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 SECURITIE
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EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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For the transition period from to
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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)
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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 November 4,2005 there were 27,485,200 shares, net of treasury
shares, of common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes No X
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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.
ALANCO TECHNOLOGIES, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 2005 and June 30, 2005.........................3
Condensed Consolidated Statements of Operations (Unaudited)
For the three months ended September 30, 2005 and 2004.......4
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
For the three months ended September 30, 2005................5
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the three months ended September 30, 2005 and 2004.......6
Notes to Condensed Consolidated Financial Statements (Unaudited)..........8
Note A - Basis of Presentation and Recent Accounting Pronouncements
Note B - Inventories
Note C - Contracts in Process
Note D - Deferred Revenue
Note E - Loss per Share
Note F - Equity
Note G - Industry Segment Data
Note H - Related Party Transactions
Note I - Line of Credit
Note J - Litigation
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................13
Item 3. Controls and Procedures..........................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................17
Item 2. Changes in Securities............................................17
Item 6. Exhibits.........................................................17
2
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2005 AND JUNE 30, 2005
Sep. 30, 2005 June 30, 2005
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ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 351,200 $ 737,300
Accounts receivable, net 1,130,800 1,091,400
Notes receivable, current 29,600 80,000
Inventories, net 2,264,300 1,902,600
Prepaid expenses and other current assets 412,800 378,200
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Total current assets 4,188,700 4,189,500
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PROPERTY, PLANT AND EQUIPMENT, NET 286,200 273,500
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OTHER ASSETS
Goodwill, net 5,356,300 5,356,300
Other intangible assets 505,300 560,700
Long-term notes receivable, net 6,500 8,000
Net assets held for sale 85,000 100,200
Other assets 53,000 55,700
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Total other assets 6,006,100 6,080,900
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TOTAL ASSETS $ 10,481,000 $ 10,543,900
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,580,300 $ 1,279,600
Billings in excess of cost and est earnings
on uncompleted contracts 3,000 4,200
Deferred revenue, current 15,000 60,100
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Total Current Liabilities 1,598,300 1,343,900
LONG TERM LIABILITIES
Notes payable, long term 1,314,100 1,143,600
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TOTAL LIABILITIES 2,912,400 2,487,500
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Preferred Stock - Series B, 69,700 and
68,000 shares issued and outstanding,
respectively 684,200 667,300
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SHAREHOLDERS' EQUITY
Preferred Stock - Series A Convertible,
2,947,100 and 2,781,200 shares issued
and outstanding, respectively 3,661,500 3,412,700
Common Stock- 27,485,200 and 26,680,200
shares outstanding, net of 500,000
shares of Treasury Stock 72,291,100 71,714,600
Treasury Stock, at cost (375,100) (375,100)
Accumulated deficit (68,693,100) (67,363,100)
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Total shareholders' equity 6,884,400 7,389,100
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TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 10,481,000 $ 10,543,900
============= =============
See accompanying notes to the consolidated financial statements
3
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, (Unaudited)
2005 2004
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NET SALES $ 1,601,600 $ 1,737,200
Cost of goods sold 1,056,700 1,115,800
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GROSS PROFIT 544,900 621,400
Selling, general and administrative expense 1,597,100 1,518,700
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OPERATING LOSS (1,052,200) (897,300)
OTHER INCOME & EXPENSES
Interest expense, net (20,500) (16,300)
Other income, net 8,400 5,000
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LOSS FROM OPERATIONS (1,064,300) (908,600)
Preferred stock dividends - paid in kind (265,700) (236,800)
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NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (1,330,000) $ (1,145,400)
============= =============
NET LOSS PER SHARE - BASIC AND DILUTED
- Net loss attributable to common shareholders $ (0.05) $ (0.05)
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 26,915,400 24,312,600
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See accompanying notes to the consolidated financial statements
4
ALANCO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 (unaudited)
SERIES A
COMMON STOCK PREFERRED STOCK TREASURY STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
----------------------- ---------------------- -------------------- ------------ -----------
Balances, June 30, 2005 27,180,200 $ 71,714,600 2,781,200 $ 3,412,700 500,000 $ (375,100) $(67,363,100) $ 7,389,100
Exercise of options 30,000 11,100 - - - - - 11,100
Exercise of warrants 700,000 560,000 - - - - - 560,000
Shares issued for services 75,000 51,100 - - - - - 51,100
Quarterly stock valuation - (45,700) - - - - - (45,700)
Preferred dividends, paid in
kind - - 165,900 248,800 - - - 248,800
Net loss - - - - - - (1,330,000) (1,330,000)
---------- ------------ --------- ----------- -------- ----------- ------------ -----------
Balances, September 30, 2005 27,985,200 $ 72,291,100 2,947,100 $ 3,661,500 500,000 $ (375,100) $(68,693,100) $ 6,884,400
========== ============ ========= =========== ======== =========== ============ ===========
5
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
2005 2004
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CASH FLOWS FROM OPERATING ACTIVITIES
Loss from operations $ (1,064,300) $ (908,700)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 92,500 82,800
Stock issued for services - 59,900
Income from assets held for sale (8,400) (5,000)
Changes in:
Accounts receivable, net (39,400) (182,200)
Inventories, net (361,700) (55,000)
Costs in excess of billings and estimated
earnings on uncompleted contracts - (21,600)
Prepaid expenses and other current assets (29,300) (51,600)
Accounts payable and accrued expenses 300,700 209,700
Deferred revenue (45,100) (27,200)
Billings and estimated earnings in excess
of costs on uncompleted contracts (1,200) (25,800)
Other assets 2,800 5,200
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Net cash used in operating activities (1,153,400) (919,500)
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CASH FLOWS FROM INVESTING ACTIVITIES
Net cash from assets held for sale 23,600 19,100
Collection of notes receivable, net 51,900 30,000
Purchase of property, plant and equipment (49,800) (34,000)
Patent renewal and other - (1,900)
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Net cash provided by investing activities 25,700 13,200
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See accompanying notes to the consolidated financial statements
6
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, (Continued)
2005 2004
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CASH FLOWS FROM FINANCING ACTIVITIES
Advances on borrowings $ 170,500 $ -
Repayment on borrowings - (3,000)
Net proceeds from equity transactions 571,100 1,100,100
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Net cash provided by financing activities 741,600 1,097,100
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NET INCREASE (DECREASE) IN CASH (386,100) 190,800
CASH AND CASH EQUIVALENTS, beginning of period 737,300 1,975,600
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CASH AND CASH EQUIVALENTS, end of period $ 351,200 $ 2,166,400
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SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Net cash paid during the period for interest $ 20,500 $ 16,700
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Non-Cash Activities:
Value of stocks and warrants issued for
services and prepayments $ 51,100 $ 59,900
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Valuation adjustment $ (45,700) $ -
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Value of warrants issued for credit
line extension $ - $ 23,300
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Series B preferred stock dividend, paid
in kind $ 16,900 $ 15,000
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Series A preferred stock dividend,
paid in kind $ 248,800 $ 221,800
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See accompanying notes to the consolidated financial statements
7
ALANCO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
Note A - Basis of Presentation and Recent Accounting Pronouncements
Alanco Technologies, Inc., an Arizona corporation ("Alanco" or
"Company"), operates in two business segments: Computer Data Storage Segment
and RFID Technology Segment.
The unaudited condensed consolidated balance sheet as of September 30,
2005, the related unaudited condensed consolidated statements of operations for
the three months ended September 30, 2005 and the related unaudited condensed
consolidated statement of cash flows for the three months ended September 30,
2005 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, 2005, Annual Report 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.
All stock options issued to employees have an exercise price not less
than the fair market value of the Company's Common Stock on the date of grant.
In accordance with accounting for such options utilizing the intrinsic value
method under APB 25, there is no related compensation expense recorded in the
Company's financial statements for the three months ended September 30, 2005 and
2004. Had compensation cost for stock-based compensation been determined based
on the fair value of the options at the grant dates consistent with the method
of SFAS 123, the Company's net loss and loss per share would have been increased
to the pro forma amounts presented below.
8
ALANCO TECHNOLOGIES, INC.
3 months ended September 30,
2005 2004
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Net loss, as reported $ (1,330,000) $ 1,145,400)
Deduct: Total stock-based Employee compensation
expense determined under fair value based
methods for all awards, net of related tax
effects $ (358,900) $ (43,500)
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Pro forma net loss $ (1,688,900) $ (1,188,900)
============= =============
Net loss per common share, basic and diluted
As reported $ (0.05) $ (0.05)
============= =============
Pro forma $ (0.06) $ (0.05)
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Weighted Average Shares Outstanding,
Basic and Diluted 26,915,400 24,312,600
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Pro Forma Weighted Average Shares Outstanding,
Basic and Diluted 26,970,100 24,332,200
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During the three months ended September 30, 2005, the Company granted employee
stock options to purchase 1,435,000 shares of the Company's Class A Common Stock
at an average purchase price of $0.84, market price on date of grant. The fair
value of option grants is estimated as of the date of grant, in accordance with
SFAS 123, utilizing the Black-Scholes option-pricing model, with the assumptions
substantively utilized in the year-end financial statements.
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 November 2004, the FASB issued Statement
No. 151 ("SFAS 151"), "Inventory Cost - An Amendment of ARB No. 43, Chapter 4."
SFAS 151 clarifies accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material. It requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of abnormal. Currently, we do not have any inventory items that fall
into the classifications discussed; accordingly, adoption of SFAS 151 does not
have a significant impact on our financial statements.
In December 2004, the FASB issued Statement No. 152 ("SFAS 152"), "Accounting
for Real Estate Time-Sharing Transactions -- An Amendment of Statements 66 and
67." SFAS 152 amends SFAS 66 and 67 to reference the financial accounting and
reporting guidance for real estate time-sharing transactions and to state that
the guidance for incidental operations and costs incurred to sell real estate
projects does not apply to real estate time-sharing transactions. SFAS 152 is
effective for financial statements for fiscal years beginning after June 15,
2005. Currently, the Company does not have any real estate transactions.
Accordingly, adoption of SFAS 152 does not have a significant impact on our
financial statements.
In December 2004, the FASB issued Statement No. 153 ("SFAS 153"), "Exchanges of
Nonmonetary Assets - An Amendment of APB Opinion No. 29." SFAS 153 amends APB
Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. Adoption of SFAS 153 does not
have a significant impact on our financial statements.
9
ALANCO TECHNOLOGIES, INC.
In December 2004, the FASB issued Statement No. 123R ("SFAS 123R"), "Share-Based
Payment." This Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
It requires that the fair-value-based method be used to account for these
transactions for all public entities. This Statement is effective for small
business issuers for the first reporting period after December 15, 2005, subject
to additional extensions granted by the SEC, and will effect any stock-based
compensation for options issued after that date, or not vested as of that date.
In May 2005, the FASB issued Statement No. 154 ("SFAS 154"), "Accounting Changes
and Error Corrections." SFAS 154 replaces APB Opinion No. 20, ("APB 20") and
SFAS No. 3 to require retrospective application of changes to all prior period
financial statements so that those financial statements are presented as if the
current accounting principle had always been applied. APB 20 previously required
most voluntary changes in accounting principles to be recognized by including in
net income of the period of change the cumulative effect of changing to the new
accounting principle. In addition, SFAS 154 carries forward without change the
guidance contained in APB 20 for reporting a correction of an error in
previously issued financial statements and a change in accounting estimate. SFAS
154 is effective for changes and corrections made after January 1, 2006, with
early adoption permitted. The Company is currently not contemplating changes
that would be impacted by SFAS 154.
Note B - Inventories
Inventories are recorded at the lower of cost or market. The
composition of inventories as of September 30, 2005 and June 30, 2005 are
summarized as follows:
September 30, June 30,
2005 2005
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(unaudited)
Raw materials and purchased parts $ 2,403,300 $ 2,011,900
Work-in-progress 91,700 106,000
Finished goods 99,200 99,300
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2,594,200 2,217,200
Less reserves for obsolescence (329,900) (314,600)
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$ 2,264,300 $ 1,902,600
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Note C - Contracts In Process
Costs incurred, estimated earnings and billings in the RFID Technology
segment, related to contracts for the installation of TSI PRISM system in
process at September 30, 2005 and June 30, 2005 consist of the following:
September 30, June 30,
2005 2005
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(unaudited)
Costs incurred on uncompleted contracts $ 64,300 $ 34,100
Estimated gross profit earned to date 9,700 1,700
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Revenue earned to date 74,000 35,800
Less Billing to date (77,000) (40,000)
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Billing in excess of costs and
estimated earnings $ (3,000) $ (4,200)
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10
ALANCO TECHNOLOGIES, INC.
Note D - Deferred Revenue
Deferred Revenues at September 30, 2005 and June 30, 2005 consist of
the following:
September 30, June 30,
2005 2005
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(unaudited)
Extended warranty revenue $ 15,000 $ 60,100
Less - current portion (15,000) (60,100)
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Deferred revenue - long term $ - -
============= =============
Note E - Loss Per Share
Basic 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 September
30, 2005 there were 3,690,000 potentially dilutive securities outstanding.
Note F - Equity
During the three months ended September 30, 2005, the Company issued a
total of 805,000 shares of the Company's Class A Common Stock. Included were
730,000 shares issued upon exercise of outstanding warrants and options
generating $571,100 in proceeds to the Company. In addition, the Company granted
75,000 shares, valued at fair market value on date of issue of $51,100, in
exchange for future services to be rendered to the Company.
During March 2005, the Company entered into a technology license
agreement with a developer of RFID real-time location services technology
utilizing 2.4 GHz wireless networking standards. In conjunction with the
execution of the license agreement, the Company issued 250,000 shares of the
Company's Class A Common Stock, the value of which may be applied to future
royalty payments and inventory purchases. The definitive value for the 250,000
shares issued will be determined at market value on the effective date of the
applicable stock registration statement; however, at September 30, 2005, the
value of the issued shares was determined to be $175,000, based upon the closing
market price on September 30, 2005, of $.70 per share. At June 30, 2005, the
stock had been valued at $220,700, resulting in a quarterly valuation reduction
of $45,700.
The Company modified, during the quarter ended September 30, 2005, the
exercise price and expiration date of warrants granted to four institutional
investors to purchase a total of 700,000 shares of the Company's Class A Common
Stock. The warrants were granted in conjunction with a private placement
completed in April 2004. The Company modified the exercise price from the
formula base to $.80 per share. The warrants were to expire on August 1, 2005,
and were modified to expire on September 1, 2005. The warrants were exercised on
August 31, 2005, resulting in net proceeds to the Company of $560,000.
Subsequent to September 30, 2005, the Company reduced the exercise
price from $1.00 per share to $.70 per share for warrants to purchase 1,450,000
shares of the Company's Class A Common Stock, granted to a group of equity
investors in conjunction with a private placement in October 2002. The $.70
11
ALANCO TECHNOLOGIES, INC.
exercise price represented a value approximately three percent greater than
market on the date the warrant strike price was modified. Warrants to purchase
600,000 (43%) of the 1,450,000 shares were held by officers and directors of the
Company, including warrants to purchase 100,000 shares held by Robert R.
Kauffman, CEO, Director and greater than five percent (5%) owner of the Company
and warrants to purchase 400,000 shares controlled by Don Anderson, a Director
and greater than five percent (5%) owner of the Company. The warrants expire on
December 31, 2005.
The Company declared and paid dividends-in-kind on the Company's
preferred shares through the issuance of 165,900 shares of Series A Preferred
Stock valued at $248,800 and 1,700 shares of Series B Preferred Stock valued at
$16,900. The Preferred Stocks are more fully discussed in the Form-10KSB for the
year ended June 30, 2005.
Note G -Industry Segment Data
Information concerning operations by industry segment follows (unaudited):
Three Months ended 09/30
2005 2004
------------- -------------
Revenue
Data Storage $ 1,464,600 $ 1,365,700
RFID Technology 137,000 371,500
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Total Revenue 1,601,600 1,737,200
============= =============
Gross Profit
Data Storage 510,000 479,900
RFID Technology 34,900 141,500
------------- -------------
Total Gross Profit 544,900 621,400
------------- -------------
Gross Margin
Data Storage 34.8% 35.1%
------------- -------------
RFID Technology 25.5% 38.1%
------------- -------------
Overall Gross Margin 34.0% 35.8%
------------- -------------
Selling, General and Administrative Expense
Data Storage 562,100 445,200
RFID Technology 673,300 690,000
------------- -------------
Total Segment Operating Expense 1,235,400 1,135,200
------------- -------------
Operating Profit (Loss)
Data Storage (52,100) 34,700
RFID Technology (638,400) (548,500)
Corporate Expense, net (361,700) (383,500)
------------- -------------
Operating Loss $ (1,052,200) $ (897,300)
============= =============
Depreciation and Amortization
Data Storage 6,100 3,600
RFID Technology 85,500 78,500
Corporate 900 700
------------- -------------
Total Depreciation and Amortization $ 92,500 $ 82,800
============= =============
12
ALANCO TECHNOLOGIES, INC.
Note H - Related Party Transactions
The Company has a $1.5 million line of credit agreement ("Agreement"),
more fully discussed in the Company's Form 10-KSB for the year ended June 30,
2005, 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 - F Equity for discussion of modification to warrants granted to a group of
equity investors, including entities Mr. Anderson controls.
Note I - Line of Credit
At September 30, 2005, the Company had an outstanding balance under the
line of credit agreement of $1,000,000. The balance is under a $1.5 million line
of credit agreement with a private trust ("Lender"), entered into in June 2002
and last modified on June 29, 2005. Under the Agreement, the Company must
maintain a minimum balance due under the line of at least $1,000,000 through the
July 1, 2007 expiration date. As such, the $1,000,000 due under the line of
credit agreement is recorded as Notes payable, long term. At September 30, 2005,
the Company had $500,000 available under the line of credit agreement.
Note J - 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. No significant new activity
has occurred subsequent to our report of litigation in our Form 10-KSB filed for
the year ended June 30, 2005. Due to internal governance issues affecting the
plaintiff, the litigation has been indefinitely stayed. The Company's
management, in consultation with legal counsel, believes 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 deemed immaterial. The Company intends to pursue
legal expense reimbursement from both the Company's insurance carrier and the
Plaintiffs in the litigation matters.
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
G - Segment Reporting to the Condensed Consolidated Financial Statements.
13
ALANCO TECHNOLOGIES, INC.
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, 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 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 over a 90-day completion period) in both
the Data Storage Segment and the RFID Technology Segment 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.
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 09/30/05 versus 09/30/04
Sales
Consolidated sales for the quarter ended September 30, 2005 was
$1,601,600, a decrease of $135,600, or 7.8%, when compared to $1,737,200 for the
comparable quarter of the prior year. The decrease resulted from a sales
decrease in the RFID Technology reporting segment of $234,500, from $371,500 for
the quarter ended September 30, 2004 to $137,000 for the current quarter. The
Data Storage segment increased sales by 7.2%, to $1,464,600 from $1,365,700
reported for the quarter ended September 30, 2004. The increase in Data Storage
segment sales compared to the previous year resulted from increased demand for
the Company's data storage products as companies increased technology
expenditures in reaction to improving economic conditions. Sales of the RFID
Technology segment decreased due to a reduction in current contract in progress
revenue resulting from the continued prison contract and funding postponements
caused by fiscal budgetary constraints.
Gross Profit and Operating Expenses
Gross profit reported during the quarter amounted to $544,900, a
decrease of $76,500, or 12.3%, when compared to $621,400 reported for the same
quarter of the prior year. The decrease in gross profit resulted from reduced
sales of the RFID Technology segment. Consolidated gross margins decreased from
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ALANCO TECHNOLOGIES, INC.
35.8% for the quarter ended September 30, 2004 to 34.0% for the current quarter.
The decrease in gross margin resulted from the minimal sales of the RFID
Technology segment which distorts the gross margin percentage and a change in
product mix in the Data Storage segment to lower gross margin products resulting
in a gross margin reduction to 34.8% from 35.1% for the same quarter of the
prior year.
Selling, general and administrative expenses for the current quarter
increased to $1,597,100, a $78,400 increase, or 5.2%, when compared to
$1,518,700 incurred in the comparable quarter of fiscal year 2004. The major
component of the increase was an increase of approximately $117,000 in sales and
administrative expenses related to Data Storage segment sales growth, offset by
small reductions in selling, general and administrative expenses for the RFID
Technology segment and a reduction of corporate expenses. The selling, general
and administrative expenses reflected an increase in unallocated engineering
project expenses of approximately $45,000, increased sales and sales support
expenses of approximately $65,000.
Operating Loss
The Operating Loss for the quarter was ($1,052,200) compared to a loss
of ($897,300) for the same quarter of the prior year, an increase of $154,900,
or 17.3%. The increased Operating Loss resulted from the RFID Technology segment
increasing its Operating Loss to ($638,400), an increase of $89,900, or 16.4%,
when compared to the Operating Loss reported in the same quarter of the prior
year of ($548,500), and from the Data Storage segment reporting a Operating Loss
of ($52,100), compared to an Operating profit of $34,700 reported in the
comparable quarter of the prior year.
Interest Expense, Other Income and Dividends Expense
Net interest expense for the quarter amounted to $20,500 compared to
interest expense of $16,300 for the same quarter in the prior year. The interest
expense increase resulted from increases in the prime rate, and an increase in
the minimum borrowing limit of our credit line. Other Income increased to $8,400
from $5,000 reported for the comparable quarter of the prior year. The Company
paid quarterly in-kind Series A and Series B Preferred Stock dividends with
values of $265,700 and $236,800 in the quarters ended September 30, 2005 and
2004, respectively.
Net Loss Attributable to Common Stockholders
Net Loss Attributable to Common Stockholders for the quarter ended
September 30, 2005 amounted to ($1,330,000), or ($.05) per share, compared to a
loss of ($1,145,400), or ($.05) per share, in the comparable quarter of the
prior year. Although the Company has reported increased operating losses in both
the RFID Technology segment and its Data Storage segment, it anticipates
improved future operating results in both segments as the economy improves.
However, actual results in both the Data Storage segment and the RFID Technology
segments may be affected by unfavorable economic conditions and reduced capital
spending budgets. If the economic conditions in the United States worsen or if a
wider or 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 September 30, 2005 exceeded current
liabilities by $2,590,400, resulting in a current ratio of 2.62 to 1. At June
30, 2005 the Company's current assets exceeded current liabilities by
$2,845,600, reflecting a current ratio of 3.12 to 1. The decrease in the current
ratio at September 30, 2005 when compared to June 30, 2005 resulted primarily
15
ALANCO TECHNOLOGIES, INC.
from funding operating losses during the period. Accounts receivable of
$1,130,800 at September 30, 2005, reflects an increase of $39,400, or 3.6%, when
compared to the $1,091,400 reported as consolidated accounts receivable at June
30, 2005. The accounts receivable balance at September 30, 2005 represented
sixty-four days' sales in receivables compared to fifty-five days' sales at June
30, 2005.
Consolidated inventories at September 30, 2005 amounted to $2,264,300,
an increase of $361,700, or 19.0%, when compared to $1,902,600 at June 30, 2005.
The September 30, 2005 reflects an inventory turnover of 1.9 compared to an
inventory turnover of 3.8 reported at June 30, 2005. Although the September 30,
2005 inventory balance of $2,264,300 reflects a significant increase from the
inventory balance at June 30, 2005 of $1,902,600, it reflects a slight decrease
from the $2,337,300 reported as of September 30, 2004. The current inventory
levels reflect management's continued anticipated revenue increases for both the
Data Storage segment and the RFID Technology segment.
At September 30, 2005, the Company had an outstanding balance of
$1,000,000 under a $1.5 million formula-based revolving bank line of credit
agreement with interest calculated at prime plus 2%. The line of credit
agreement formula is based upon current asset values and is used to finance
working capital. At September 30, 2005, the Company had $500,000 available under
the line of credit. See Line of Credit Footnote I for additional discussion of
the existing line of credit agreement.
Cash used in operations for the three-month period ended September 30,
2005 was $1,153,400, an increase of $233,900 when compared to cash used in
operations of $919,500 for the comparable period ended September 30, 2004. The
increase resulted primarily from increases in inventory levels during the
current quarter, compared to an increase in inventory levels during the
comparable quarter of the prior year, offset somewhat by increases in accounts
payable and accrued expense that exceeded the increase in the quarter ended
September 30, 2004.
During the three months ended September 30, 2005, the Company reported
cash flows from investing activities of $25,700, compared to $13,200 reported
for the three months ended September 30, 2004. The increase is primarily the
result of collection of notes receivable.
Cash provided by financing activities for the three months ended
September 30, 2005 consisted of $571,100 in net proceeds received from the
exercise of warrants and options, and $170,500 borrowed against the credit
line. Cash provided by financing activities during the same period in the prior
fiscal year included the net proceeds from the sale of common and preferred
stock of $1,100,100, offset by net repayment on borrowings during the period of
$3,000.
The Company believes that additional cash resources may be required for
working capital to achieve planned operating results for fiscal year 2006 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 September 30, 2005. If additional
working capital was required and the Company was 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 2006.
See Footnote F - Equity for additional information related to working capital
raised by the Company during the three months ended September 30, 2005,
necessary to achieve planned operating results for the current fiscal year
results.
Item 3 - CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to
ensure that it is able to collect the information it is required to disclose in
the reports it files with the Securities and Exchange Commission (SEC), and to
process, summarize and disclose this information within the time periods
specified in the rules of the SEC. Based on various evaluations of the Company's
disclosure controls and procedures, some of which occurred during the 90 days
prior to the filing date of this report, the Chief Executive and Chief Financial
Officers believe that these controls and procedures are effective to ensure that
the Company is able to collect, process and disclose the information it is
required to disclose in the reports it files with the SEC within the required
periods.
The Company also maintains a system of internal controls designed to
provide reasonable assurance that: transactions are executed in accordance with
management's general or specific authorization; transactions are recorded as
necessary (1) to permit preparation of financial statements in conformity with
generally accepted accounting principles, and (2) to maintain accountability for
assets. Access to assets is permitted only in accordance with management's
general or specific authorization; and the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
16
ALANCO TECHNOLOGIES, INC.
Since the date of the most recent evaluation of the Company's internal
controls by the Chief Executive and Chief Financial Officers, there have been no
significant changes in such controls or in other factors that could have
significantly affected those controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
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. No significant new activity
has occurred subsequent to our report of litigation in our Form 10-KSB filed for
the year ended June 30, 2005. Due to internal governance issues affecting the
plaintiff, the litigation has been indefinitely stayed. The Company's
management, in consultation with legal counsel, believes the plaintiff's claims
are without merit and the Company will aggressively defend the actions.
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 deemed immaterial. The Company intends to pursue
legal expense reimbursement from both the Company's insurance carrier and the
Plaintiffs in the litigation matters.
Item 2. CHANGES IN SECURITIES
During the three months ended September 30, 2005, the Company issued
165,900 shares of Series A Preferred Stock and 1,700 Shares of Series B
Preferred Stock as dividend in-kind payments, 730,000 shares of Class A Common
Stock for the exercise of existing warrants and options and 75,000 shares of
Common Stock for services rendered.
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
17
ALANCO TECHNOLOGIES, INC.
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 registrant's other certifying officer(s) 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(s) 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: November 11, 2005
/s/ Robert R. Kauffman
---------------------
Robert R. Kauffman
Chairman and Chief Executive Officer
18
ALANCO TECHNOLOGIES, INC.
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 registrant's other certifying officer(s) 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(s) 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: November 11, 2005
/s/ John A. Carlson
---------------------
John A. Carlson
Executive Vice President and Chief Financial Officer
19
ALANCO TECHNOLOGIES, INC.
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 September 30, 2005 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: November 11, 2005
/s/ Robert R. Kauffman
----------------------
Robert R. Kauffman
Chief Executive Officer
/s/ John A. Carlson
----------------------
John A. Carlson
Chief Financial Officer
20