------- ------------- ------------- -------------
Total Depreciation and Amortization $ 499,300 $ 733,300 $ 161,200 $ 247,700
============= ============= ============= =============
Mar. 31, 2008 June 30, 2007
------------- -------------
Accounts Receivable
Data Storage $ 246,100 $ 327,300
Wireless Asset Management 1,673,900 1,561,300
RFID Technology 94,800 342,400
Corporate 17,600 17,600
------------- -------------
Total Accounts Receivable $ 2,032,400 $ 2,248,600
============= =============
Inventories
Data Storage $ 930,000 $ 859,600
Wireless Asset Management 2,449,600 1,669,400
RFID Technology 2,182,300 1,279,100
------------- -------------
Total Inventories $ 5,561,900 $ 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 February 2008, the Agreement was amended whereby its maturity
date was extended to July 1, 2010. See Note J - Line of Credit and Term Loan for
additional discussion on the line of credit.
Note J - Line of Credit and Term Loan
At March 31, 2008, the Company had an outstanding balance of $2,000,000
under a $2.0 million line of credit agreement with a private trust ("Lender"),
entered into in June 2002 and last modified in February 2008. Under the
Agreement, $500,000 of the outstanding balance is convertible into Class A
Common Shares of the Company at $1.25 per share and the Company must maintain a
minimum balance outstanding of $2 million through the July 1, 2010 maturity
date.
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.
On February 11, 2008 the Company amended a $1.5 million term loan
agreement with Tenix Holdings, 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
required 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 balance.
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 continues as a
party to certain post-litigation procedures relating 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 - The Company was party to litigation arising
out of the Company's acquisition of substantially all of the assets of TSIN.
This initial derivative suit was terminated and the action converted into a
direct action by TSIN in July 2003.
TSIN is currently in Chapter 7 bankruptcy. 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,
which has been dismissed with prejudice, 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 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 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 have undertaken the appraisal process. 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 appealed 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 March 31, 2008,
there was no such litigation pending deemed material by the Company.
Note L - Subsequent Events
The Company announced on April 3, 2008 a multi-year exclusive
agreement between Alanco/TSI PRISM and NEC Australia and its first sale under
the agreement for a TSI PRISM system to be installed at Maconochie prison in
Canberra, Australia. Under the terms of the agreement, NEC has incorporated the
TSI PRISM technology into its suite of security systems and integration services
which it is marketing to the 100 other prison facilities located throughout
Australia and New Zealand. The Maconochie facility houses multiple
classifications of residents, including young adult offenders as well as both
male and female detainees. The TSI PRISM system will be utilized to monitor
physical separation and to control movement between various segments of the
populations and will provide a wide range of staff efficiencies and cost
reduction measures to the facility. The total project value is in excess of $1
million.
Note M - Liquidity
During the nine months ended March 31, 2008, the Company reported a
loss from continuing operations of approximately $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 $6.8
million during the nine months ended March 31, 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, 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 March 31, 2008 versus March 31, 2007
Net Sales
Consolidated net sales for the three months ended March 31, 2008 were
$4,167,900, a decrease of $254,900, or 5.8%, compared to sales of $4,422,800 for
the same period of the prior year. Increased sales in the Company's Data Storage
and RFID Technology segments were offset by a sales decrease in the Company's
Wireless Asset Management segment. The Company's Data Storage segment reported
an increase in sales of $44,800, or 5.1%, to $920,200 as compared to $875,400 in
the prior year. The Company's Wireless Asset Management segment reported a sales
decrease of $388,300, or 11.4%, due to its inability to duplicate a major
contract with a customer that accounted for $1.4 million for the quarter ended
March 31, 2007 versus $280,000 of sales in the current quarter, a reduction of
more than $1.1 million. 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 Technology
segment increased by $88,600, or 60.5%, when compared to the same quarter of the
previous year due to start up of new contracts during the current quarter.
Gross Profit
Gross profit reported for the quarter amounted to $1,304,700, a
decrease of $11,900, or .9%, when compared to $1,316,600 reported for the
comparable quarter of the prior year. The Company's Data Storage segment
reflected an increase in gross profit of $193,000 which is primarily due to
improvement in the segment's gross margin. The Company's Wireless Asset
Management segment reported a decrease in gross profit of $198,600, due to a
decrease in sales and a reduction in gross margin to 32.3% compared to 34.5% in
the same quarter of the prior year. Gross profit reported by the RFID Technology
segment reflects a decrease of $6,300 as compared to the prior year and is due
to reduced gross margins resulting primarily from the Company's strategic
decision to install a system at low margin providing a significant opportunity
for the RFID Technology segment to test certain design concepts with an
objective of developing 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 13.7% to $2,408,800, an
increase of $290,700 compared to $2,118,100 reported for the comparable quarter
of the prior year. The net increase among the segments was due primarily to
increases in SG&A of the Company's Wireless Asset Management segment which added
$336,800 in SG&A expense. The increase in SG&A was due to increased engineering
costs for new product development. The Company's Data Storage segment SG&A
expense increased $23,700, or 7.1%, compared to the prior year while the RFID
Technology segment reduced its SG&A expense as compared to the prior year by
$69,800.
Operating Loss
The Operating Loss for the quarter was ($1,430,700) compared to a loss
of ($1,252,200) for the same quarter of the prior year, an increase of
($178,500), or 14.3%. The increase in Operating Loss is due primarily to the
reported operating loss of the Wireless Asset Management segment of ($550,700),
an increase of ($535,400) compared to operating loss of ($15,300) reported for
the comparable quarter of the prior fiscal year. The Data Storage segment
reported an operating loss of ($61,900), a 73% reduction compared to an
operating loss of ($231,200) reported in the comparable quarter of the prior
year. The RFID Technology segment operating loss decreased to ($491,500), a
decrease of $63,500, or 11.4%, compared to ($555,000) reported for the
comparable period of the prior year. Corporate expense decreased to ($326,600)
from ($450,700) reported in the three months ended March 31, 2007 and is
primarily due to a reduction in legal and professional fees.
Other Income and Expense
Net interest expense for the quarter decreased to $166,300, a decrease
of $45,500, or 21.5%, compared to $211,800 reported for the same quarter in the
prior year. The decrease was due to a reduction in average net borrowings and a
reduction in interest rates as a result of reduced prime rates. The Loss from
Continuing Operations of ($1,557,900) increased by ($111,100) compared to
($1,446,800) reported for the quarter ended March 31, 2007.
(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 third quarter represents a loss
of ($1,230,400) compared to a loss of ($987,300) for the same quarter in the
prior year. A reconciliation of EBITDA to Loss from Continuing Operations for
the quarters ended March 31, 2008 and 2007 is presented below:
EBITDA RECONCILIATION to LOSS FROM CONTINUING OPERATIONS
3 months ended 3 months ended
March 31, March 31,
2008 2007
-------------- ---------------
EBITDA $ (1,230,400) $ (987,300)
Net interest expense (166,300) (211,800)
Depreciation and amortization (161,200) (247,700)
-------------- ---------------
LOSS FROM CONTINUING OPERATIONS $ (1,557,900) $ (1,446,800)
============== ===============
Dividends
The Company paid quarterly in-kind Series A and Series B Preferred
Stock dividends with values of $378,100 and $335,700 in the quarters ended March
31, 2008 and 2007, respectively. The Company also recorded a special Series A
Preferred Stock dividend during the current quarter of $264,000 related to the
beneficial conversion feature calculated based upon the implied value of
warrants issued in the Series A Preferred Stock Offering. The recording of the
Series A Preferred Stock special dividend increases the Net Loss Attributable to
Common Shareholders by the amount of the special dividend, but has no affect on
the Company's cash or equity balances.
Net Loss Attributable to Common Stockholders
Net Loss Attributable to Common Stockholders for the quarter ended
March 31, 2008 amounted to ($2,200,000), or ($.09) per share, compared to a loss
of ($1,782,500), or ($.10) 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) Nine months ended March 31, 2008 versus March 31, 2007
Net Sales
Consolidated net sales for the nine months ended March 31, 2008 were
$12,490,700, a decrease of $2,624,300, or 17.4%, compared to sales of
$15,115,000 for the same period of the prior year. The sales decrease resulted
from a decrease in the Data Storage and Wireless Asset Management segments
offset by a modest increase in the RFID Technology segment. The Company's Data
Storage segment reported a decrease in sales of $574,100, or 16.1%, 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 $2,115,900, or
19.8%, when compared to the nine months ended March 31, 2007 due to a major
contract with a customer that accounted for sales of approximately $4.9 million
in the nine months ended March 31, 2007 compared to approximately $2.1 million
in sales in the current nine-month period, representing sales reductions of
approximately $2.8 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 Technology segment
increased by $65,700, or 7.7%, when compared to the same period of the previous
year due to start up of new contracts during the current quarter.
Gross Profit
Gross profit reported for the nine-month period amounted to $4,058,600,
a decrease of $884,300, or 17.9%, when compared to $4,942,900 reported for the
comparable period of the prior year. The net decrease in gross profit resulted
from sales decreases in the Company's Wireless Asset Management segment and
reduced margins as discussed above and decreases in gross margin in the
Company's RFID Technology segment resulting primarily from the Company's
strategic decision to install a system at a low margin that provided a
significant opportunity for the RFID Technology segment to test certain design
concepts with an objective of developing a lower cost RFID system designed for a
new market. Gross profit for the Data Storage segment increased by $45,300, or
5.6%, due to increased margins from 22.9% during the nine months ended March 31,
2007 compared to 28.8% for the current nine-month period.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the nine
months ended March 31, 2008, excluding corporate expenses, increased 18.3% to
$7,632,700, an increase of $1,178,600 compared to $6,454,100 reported for the
comparable period of the prior year. The increase was due primarily to increases
in SG&A of the Company's Wireless Asset Management segment which added $998,800
in SG&A expense, or 84.7% of the Company's increase. The segment's SG&A increase
consisted of increased legal expense, warranty costs and additional costs to
complete product development necessary to commercialize its new product line
targeted at the truck/trailer market. The RFID Technology segment's SG&A
increased $74,400, or 4.6%, from $1,603,300 to $1,677,700 in the comparable
period of the prior year due to additional engineering investment. The Data
Storage segment reported an increase in SG&A expense of 9.7%, or $105,400.
Operating Loss
The Operating Loss for the nine-month period was ($4,559,100) compared
to a loss of ($2,446,600) for the same period of the prior year, an increase of
($2,112,500), or 86.3%. The increase in Operating Loss is due primarily to the
operating loss incurred by the Wireless Asset Management segment of
($1,666,700), an increase of ($1,764,800) compared to operating profit of
$98,100 reported for the comparable period of the prior fiscal year. The Data
Storage segment incurred an operating loss of ($328,500) compared to an
operating loss of ($268,400) reported in the comparable nine-month period of the
prior year. The RFID Technology segment operating loss increased to
($1,578,900), an increase of ($238,000), or 17.7%, compared to ($1,340,900)
reported for the comparable period of the prior year. Corporate expense
increased to ($985,000) from ($935,400) reported in the nine months ended March
31, 2007.
Other Income and Expense
Net interest expense for the nine months ended March 31, 2008 increased
to $564,600, an increase of $13,500, or 2.4%, compared to $551,100 reported for
the same period in the prior year. The increase was due to an increase in net
borrowings compared to the prior year, offset by lower interest rates. The Loss
from Continuing Operations of ($5,046,900) increased to ($2,106,000) compared to
($2,940,900) reported for the nine months ended March 31, 2007.
(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 nine months ended March 31, 2008 represents
a loss of ($3,983,000) compared to a loss of ($1,656,500) for the same period of
the prior year. A reconciliation of EBITDA to Loss from Continuing Operations
for the nine months ended March 31, 2008 and 2007 is presented below:
EBITDA RECONCILIATION to LOSS FROM CONTINUING OPERATIONS
9 months ended 9 months ended
March 31, March 31,
2008 2007
-------------- ---------------
EBITDA $ (3,983,000) $ (1,656,500)
Net interest expense (564,600) (551,100)
Depreciation and amortization (499,300) (733,300)
-------------- ---------------
LOSS FROM CONTINUING OPERATIONS $ (5,046,900) $ (2,940,900)
============== ===============
Dividends
The Company paid quarterly in-kind Series A and Series B Preferred
Stock dividends with values of $756,200 and $652,900 in the nine months ended
March 31, 2008 and 2007, respectively. The Company also recorded a special
Series A Preferred Stock dividend during the current period of $264,000 related
to the beneficial conversion feature calculated based upon the implied value of
warrants issued in the Series A Preferred Stock Offering. The recording of the
Series A Preferred Stock special dividend increases the Net Loss Attributable to
Common Shareholders by the amount of the special dividend, but has no affect on
the Company's cash or equity balances.
Net Loss Attributable to Common Stockholders
Net Loss Attributable to Common Stockholders for the nine months ended
March 31, 2008 amounted to ($6,067,100), or ($.27) per share, compared to a loss
of ($3,677,000), or ($.22) per share, in the comparable period 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 March 31, 2008 exceeded current
liabilities by $2,591,800, resulting in a current ratio of 1.4 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 March 31, 2008 versus
June 30, 2007 resulted from the conversion of approximately $1 million in debt
to equity and 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 $2,032,400 at March 31, 2008 reflects a decrease
of $216,200, or 9.6%, when compared to the $2,248,600 reported as consolidated
accounts receivable at June 30, 2007. The accounts receivable balance at March
31, 2008 for the Data Storage segment represents twenty-three days' sales in
receivables, a decrease compared to twenty-seven days' sales at June 30, 2007.
The decrease was due to an increase 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 decrease in days' sales for the Data Storage
segment is not considered a trend.
The accounts receivable balance for the Wireless Asset Management
segment at March 31, 2008 was $1,673,900 compared to $1,561,300 at June 30,
2007, an increase of $112,600, or 7.2%. Days' sales in receivables for the
Wireless Asset Management increased to fifty-three from forty-four days' sales
in receivables reported at June 30, 2007 due to customer advances in the prior
year.
The RFID Technology segment accounts receivable balance at March 31,
2008 of $94,800 represents twenty-eight 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 March
31, 2008 and June 30, 2007 due to the minimal reported sales and 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 March 31, 2008 amounted to $5,561,900, an
increase of $1,753,800, or 46.1%, when compared to $3,808,100 at June 30, 2007.
The inventory balance at March 31, 2008 for the Data Storage segment of $930,000
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 March 31, 2008 was $2,449,600 compared to $1,669,400 at June 30,
2007, an increase of $780,200, or 46.7%. The inventory balance at March 31, 2008
for the Wireless Asset Management segment represents an inventory turnover of
3.0 compared to 5.1 as of June 30, 2007. The increase in Wireless Asset
Management segment inventory is due to product conversions and development
including the changeover from an analog to digital control channel, purchase of
end-of- life materials for products, and purchases of material for new product
deployment. The inventory balance of the RFID Technology segment at March 31,
2008 was $2,182,300 compared to $1,279,100 at June 30, 2007, an increase of
$903,200, or 70.6%. The inventory balance at March 31, 2008 for the RFID
Technology segment represents an inventory turnover of .50 as compared to .58 at
June 30, 2007. The RFID Technology segment inventory increase is considered a
short-term condition due to the award of contracts during the period for which
the Company made strategic purchases to take advantage of pricing incentives
offered by its vendors.
At March 31, 2008, the Company had an outstanding balance of $2,000,000
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 March 31, 2008,
the Company had no availability 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 nine-month period ended March 31, 2008
was $5,794,100, an increase of $497,800, or 9.4%, when compared to cash used in
operations of $5,296,300 for the comparable period ended March 31, 2007. The
increase during the current nine-month period resulted primarily from an
increase in Loss from Continuing Operations and inventories offset by a
significant increase in accounts receivable and Costs in excess of billings and
estimated earnings on uncompleted contracts during the comparable period of the
prior year.
During the nine months ended March 31, 2008, the Company reported cash
used in investing activities of $69,900, compared to cash flow provided by
investing activities of $586,800 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 period ended March 31, 2007 when the Company
sold one of its Data Storage segment companies. In addition, purchases of
property, plant and equipment decreased slightly to $128,100 during the current
period compared to $158,100 in the comparable nine-month period of the prior
year.
Cash provided by financing activities for the nine months ended March
31, 2008 amounted to $6,364,600, an increase of $2,690,800 compared to the
$3,673,800 provided by financing activities for the nine months ended March 31,
2007. The increase resulted primarily from $6.8 million in proceeds from the
sale of equity instruments during the current nine-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 March 31, 2008. 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, 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 nine 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 fiscal third quarter 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 continues as a
party to certain post-litigation procedures relating 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 - The Company was party to litigation arising out of
the Company's acquisition of substantially all of the assets of TSIN. This
initial derivative suit was terminated and the action converted into a direct
action by TSIN in July 2003.
TSIN is currently in Chapter 7 bankruptcy. 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,
which has been dismissed with prejudice, 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 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 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 have undertaken the appraisal process. 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 appealed 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 March 31, 2008, there
was no such litigation pending deemed material by the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the nine months ended March 31, 2008, the Company issued 461,900
shares of Series A Preferred Stock and 6,300 Shares of Series B Preferred Stock
as dividend in-kind payments. In addition, 1,425,500 shares of Series A
Preferred Stock were issued in private offerings to accredited investors.
A total of 3,305,400 shares of Class A Common Stock were issued during
the nine month period; including 800,000 shares for conversion of debt, 10,000
shares as consideration for an amendment to the Company's line of credit
agreement, 41,500 shares for services rendered, and 2,453,900 shares in a
private offering to accredited investors.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Shareholders on January 18,
2008. The proposal and results thereof were reported in the Company's Form
10-QSB filed on February 14, 2008 for the period ended December 31, 2007.
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: May 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: May 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 March 31, 2008 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: May 14, 2008
/s/ Robert R. Kauffman
----------------------
Robert R. Kauffman
Chief Executive Officer
/s/ John A. Carlson
----------------------
John A. Carlson
Chief Financial Officer