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, 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 May 10, 2007 there were
20,159,800 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, 2007 (Unaudited)
and June 30, 2006..................................................3
Condensed Consolidated Statements of Operations (Unaudited)
For the three months ended March 31, 2007 and 2006.................4
Condensed Consolidated Statements of Operations (Unaudited)
For the nine months ended March 31, 2007 and 2006..................5
Condensed Consolidated Statements of Changes in Shareholders' Equity
(Unaudited) For the nine months ended March 31, 2007...............6
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended March 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..........................................24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................25
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
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2007 AND JUNE 30, 2006
March 31, 2007 June 30, 2006
--------------- --------------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 119,800 $ 1,155,500
Accounts receivable, net 2,795,500 1,471,400
Notes receivable, current 29,600 31,600
Cost and estimated earnings in excess
of billing 106,600 -
Inventories, net 3,784,000 2,701,600
Prepaid expenses and other current assets 357,100 551,000
--------------- --------------
Total current assets 7,192,600 5,911,100
--------------- --------------
PROPERTY, PLANT AND EQUIPMENT, NET 247,600 201,100
--------------- --------------
OTHER ASSETS
Goodwill, net 17,931,700 17,875,100
Other intangible assets 2,263,600 2,881,200
Net assets held for sale - 755,500
Other assets 646,800 37,500
--------------- --------------
Total other assets 20,842,100 21,549,300
--------------- --------------
TOTAL ASSETS $ 28,282,300 $ 27,661,500
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Credit Line $ 1,850,000 $ 1,000,000
Notes payable, current 737,500 875,300
Accounts payable and accrued expense 4,604,200 5,043,200
Billings in excess of cost and est earnings
on uncompleted contracts - 43,500
Deferred stock payment, StarTrak - 5,715,400
Customer advances - 1,001,100
Deferred revenue, current 932,800 126,000
--------------- --------------
Total Current Liabilities 8,124,500 13,804,500
LONG TERM LIABILITIES
Notes payable, long term 5,079,900 2,679,100
Deferred revenue, long term 129,000 -
--------------- --------------
Total Long-term liabilities 5,208,900 2,679,100
--------------- --------------
TOTAL LIABILITIES 13,333,400 16,483,600
--------------- --------------
Preferred Stock - Series B, 80,700 and
75,000 shares issued and outstanding,
respectively 795,000 737,500
--------------- --------------
SHAREHOLDERS' EQUITY
Preferred Stock - Series A Convertible,
3,759,800 and 3,122,900 shares issued and
outstanding, respectively 4,930,100 3,925,200
Common Stock- 18,859,800 and 15,261,500
shares outstanding, net of Treasury Stock
of 200,500 and 200,000, respectively 84,855,800 78,470,200
Accumulated deficit (75,632,000) (71,955,000)
--------------- --------------
Total shareholders' equity 14,153,900 10,440,400
--------------- --------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 28,282,300 $ 27,661,500
=============== ==============
See accompanying notes to the consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, (Unaudited)
2007 2006
--------------- --------------
NET SALES $ 4,422,800 $ 988,000
Cost of goods sold 3,106,200 716,000
--------------- --------------
GROSS PROFIT 1,316,600 272,000
Selling, general and administrative expense 2,568,800 1,439,100
--------------- --------------
OPERATING LOSS (1,252,200) (1,167,100)
OTHER INCOME & (EXPENSES)
Interest expense, net (211,800) (23,700)
Other income, net 17,200 60,200
--------------- --------------
LOSS FROM CONTINUING OPERATIONS (1,446,800) (1,130,600)
INCOME FROM DISCONTINUED OPERATIONS - 138,500
Preferred stock dividends - paid in kind (335,700) (281,500)
--------------- --------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (1,782,500) $ (1,273,600)
=============== ==============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
- Net loss attributable to common
shareholders $ (0.10) $ (0.11)
=============== ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 17,968,600 12,044,800
=============== ==============
See accompanying notes to the consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, (Unaudited)
2007 2006
--------------- --------------
NET SALES $ 15,115,000 $ 3,858,400
Cost of goods sold 10,172,100 2,757,700
--------------- --------------
GROSS PROFIT 4,942,900 1,100,700
Selling, general and administrative expense 7,389,500 4,216,300
--------------- --------------
OPERATING LOSS (2,446,600) (3,115,600)
OTHER INCOME & (EXPENSES)
Interest expense, net (551,100) (66,400)
Other income, net 56,800 77,300
--------------- --------------
LOSS FROM CONTINUING OPERATIONS (2,940,900) (3,104,700)
(LOSS) INCOME FROM DISCONTINUED OPERATIONS (83,200) 6,500
Preferred stock dividends - paid in kind (652,900) (564,600)
--------------- --------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (3,677,000) $ (3,662,800)
=============== ==============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
- Net loss attributable to common
shareholders $ (0.22) $ (0.32)
=============== ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 16,441,500 11,340,700
=============== ==============
See accompanying notes to the consolidated financial statements
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2007 (unaudited)
SERIES A
COMMON STOCK PREFERRED STOCK TREASURY STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
Balances, June 30, 2006 15,461,500 $ 78,845,300 3,122,900 $ 3,925,200 200,000 $(375,100) $(71,955,000) $10,440,400
Shares issued for services 4,000 5,500 - - - - - 5,500
Shares issued for loan fees 210,000 267,200 - - - - - 267,200
Shares issued for options
exercised 48,000 44,200 - - - - - 44,200
Shares issued-StarTrak Deferred
Stock Payment 3,280,000 5,715,400 - - - - - 5,715,400
Conversion of note payable to
equity 56,800 107,000 - - - - - 107,000
Fractional shares eliminated and
purchased in reverse split - - - - 500 (100) - (100)
Value of warrant issued for loan
fees - 119,300 - - - - - 119,300
Value of stock based compensation - 127,100 - - - - - 127,100
Private offering, net of expenses - - 240,000 409,500 - - - 409,500
Preferred dividends,
paid in kind - A - - 396,900 595,400 - - (595,400) -
Preferred dividends,
paid in kind - B - - - - - - (57,500) (57,400)
Net loss - - - - - - (3,024,100) 3,024,200)
Balances, March 31, 2007 19,060,300 $ 85,231,000 3,759,800 $ 4,930,100 200,500 $(375,200) $(75,632,000) $14,153,900
========== ============ ========= =========== ======= ========== ============= ============
See accompanying notes to the consolidated financial statements
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, (Unaudited)
2007 2006
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations $ (2,940,900) $ (3,104,700)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 733,300 301,200
Gain on Sale - Data Storage Assets (18,300) -
Stock-based Compensation 127,100 -
Stock issued for services 5,500 51,100
(Loss) Income from discontinued
operations (83,200) 6,500
Income from assets held for sale (29,000) (23,600)
Changes in:
Accounts receivable, net (1,324,100) 166,000
Inventories, net (1,082,400) (328,600)
Costs in excess of billings and estimated
earnings on uncompleted contracts (106,600) -
Prepaid expenses and other current assets 192,800 (147,600)
Accounts payable and accrued expenses (439,000) 214,500
Deferred revenue 935,800 (12,700)
Billings and estimated earnings in excess
of costs on uncompleted contracts (43,500) 27,700
Customer Advances (1,001,100) -
Other assets (222,700) 8,200
--------------- --------------
Net cash used in operating activities (5,296,300) (2,842,000)
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash from assets sold 806,200 77,200
Net cash forfeited in sale (2,600) -
Goodwill (56,600) -
Collection of notes receivable, net 2,000 54,900
Purchase of property, plant and equipment (158,100) (80,000)
Patent renewal and other (4,100) 900
--------------- --------------
Net cash provided by investing activities 586,800 53,000
--------------- --------------
See accompanying notes to the consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED MARCH 31, (Continued)
2007 2006
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) advances on line of credit 850,000 495,500
Repayment on borrowings (2,747,400) (236,000)
Proceeds from notes payable 5,117,500 -
Proceeds from sale of equity instruments 453,700 1,989,500
--------------- --------------
Net cash provided by financing activities 3,673,800 2,249,000
--------------- --------------
NET (DECREASE) IN CASH (1,035,700) (540,000)
CASH AND CASH EQUIVALENTS, beginning of period 1,155,500 737,300
--------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 119,800 $ 197,300
=============== ==============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Net cash paid during the period for interest $ 185,200 $ 47,400
=============== ==============
Non-Cash Activities:
Value of stocks and warrants issued for
services and prepayments $ 519,100 $ 135,100
=============== ==============
Value of shares issued - Startrak
Deferred Stock payment $ 5,715,400 $ -
=============== ==============
Value of stock issued for note payable
conversion $ 107,000 $ -
=============== ==============
Valuation adjustment $ - $ (64,700)
=============== ==============
Series B preferred stock dividend,
paid in kind $ 57,500 $ 52,000
=============== ==============
Series A preferred stock dividend,
paid in kind $ 595,400 $ 512,500
=============== ==============
See accompanying notes to the consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 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, 2006, 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 have received, or will receive, 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 third quarter and nine month period
ended March 31, 2007 of fiscal 2007 includes compensation expense for all
stock-based compensation awards granted during the quarter, or granted in a
prior quarter if not fully vested as of July 1, 2006, based on the grant date
fair value estimated in accordance with the original provision 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.
The following table illustrates the effect on net loss and net loss per
share if the Company had applied the fair value recognition provisions of SFAS
123 to options granted under the stock option plans in the nine months ended
March 31, 2006. For purposes of pro forma disclosures, the value of the options
granted during the period is estimated using the Black-Scholes option-pricing
formula and expensed in the period of grant whether or not the options were
vested. The following pro forma information sets forth the net loss and net loss
per share assuming that the Company had used the SFAS 123 fair value method in
accounting for stock options during the nine months ended March 31, 2006:
9 months ended
March 31, 2006
--------------
Net loss, as reported $ (3,662,800)
Add: Stock-based employee compensation expense included
in reported income
Deduct: Total stock-based employee compensation expense
determined under fair value based methods, net of
related tax effects (525,000)
--------------
Pro Forma net loss $ (4,187,800)
==============
Net loss per common share, basic and diluted
As reported $ (0.32)
==============
Pro forma $ (0.37)
==============
Weighted Average Shares Outstanding
Basic and Diluted 11,340,700
==============
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 June 2006, the Financial Accounting Standards Board (FASB) issued a
standard that addresses accounting for income taxes: FIN 48, Accounting for
Uncertainty in Income Taxes. Among other things, FIN 48 requires applying an
audit sustainability standard of "more likely than not" related to the
recognition and de-recognition of tax positions. The new guidance will be
effective for us in fiscal 2008. We are currently evaluating the requirements of
FIN 48 and the impact this interpretation may have on our consolidated financial
statements.
In September 2006, the SEC issued Staff Accounting Bulletin (SAB) 108 "
Considering the Effects of Prior Year Misstatements in Current Year Financial
Statements," which provides interpretive guidance on how the effects of prior
year uncorrected misstatements should be considered when quantifying
misstatements in current year financial statements. There is currently diversity
in practice, with the two commonly used methods to quantify misstatements being
the "rollover" method (which primarily focuses on the income statement impact of
misstatements) and the "iron curtain" method (which focuses on the balance sheet
impact). SAB 108 requires registrants to use a dual approach whereby both of
these methods are considered in evaluating the materiality of financial
statement errors. Prior materiality assessments will need to be reconsidered
using both the rollover and iron curtain methods.
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, 2006.
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:
Awards Prior to
July 1, 2006
---------------
Dividend yield 0%
Expected volatility 27%-80%
Weighted-average volatility 43.1%
Risk-free interest rate 3%-4 1/2%
Expected life of options (in years) 5-10
Weighted average grant-date fair value $0.61
Assumptions for awards of options granted during the nine months ended
March 31, 2007 were:
Awards Granted
Nine months ended
March 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 $0.78
The following table summarizes the Company's stock option activity
during the first nine months of fiscal 2007:
Weighted Average
Weighted Average Remaining Aggregate Aggregate
Shares Exercise Price Contractual Fair Intrinsic
Per Share Term (1) Value Value(2)
Outstanding July 1, 2006 5,721,000 $1.98 5.82 $3,597,300 -
Granted 278,000 $1.47 - 185,300 -
Exercised (48,000) $0.92 - (30,400) -
Forfeited or expired (105,200) $3.31 - (66,100) -
Outstanding March 31, 2007 5,845,800 $1.94 5.09 $3,686,100 $3,109,200
========== =============== ================ =========== ===========
Exercisable March 31, 2007 4,654,800 $1.99 5.29 $2,934,200 $1,784,500
========== =============== ================ =========== ===========
(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, 2007, for those awards that have
an exercise price currently below the closing price as of March 30, 2007 of $2.24.
Note C - Inventories
Inventories are recorded at the lower of cost or market. The
composition of Inventories as of March 31, 2007 and June 30, 2006 (excluding
inventories included in net assets held for sale at June 30, 2006) are
summarized as follows:
March 31, June 30,
2007 2006
--------------- ---------------
(unaudited)
Raw materials and purchased parts $ 4,046,300 $ 2,915,600
Finished goods 75,300 101,000
--------------- ---------------
4,121,600 3,016,600
Less reserves for obsolescence (337,600) (315,000)
--------------- ---------------
$ 3,784,000 $ 2,701,600
=============== ===============
Note D - Contracts In Process
Costs incurred, estimated earnings and billings in the RFID Technology
segment, related to contracts for the installation of TSI PRISM systems in
process at March 31, 2007 and June 30, 2006 consist of the following:
March 31, June 30,
2007 2006
-------------- ---------------
(unaudited)
Costs incurred on uncompleted contracts $ 529,300 $ 97,100
Estimated gross profit earned to date 177,800 19,900
-------------- ---------------
Revenue earned to date 707,100 117,000
Less: Billings to date (600,500) (160,500)
-------------- ---------------
Costs and estimated earnings/(billings)
in excess of billings/(costs and
estimated earnings) $ 106,600 $ (43,500)
============== ===============
Note E - Deferred Revenue
Deferred Revenues at March 31, 2007 and June 30, 2006 consist of the
following:
March 31, June 30,
2007 2006
-------------- ---------------
(unaudited)
Extended warranty revenue $ 1,061,800 $ 126,000
Less - current portion (932,800) (126,000)
-------------- ---------------
Deferred revenue - long term $ 129,000 $ -
============== ===============
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,
2007 there were 4,999,000 potentially dilutive securities outstanding.
Note G - Equity
The Company's annual meeting of shareholders was held on January 30,
2007. Proposals voted upon and approved included Proposal #5 - "Approval of
Issuance of Class A Common Stock as Payment in Lieu of Cash Related to
Obligations Incurred in Connection with the Company's Acquisition of StarTrak
Systems, LLC," resulting in the Company issuing, in January 2007, 3,280,000
shares of Class A Common Stock in payment of $5,715,400 in "Deferred stock
payment, StarTrak" and 56,800 shares issued for payment of $107,000 notes
payable acquired in the acquisition. The acquisition of StarTrak Systems, LLC,
which became effective June 30, 2006, is more fully discussed in the Company's
Form 10-KSB filed for the year ended June 30, 2006.
During the nine months ended March 31, 2007, the Company issued, in
addition to the 3,336,800 discussed above, a total of 262,000 shares of the
Company's Class A Common Stock. Included were 4,000 shares issued for services
valued at $5,500, 48,000 shares issued in connection with the exercise of
employee stock options and 210,000 shares issued as financing costs in
conjunction with a $4 million term loan transaction valued at fair market value
on date of issue at $267,200, net of a $5,000 payment made by the lender.
Warrants to purchase 283,500 shares of the Company's Class A Common Stock at a
strike price of $1.80 (valued at $119,300) were also issued in conjunction with
the term loan. The net value of stock and warrants issued in conjunction with
the term loan has been recorded and will be amortized over the loan period as
interest expense.
The value of employee stock-based compensation recognized for the nine
months ended March 31, 2007 amounted to $127,100. 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 in July 2006 an offering of 240,000 units
consisting of one share of Series A Preferred Stock and a warrant to purchase
1.2 shares of the Company's Class A Common Stock at a strike price of $1.50 per
share. The units were sold for $1.71 each and generated $409,500, net of
expenses. 180,000 units were purchased by directors and officers of the Company
including 60,000 units each purchased by Robert R. Kauffman, director and CEO,
Harold S. Carpenter, director, and Donald E. Anderson, director. The remaining
60,000 units were sold to non-related third parties.
The Company declared and paid dividends-in-kind on the Company's
preferred shares through the issuance of 396,900 shares of Series A Preferred
Stock valued at $595,400 and 5,700 shares of Series B Preferred Stock valued at
$57,500. The Preferred Stocks are more fully discussed in the Form-10KSB for the
year ended June 30, 2006.
Note H -Industry Segment Data
Information concerning operations by industry segment follows (unaudited):
Nine Months ended 3/31 Three Months ended 3/31
2007 2006 2007 2006
Revenue
Data Storage $ 3,556,900 $ 3,537,100 $ 875,400 $ 902,700
Wireless Asset Management 10,708,600 n/a 3,400,900 n/a
RFID Technology 849,500 321,300 146,500 85,300
------------ ------------ ----------- ------------
Total Revenue $15,115,000 $ 3,858,400 $ 4,422,800 $ 988,000
============ ============ =========== ============
Gross Profit
Data Storage $ 814,500 $ 1,015,900 $ 101,900 $ 251,700
Wireless Asset Management 3,866,000 n/a 1,172,700 n/a
RFID Technology 262,400 84,800 42,000 20,300
------------ ------------ ------------ ------------
Total Gross Profit $ 4,942,900 $ 1,100,700 $ 1,316,600 $ 272,000
============ ============ ============ ============
Gross Margin
Data Storage 22.9% 28.7% 11.6% 27.9%
Wireless Asset Management 36.1% n/a 34.5% n/a
RFID Technology 30.9% 26.4% 28.7% 23.8%
------------ ------------ ------------ ------------
Overall Gross Margin 32.7% 28.5% 29.8% 27.5%
============ ============ ============ ============
Selling, General and Administrative Expense
Data Storage $ 1,082,900 $ 1,030,000 $ 333,100 $ 304,300
Wireless Asset Management 3,767,900 n/a 1,188,000 n/a
RFID Technology 1,603,300 2,062,300 597,000 692,900
------------ ------------ ------------ ------------
Total Segment Operating Expen $ 6,454,100 $ 3,092,300 $ 2,118,100 $ 997,200
============ ============ ============ ============
Operating Profit (Loss)
Data Storage $ (268,400) $ (14,100) $ (231,200) $ (52,600)
Wireless Asset Management 98,100 n/a (15,300) n/a
RFID Technology (1,340,900) (1,977,500) (555,000) (672,600)
Corporate Expense, net (935,400) (1,124,000) (450,700) (441,900)
------------ ------------ ------------ ------------
Operating Loss $(2,446,600) $(3,115,600) $(1,252,200) $(1,167,100)
============ ============ ============ ============
Depreciation and Amortization
Data Storage $ 16,200 $ 18,200 $ 5,900 $ 5,200
Wireless Asset Management 482,500 n/a 159,900 n/a
RFID Technology 232,500 280,500 81,200 75,100
Corporate 2,100 2,500 700 700
------------ ------------ ------------ ------------
Total Depreciation and Amortization $ 733,300 $ 301,200 $ 247,700 $ 81,000
============ ============ ============ ============
Mar. 31, 2007 June 30, 2006
Accounts Receivable
Data Storage $ 473,000 $ 356,100
Wireless Asset Management 1,937,200 919,700
RFID Technology 367,900 178,300
Corporate 17,400 17,300
------------ ------------
Total Accounts Receivable $ 2,795,500 $ 1,471,400
============ ============
Inventories
Data Storage $ 852,000 $ 875,200
Wireless Asset Management 1,612,600 885,900
RFID Technology 1,319,400 940,500
------------ ------------
Total Inventories $ 3,784,000 $ 2,701,600
============ ============
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,
2006, with a private trust controlled by Mr. Donald Anderson, a greater than
five percent stockholder and a member of the Company's Board of Directors.
See Note G - Equity for discussion of units sold in July 2006
consisting of one share of Series A Preferred Stock and warrants to purchase 1.2
shares of the Company's Class A Common Stock for a strike price of $1.50 per
share. The units were purchased by a group of investors that included Robert R.
Kauffman, CEO and Company director, Harold S. Carpenter, Company director, and
Donald E. Anderson, Company director.
During the first quarter of fiscal 2007, the Company sold its wholly
owned subsidiary, Arraid, Inc., to a trust controlled by Donald E. Anderson, a
director of the Company, for cash of approximately $456,400. The transaction was
completed in conformance with a fairness opinion letter received by the Company.
Note J - Line of Credit and Term Loan
At March 31, 2007, the Company had an outstanding balance under the
line of credit agreement of $1,850,000. 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 June 2006. Under the Agreement, the Company must maintain a
minimum balance due under the line of at least $1.5 million through the July 1,
2007 expiration date. Under the Agreement, the lender has the unilateral right
to reduce the line of credit Agreement to $1.5 million, at which time the
minimum outstanding balance under the Agreement reduces from $1.5 to $1.0
million. At March 31, 2007, the Company had $150,000 available under the line of
credit agreement.
The Company completed a $4 million term loan financing on September 28,
2006 with ComVest Capital LLC, to be used to repay short-term notes and provide
working capital to fund operations. Provisions for the four-year loan include
interest only payments for the first year with the loan balance amortized over
the remaining three-year period. The loan bears interest at prime plus two and
one-half percent per annum, currently 10.75%, matures in September 2010 and is
secured by the Company assets. Closing fees and expenses related to the
transaction paid in cash, common stock and warrants amounted to $532,800. The
costs will be amortized over the term of the loan. The loan transaction was
reported via Form 8-K filed on October 3, 2006, including the applicable loan
documents.
Note K - Litigation
The Company continues to be a defendant in litigation that relates to
the acquisition, in May of 2002, of substantially all the assets of Technology
Systems International, Inc., a Nevada corporation ("TSIN"), as described in our
Form 10-KSB filed for the year ended June 30, 2006. The court dismissed the
initial suit due to lack of prosecution, but allowed the bankruptcy trustee for
the plaintiff to re-initiate the suit. The Company believes that allowing
re-initiation of the suit was improper and has appealed the order allowing the
suit to be re-initiated to an appellate court. In the meantime the re-started
suit is pending. The Company's management, in consultation with legal counsel,
continues to believe the plaintiff's claims are without merit and the Company
will aggressively defend against the action.
Litigation previously reported as arising from an expired property
lease between the Company's subsidiary, Arraid, Inc., and Arraid Property
L.L.C., a limited liability company, has been concluded at the trial court level
with an order adverse to the Company in an amount of approximately $35,000
(representing less that one percent of the amount claimed by the plaintiffs),
plus certain attorney's fees and costs in the amount of approximately $100,000,
both of which have been accrued. The Company is currently awaiting a judgment
and intends to appeal the judgment when entered. The Company's management, in
consultation with legal counsel, believes the Company will be successful upon
the appeal.
The Company has settled litigation against the Company's insurance
carrier with respect to claims originating from the TSIN litigation and has
received payment from the insurance carrier in the amount of $350,000.
Note L - Subsequent Events
Subsequent to March 31, 2007, the Company issued 1,300,000 shares of
its Class A Common Stock receiving approximately $2.5 million, net of expenses.
564,000 shares were issued pursuant to the exercise of warrants and employee
stock options generating approximately $1,048,000 and 736,000 shares were issued
in a private offering to several qualified investors for approximately
$1,468,000, net of expenses.
Note M - Liquidity
Through March 31, 2007, the Company had sustained recurring losses from
operations, and as of March 31, 2007, the Company has a deficit working capital
position. These conditions raise substantial doubt about the ability of the
Company to continue as a going concern. During fiscal 2007, 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 certified public accountants have issued a
going concern opinion on the consolidated financial statements of the Company
for the fiscal year ended June 30, 2006. 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 completed over a 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 becomes
known, the entire amount of the estimated ultimate loss is accrued.
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, 2007 versus March 31, 2006
Net Sales
Consolidated sales for the third fiscal year quarter ended March 31,
2007 were $4,422,800, an increase of $3,434,800, or 347.7%, versus comparable
quarter sales of $988,000 for the third quarter of the prior year. The increase
in sales primarily resulted from the $3,400,900 of added sales reported by the
Wireless Asset Management segment, acquired effective June 30, 2006. Revenues
from the RFID Technology segment for the quarter increased to $146,500 from
$85,300, an increase of $61,200 or 71.7% as compared to revenues for the
comparable quarter of the prior year. The improvement in the RFID Technology
segment reflects recent activity on execution of contracts the Company started
during the current fiscal year. Revenues from the Data Storage segment decreased
to $875,400 from $902,700, a decrease of $27,300, or 3%, when compared to sales
in the same quarter of the prior year. The Data Storage segment revenues for
both periods reflect only Excel/Meridian Data ("Excel"), the company's remaining
business in this segment after the sale of Arraid, Inc. during the first quarter
of the current fiscal year. As a result of the adoption of SAB 108 during the
quarter, the Company recorded an adjustment to increase deferred revenue
relative to extended warranty sales. The Company had previously recognized a
portion of its extended warranty revenue in the period of sale, as opposed to
over the term of the warranty coverage. The adjustment, representing the
cumulative effect, decreased net sales in the current quarter by approximately
$150,000. The practice had occurred over a number of years and the effect on
individual prior reporting periods was deemed to be immaterial.
Gross Profit
Gross profit reported during the quarter amounted to $1,316,600, an
increase of $1,044,600, or 384%, when compared to $272,000 reported for the same
quarter of the prior year. Approximately 89% of the increase, or $1,172,700, is
due to gross profit of the Wireless Asset Management segment, acquired in June
of 2006. Gross profit for the RFID Technology segment increased to $42,000 as
compared to $20,300 for the prior year's quarter and is a result of the
additional revenue in the current quarter. The Data Storage segment gross profit
decreased $149,800 to $101,900 compared to $251,700 in the same quarter of the
prior year. This decrease in gross profit is a result of the one-time adjustment
to net sales. Consolidated gross margin increased from 27.5% for the quarter
ended March 31, 2006 to 29.8% for the current quarter. The net improvement in
gross margin resulted from the Wireless Asset Management margin and improved
gross margin of the RFID Technology segment, which increased to 28.7% from 23.8%
for the same quarter of the prior year. The Data Storage segment gross margin
for the quarter ended March 31, 2007 was 11.6% as compared to 27.9% for the same
quarter of the prior fiscal year. Again, the current period gross margin was
negatively impacted by the one-time adjustment mentioned above and therefore is
not considered a trend. Excluding the one-time adjustment, gross margin for the
Data Storage Segment would have been 28.8%. Gross margin can be impacted for
all segments by economic conditions and specific market pressures. As a result,
the margins reported are not considered to be trends.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses, excluding
corporate expenses, for the current quarter increased to $2,118,100, an increase
of $1,120,900, or 112.4%, when compared to $997,200 incurred in the comparable
quarter of fiscal year 2006. The increase was due to the newly acquired Wireless
Asset Management segment which added $1,188,000 in SG&A expenses for the current
quarter. Excluding the Wireless Asset Management segment, SG&A expense decreased
by $67,100, or 6.7%, when compared to the comparable quarter of the prior year.
The decrease resulted primarily from a decrease in RFID Technology
segment expenses of $95,900, or 13.8%, from $692,900 to $597,000 when compared
to the same quarter of the prior year. The reduction was due to approximately
$50,000 of engineering development costs related to new technology products that
was deferred pursuant to FAS No. 86 and reduced marketing expenses. Data Storage
segment operating expenses increased by $28,800, or 9.5%. The increase is
primarily due to increased marketing expenses.
Operating Loss
The Operating Loss for the quarter was ($1,252,200) compared to a loss
of ($1,167,100) for the same quarter of the prior year, an increase of $85,100,
or 7.3%. The increase in Operating Loss is primarily due to the increased loss
in the Data Storage segment resulting from an approximately $150,000 one-time
adjustment to its deferred warranty revenues, discussed above. The Data Storage
segment reported an Operating Loss of ($231,200), compared to ($52,600) reported
in the comparable quarter of the prior year. The Wireless Asset Management
segment has an Operating Loss of ($15,300) for the current quarter; there is no
applicable comparison in the prior year. The RFID Technology segment decreased
its Operating Loss by $117,600 to ($555,000), a decrease of 17.5%, when compared
to the Operating Loss reported in the same quarter of the prior year of
($672,600).
Other Income and Expense
Net interest expense for the quarter increased to $211,800 compared to
interest expense of $23,700 for the same quarter in the prior year. The increase
was primarily due to interest expense in the current quarter on the $4 million
term loan financing the Company completed on September 28, 2006. In addition,
interest expense increased due to increases in the prime rate and an increase in
the minimum borrowing limit of our credit line. Other Income was $17,200 versus
$60,200 reported for the comparable quarter of the prior year which included a
$50,000 recovery of bad debt. The net interest expense and other income resulted
in a Loss From Continuing Operations of ($1,446,800), an increase of $316,200,
or 28%, when compared to ($1,130,600) reported for the quarter ended March 31,
2006.
(Loss) Earnings before Dividends, Interest, Depreciation & Amortization (EBITDA)
The Company believes that (loss) earnings before net interest income,
income taxes, 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 2007 fiscal year third quarter
represents a loss of ($987,300) compared to a loss of ($1,025,900) for the same
quarter of the prior fiscal year, a decrease of 3.7%. A reconciliation of EBITDA
to Loss From Continuing Operations for the quarters ended March 31, 2007 and
2006 is presented below:
EBITDA RECONCILIATION to LOSS FROM CONTINUING OPERATIONS
3 months ended 3 months ended
March 31, March 31,
2007 2006
-------------- --------------
EBITDA $ (987,300) $ (1,025,900)
Net interest expense (211,800) (23,700)
Depreciation and amortization (247,700) (81,000)
-------------- --------------
LOSS FROM CONTINUING OPERATIONS $ (1,446,800) $ (1,130,600)
============== ==============
Dividends
The Company paid quarterly in-kind Series A and Series B Preferred
Stock dividends with values of $335,700 and $281,500 in the quarters ended March
31, 2007 and 2006, respectively.
Net Loss Attributable to Common Stockholders
Net Loss Attributable to Common Stockholders for the quarter ended
March 31, 2007 amounted to ($1,782,500), or ($.10) per share, compared to a loss
of ($1,273,600), or ($.11) 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, 2007 versus March 31, 2006
Net Sales
Consolidated Sales for the nine months ended March 31, 2007 were
$15,115,000, an increase of $11,256,600, or 291.7%, compared to $3,858,400
reported for the comparable period of the previous year. Approximately 95.1%, or
$10,708,600 of the total sales increase, is attributed to the Wireless Asset
Management segment, acquired effective June 30, 2006. The RFID Technology
segment reported sales of $849,500 for the nine months ended March 31, 2007 as
compared to $321,300 for the same period in the prior year, an increase of
$528,200, or 164.4%. The increase in revenue is to due to activity on contracts
the Company started to execute during the current fiscal year. Data Storage
segment revenue increased $19,800, or .6%, for the nine-month period. The Data
Storage segment revenues for both periods reflect only those for Excel/Meridian
Data, the Company's remaining business in this segment. As a result of the
adoption of SAB 108 during the quarter, the Company recorded an adjustment to
increase deferred revenue relative to extended warranty sales. The Company had
previously recognized a portion of its extended warranty revenue in the period
of sale, as opposed to over the term of the warranty coverage. The adjustment,
representing the cumulative effect, decreased net sales in the current quarter
by approximately $150,000. The practice had occurred over a number of years and
the effect on individual prior reporting periods was deemed to be immaterial.
Without this adjustment, the Data Storage segment would have experienced an
increase in sales of approximately 4.8% over the comparable period of the prior
year.
Gross Profit
Gross profit generated during the nine-month period ended March 31,
2007 amounted to $4,942,900, an increase of $3,842,200, or 349.1%, when compared
to $1,100,700 reported for the same period of the prior year. The Wireless Asset
Management segment contributed $3,866,000 of gross profit during the nine-month
period, whereas there is no comparable contribution for the same period of the
prior year. The RFID Technology segment reported gross profit of $262,400, an
increase of $177,600, or 209.4%, when compared to gross profit of $84,800 for
the same period of the prior year. The increase is due to increased revenue for
new system sales during the period and improved gross margin for the segment.
The Data Storage segment reported a decrease in gross profit of $201,400 which
was the result of a decrease in gross margin to 22.9% versus 28.7% in the same
period of the prior year. The decrease in gross margin and gross profit is
primarily due to the one-time adjustment made in the current quarter discussed
above and therefore is not considered a trend. Gross margins from all business
segments can be impacted by economic conditions and specific market pressures.
As a result, the changes in margins reported are not considered to be trends.
Selling, General and Administrative Expenses
Selling, general, and administrative ("SG&A") expenses, excluding
corporate expenses, for the nine months ended March 31, 2007 increased to
$6,454,100, a 108.7% or $3,361,800 increase, when compared to $3,092,300
incurred in the comparable period of fiscal year 2006. The increase was due to
the newly acquired Wireless Asset Management segment which added $3,767,900 in
SG&A expenses for the nine-month period. Excluding the Wireless Asset Management
segment, SG&A decreased by $406,100, or 13.1%, when compared to the comparable
quarter of the prior year. The decrease resulted from a decrease in RFID
Technology segment SG&A expenses of $459,000, or 22.3%, from $2,062,300 to
$1,603,300 when compared to the same nine month period of the prior year. The
reduction was due to approximately $240,000 of engineering development costs
related to new technology products that was deferred pursuant to FAS No. 86 and
reduced marketing expenses. In addition, the nine-months ended March 31, 2006
included a one time charge for the write down of certain marketing assets. The
RFID Technology segment decrease was offset by an increase in Data Storage
segment expenses of $52,900, or 5.1%, due primarily to an increase in
advertising expense related to the promotion of a new product line introduced
during the period.
Corporate expenses for the nine months ended March 31, 2007 of $935,400
reflected a decrease of $188,600, or 16.8%, when compared to the $1,124,000
reported in the comparable nine months of the prior year. The decrease was
primarily due to a settlement with respect to claims originating from the TSIN
litigation that reduced legal fees for the nine months by approximately
$200,000.
Operating Loss
The Operating Loss for the nine-month period was ($2,446,600) compared
to a loss of ($3,115,600) for the same nine-month period of the prior fiscal
year, a decrease of $669,000, or 21.5%. The decreased Operating Loss is due to
the combined improvement in gross profit due to higher sales and decreases in
SG&A expenses, including corporate expenses, as noted earlier. The Wireless
Asset Management segment had an Operating Profit of $98,100 for the nine-month
period, whereas there is no applicable comparison for the same period in the
prior year. The Data Storage segment reported an Operating Loss of ($268,400)
compared to an Operating Loss of ($14,100) in the prior fiscal year and is the
result of reduced gross profit as explained above. The RFID Technology segment
reported an Operating Loss of ($1,340,900) for the nine-month period ended March
31, 2007, as compared to the prior year loss of ($1,977,500), an improvement of
$636,600, or 32.2%. The improvement is due to increased sales and gross profit
combined with decreased SG&A expenses.
Other Income and Expense
Net interest expense for the nine months ended March 31, 2007 amounted
to $551,100 compared to net interest expense of $66,400 for the same nine-month
period in the prior year. The increase resulted from increases in the prime rate
and an increase in the minimum borrowing limit of our credit line. In addition,
the Company realized interest expense during the nine-month period on the $4
million term loan financing it completed on September 28, 2006. Other Income was
$56,800 as compared to $77,300 in the prior nine-month period which included a
$50,000 recovery of bad debt. The net interest expense and other income resulted
in a Loss From Continuing Operations of ($2,940,900) for the nine months ended
March 31, 2007, as compared to a Loss From Continuing Operations of ($3,104,700)
for the same period in the prior year, a decrease of $163,800, or 5.3%.
(Loss) Earnings before Dividends, Interest, Depreciation & Amortization (EBITDA)
The Company believes that (loss) earnings before net interest income,
income taxes, 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 2007 fiscal year nine months ended
March 31, 2007 represents a loss of ($1,656,500) compared to a loss of
($2,737,100) for the same period of the prior fiscal year, a 39.5% decrease. If
the value of stock based compensation charged during the nine-month period of
$127,100 is considered in the EBITDA determination, the loss would have been
reduced to ($1,529,400). A reconciliation of EBITDA to Loss From Continuing
Operations for the nine months ended March 31, 2007 and 2006 is presented below:
EBITDA RECONCILIATION to LOSS FROM CONTINUING OPERATIONS
9 months ended 9 months ended
March 31, March 31,
2007 2006
-------------- --------------
EBITDA $ (1,656,500) $ (2,737,100)
Net interest expense (551,100) (66,400)
Depreciation and amortization (733,300) (301,200)
-------------- --------------
LOSS FROM CONTINUING OPERATIONS $ (2,940,900) $ (3,104,700)
============== ==============
Loss From Discontinued Operations and Dividends
The Company reported a loss from discontinued operations for the
nine-month period ended March 31, 2007 of $83,200, representing the losses
incurred by one of the Data Storage Segment businesses prior to its sale in
September 2006. During the comparable period in the prior year, that business
entity reported an income of $6,500.
The Company paid in-kind Series A and Series B Preferred Stock
dividends with values of $652,900 and $564,600 in the nine months ended March
31, 2007 and 2006, respectively.
Net Loss Attributable to Common Stockholders
Net Loss Attributable to Common Stockholders for the nine months ended
March 31, 2007 amounted to ($3,677,000), or ($.22) per share, compared to a loss
of ($3,662,800), or ($.32) per share, in the comparable period of the prior
year. The Company anticipates improved future operating results in all segments
as the economy improves. 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 liabilities at March 31, 2007 exceeded current
assets by $931,900, resulting in negative working capital and a current ratio of
..89 to 1. The comparable negative net working capital June 30, 2006 was
$7,893,400, reflecting a current ratio of .43 to 1. The improvement in current
ratio at March 31, 2007 versus comparable negative net working capital at June
30, 2006 resulted primarily from the issuance of 3,280,000 shares of Class A
Common Stock in payment of approximately $5.7 million in a deferred stock
payment related to the StarTrak Systems acquisition, the funding from a $4
million term loan, the sale of Arraid, Inc. and the sale of equity, offset by
the funding of operating losses.
Accounts receivable of $2,795,500 at March 31, 2007 reflects an
increase of $1,324,100, or 90%, when compared to the $1,471,400 reported as
consolidated accounts receivable at June 30, 2006 (excludes $289,300 presented
as assets held for sale related to a data storage subsidiary that was sold
during the quarter ended September 30, 2006). The accounts receivable balance at
March 31, 2007 for the Data Storage segment's remaining company represents
twenty-six days' sales in receivables, an increase compared to nineteen days'
sales at June 30, 2006. The increase is due to a higher balance of accounts
receivable for the remaining data storage company based on about the same amount
of sales. The days' sales calculation can be significantly effected 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 March 31, 2007 was $1,937,200 as compared to $919,700 at June 30,
2006, an increase of $1,017,500, or 110.6%. The increase is due to the high
volume of sales for the nine-month period and represents thirty-five days' sales
in receivables. There is no comparative data for the same period of the prior
year since the segment was added effective June 30, 2006; however, the days'
sales in receivables for the quarter ended December 31, 2006 also represented
thirty-five days in receivables.
The accounts receivable balance at March 31, 2007 for the RFID
Technology segment represents eighty-four days' sales in receivables as compared
to seventy-three days' sales in receivables at June 30, 2006. The increase in
days' sales in receivables is primarily due to one past due invoice which was
collected in April 2007.
Consolidated inventories at March 31, 2007 amounted to $3,784,000, an
increase of $1,082,400, or 40.1%, when compared to $2,701,600 at June 30, 2006.
The $2,701,600 June 30, 2006 balance has been reduced by $442,400, the amount
associated with a data storage subsidiary that had been sold. The inventory
balance at March 31, 2007 for the Data Storage segment's remaining company
reflected an inventory turnover of 4.3 compared to an inventory turnover of 3.9
at June 30, 2006. The slight increase in turnover resulted primarily from a
decrease in inventory. The inventory balance at March 31, 2007 for the Wireless
Asset Management segment represents an inventory turnover of 4.7. There is no
comparative data for the nine-month period ended March 31, 2006 since the
segment was added effective June 30, 2006; however, inventory turnover for the
quarter ended December 31, 2006 was 6.3. The reduction in inventory turnover was
due to increased inventory purchases related to new product lines and purchase
of specific inventory components in anticipation of increased sales. The
inventory balance for the Wireless Asset Management segment at March 31, 2007
was $1,612,600 compared to $885,900 at June 30, 2006, an increase of $726,700,
or 82%.
The inventory balance of the RFID Technology segment at March 31, 2007
represents inventory turnover of .59 as compared to .51 at June 30, 2006.
Although inventory is up for the period ended March 31, 2007, the increased
sales during the period still produced a slight improvement to the inventory
turnover. The current inventory levels reflect management's continued projected
revenue increases.
At March 31, 2007, the Company had an outstanding balance of $1,850,000
under a $2.0 million formula-based revolving bank line of credit agreement with
interest calculated at prime plus 2%. The line of credit formula is based upon
current asset values and is used to finance working capital. At March 31, 2007,
the Company had $150,000 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.
In addition, the Company completed a four-year term loan agreement that
provided $4.0 million in additional working capital. The loan requires interest
only payments for the first year and bears interest at prime plus 2.5%. See
Line of Credit and Term Loan Note J for additional discussion of the existing
line of credit and Term loan agreements.
Cash used in operations for the nine-month period ended March 31, 2007
was $5,296,300, an increase of $2,454,300, or 86%, when compared to cash used in
operations of $2,842,000 for the comparable period ended March 31, 2006. The
increase during the nine month period resulted primarily from increases in
accounts receivable and inventories, reductions in accounts payable and accrued
liabilities, offset by increases in deferred revenues.
During the nine months ended March 31, 2007, the Company reported cash
flows from investing activities of $586,800, compared to $53,000 reported for
the same period in the prior fiscal year. The increase is the result of a
current period increase in net cash from assets sold offset by increases in
purchases of property, plant and equipment and goodwill.
Cash provided by financing activities for the nine months ended March
31, 2007 amounted to $3,673,800, an increase of $1,424,800 compared to the
$2,249,000 provided by financing activities for the nine months ended March 31,
2006. The increase resulted primarily from increases in proceeds from net
borrowings.
The Company believes that additional cash resources will be required
for working capital to achieve planned operating results for fiscal year 2007
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, 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 2007. 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 third quarter of fiscal year 2007
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 continues to be a defendant in litigation that relates to
the acquisition, in May of 2002, of substantially all the assets of Technology
Systems International, Inc., a Nevada corporation ("TSIN"), as described in our
Form 10-KSB filed for the year ended June 30, 2006. The court dismissed the
initial suit due to lack of prosecution, but allowed the bankruptcy trustee for
the plaintiff to re-initiate the suit. The Company believes that allowing
re-initiation of the suit was improper and has appealed the order allowing the
suit to be re-initiated to an appellate court. In the meantime the re-started
suit is pending. The Company's management, in consultation with legal counsel,
continues to believe the plaintiff's claims are without merit and the Company
will aggressively defend against the action.
Litigation previously reported as arising from an expired property
lease between the Company's subsidiary, Arraid, Inc., and Arraid Property
L.L.C., a limited liability company, has been concluded at the trial court level
with a order adverse to the Company in an amount of approximately $35,000
(representing less that one percent of the amount claimed by the plaintiffs),
plus certain attorney's fees and costs in the amount of approximately $100,000.
The Company is currently awaiting a judgment and intends to appeal the judgment
when entered. The Company's management, in consultation with legal counsel,
believes the Company will be successful upon the appeal.
The Company has settled litigation against the Company's insurance
carrier with respect to claims originating from the TSIN litigation and has
received payment from the insurance carrier in the amount of $350,000.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the nine months ended March 31, 2007, the Company issued 240,000
shares of Series A Preferred Stock in a private offering, 396,900 shares of
Series A Preferred Stock and 5,700 Shares of Series B Preferred Stock as
dividend in-kind payments, and a total of 3,598,800 shares of Class A Common
Stock including 48,000 shares for the exercise of existing stock options,
214,000 shares for services rendered, including loan fees, 3,280,000 shares
issued pursuant to the StarTrak Deferred Stock obligation and 56,800 shares
issued to convert a note payable to equity.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on January 30, 2007
in Scottsdale, Arizona. The results of proposals considered at the annual
meeting were reported in Item 4 of Form 10-QSB for the quarter ended December
31, 2006 filed on February 14, 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 15, 2007
/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 15, 2007
/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, 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: May 15, 2007
/s/ Robert R. Kauffman
----------------------
Robert R. Kauffman
Chief Executive Officer
/s/ John A. Carlson
----------------------
John A. Carlson
Chief Financial Officer