ALANCO TECHNOLOGIES, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
_ X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
----------------
____TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________ to ____________
Commission file number 0-9347
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ALANCO TECHNOLOGIES, INC.
---------------------------
(Exact name of registrant as specified in its charter)
Arizona
---------
(State or other jurisdiction of incorporation or organization)
86-0220694
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(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
----------------
(Registrant's telephone number)
______________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements in the past 90 days. X Yes ___ No
-----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ___ Accelerated filer ___
Non-accelerated file ___ Smaller reporting company X
-----
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act)
___ Yes X No
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of May 11, 2010 there were 36,224,100 shares, net of treasury shares,
------------------------------------------------------------------------
of common stock outstanding.
----------------------------
1
ALANCO TECHNOLOGIES, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2010 (Unaudited)and June 30, 2009 4
Condensed Consolidated Statements of Operations
(Unaudited) For the three months ended March 31,
2010 and 2009 5
Condensed Consolidated Statements of Operations
(Unaudited) For the nine months ended March 31,
2010 and 2009 6
Condensed Consolidated Statements of Changes in
Shareholders' Equity (Unaudited)For the nine months
ended March 31, 2010 7
Condensed Consolidated Statements of Cash Flows
(Unaudited) For the nine months ended March 31,
2010 and 2009 8
Notes to Condensed Consolidated Financial Statements (Unaudited) 10
Note A - Basis of Presentation and Recent Accounting
Pronouncements
Note B - Stock-Based Compensation
Note C - Inventories
Note D - Assets Held For Sale
Note E - Deferred Revenue
Note F - Loss per Share
Note G - Equity
Note H - Related Party Transactions
Note I - Line of Credit and Term Loan
Note J - Litigation
Note K - Subsequent Events
Note L - Liquidity
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 28
Item 4T. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Unregistered Sale of Equity Securities and Use of
Proceeds 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits 31
2
ALANCO TECHNOLOGIES, INC.
Forward-Looking Statements: 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. Forward-
looking statements include statements concerning plans, objectives, goals,
strategies, future events or performance, and underlying assumptions and other
statements, which are other than statements of historical facts. The words
"believe," "may," "estimate," "continue," "anticipate," "intend," "should,"
"plan," "could," "target," "potential," "is likely," "will," "expect" and
similar expressions, as they relate to the Company are intended to identify
forward-looking statements within the meaning of the "safe harbor" provisions of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. From time to time, the Company may
publish or otherwise make available forward-looking statements of this nature.
All such forward-looking statements are based on the expectations of management
when made and are subject to, and are qualified by, 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, among others, that could affect the outcome of the
Company's forward-looking statements: 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; unfavorable result of current pending 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; the ability to maintain satisfactory relationships with suppliers;
federal and/or state regulatory and legislative actions; customer preferences
and spending patterns; the ability to implement or adjust to new technologies
and the ability to secure and maintain key contracts and relationships. New risk
factors emerge from time to time and it is not possible to accurately predict
all such risk factors, nor can we assess the impact of all such risk factors on
our business or the extent to which any risk factor, or combination of risk
factors, may cause results to differ materially from those contained in any
forward-looking statements. Except as otherwise required by applicable law, we
undertake no obligation to publicly update or revise any forward-looking
statements or the risk factors described in this Quarterly Report or in the
documents we incorporate by reference, whether as a result of new information,
future events, changed circumstances or any other reason after the date of this
Quarterly Report on Form 10-Q.
3
ALANCO TECHNOLOGIES, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2010 AND JUNE 30, 2009
March 31, 2010 June 30, 2009
------------ ------------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 214,100 $ 413,500
Accounts receivable, net 3,061,500 2,303,000
Inventories, net 1,024,700 1,354,800
Assets held for sale 6,593,200 7,574,100
Prepaid expenses and other current assets 501,500 631,100
------------ ------------
Total current assets 11,395,000 12,276,500
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 246,300 320,900
------------ ------------
OTHER ASSETS
Goodwill, net 12,575,400 12,575,400
Other intangible assets, net 877,900 1,201,100
Other assets 223,500 344,900
------------ ------------
Total other assets 13,676,800 14,121,400
------------ ------------
TOTAL ASSETS $ 25,318,100 $ 26,718,800
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,790,000 $ 2,539,300
Dividends payable 29,600 106,500
Notes payable, current 2,631,600 1,716,500
Capital leases, current 17,300 15,100
Customer advances 120,400 192,900
Liabilites related to assets held for sale 1,721,200 2,248,400
Deferred revenue, current 329,800 248,300
------------ ------------
Total current liabilities 7,639,900 7,067,000
LONG TERM LIABILITIES
Notes payable, long term 4,200,000 3,394,700
Capital leases, long term 9,900 23,200
Deferred revenue, long term 290,600 256,000
------------ ------------
TOTAL LIABILITIES 12,140,400 10,740,900
------------ ------------
Preferred Stock - Series B, 108,400 and
100,700 shares issued and outstanding,
respectively 1,071,600 994,500
------------ ------------
SHAREHOLDERS' EQUITY
Preferred - Series D - 500,000 shares
authorized, 134,200 and 285,500 shares
outstanding, respectively 1,333,800 2,847,700
Preferred - Series E Convertible - 750,000
shares authorized, 235,000 and 15,000 shares
outstanding, respectively 977,300 67,500
Common Stock - 35,511,300 and 32,447,600 shares
outstanding, net of 16,000 shares of Treasury
Stock outstanding at both March 31, 2010
and June 30, 2009 106,875,300 105,570,200
Accumulated deficit (97,080,300) (93,502,000)
------------ ------------
Total shareholders' equity 12,106,100 14,983,400
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 25,318,100 $ 26,718,800
============ ============
See accompanying notes to the condensed consolidated financial statements
4
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, (unaudited)
2010 2009
------------- -------------
NET SALES $ 3,825,800 $ 3,758,000
Cost of goods sold 2,188,400 2,784,100
------------- -------------
GROSS PROFIT 1,637,400 973,900
Selling, general and administrative expense 1,437,400 1,182,000
Corporate expense 227,100 309,100
Amortization of stock-based compensation 72,500 113,100
Depreciation and amortizaton 133,000 129,400
------------- -------------
OPERATING LOSS (232,600) (759,700)
OTHER INCOME & (EXPENSES)
Interest expense, net (277,400) (190,600)
Other income (expense), net (800) (500)
------------- -------------
LOSS FROM CONTINUING OPERATIONS (510,800) (950,800)
LOSS FROM DISCONTINUED OPERATIONS (510,000) (56,900)
------------- -------------
NET LOSS (1,020,800) (1,007,700)
Preferred stock dividends (43,600) (127,200)
------------- -------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (1,064,400) $ (1,134,900)
============= =============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
- Continuing operations $ (0.01) $ (0.03)
============= =============
- Discontinued operations $ (0.01) $ (0.00)
============= =============
- Preferred stock dividends $ (0.00) $ (0.00)
============= =============
- Net loss per share attributable to
common shareholders $ (0.03) $ (0.04)
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
- Basic and diluted 34,654,400 31,932,200
============= =============
See accompanying notes to the condensed consolidated financial statements
5
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, (unaudited)
2010 2009
------------- -------------
NET SALES $ 10,430,000 $ 10,460,300
Cost of goods sold 5,935,500 7,739,500
------------- -------------
GROSS PROFIT 4,494,500 2,720,800
Selling, general and administrative expense 4,122,400 3,843,800
Corporate expense 657,700 616,100
Amortization of stock-based compensation 311,400 339,400
Depreciation and amortizaton 403,100 365,800
------------- -------------
OPERATING LOSS (1,000,100) (2,444,300)
OTHER INCOME & (EXPENSES)
Interest expense, net (657,300) (702,700)
Other income (expense), net (2,700) (185,300)
------------- -------------
LOSS FROM CONTINUING OPERATIONS (1,660,100) (3,332,300)
LOSS FROM DISCONTINUED OPERATIONS (1,616,400) (157,800)
------------- -------------
NET LOSS (3,276,500) (3,490,100)
Preferred stock dividends (301,800) (347,300)
------------- -------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (3,578,300) $ (3,837,400)
============= =============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
- Continuing operations $ (0.05) $ (0.11)
============= =============
- Discontinued operations $ (0.05) $ (0.00)
============= =============
- Preferred stock dividends $ (0.01) $ (0.01)
============= =============
- Net loss per share attributable to
common shareholders $ (0.11) $ (0.12)
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
- Basic and diluted 33,720,200 31,669,000
============= =============
See accompanying notes to the condensed consolidated financial statements
6
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2010 (unaudited)
SERIES D SERIES E
COMMON STOCK PREFERRED STOCK PREFERRED STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
----------------------- ------------------ ------------------ ------------- -------------
Balances, June 30, 2009 32,447,600 $105,570,200 285,500 $2,847,700 15,000 $ 67,500 $(93,502,000) $ 14,983,400
Shares issued for services 30,000 14,800 - - - - - 14,800
Shares issued for payment on notes
and interest 2,542,800 816,000 - - - - - 816,000
Value of stock based compensation - 341,800 - - - - - 341,800
Private offering, net of expenses 200,000 52,200 - (1,300) 220,000 909,800 - 960,700
Series D Preferred dividends, paid
as indicated 290,900 105,300 17,800 178,500 - - - 283,800
Series D Preferred Stock converted
to debt - - (169,100)(1,691,100) - - - (1,691,100)
Series B Preferred dividends, paid
in kind - - - - - - (77,000) (77,000)
Series D Preferred dividends, paid
or accrued - - - - - - (194,100) (194,100)
Series E preferred dividends, paid
or accrued - - - - - - (30,700) (30,700)
NASDAQ listing fees and other - (25,000) - - - - - (25,000)
Net loss - - - - - - (3,276,500) (3,276,500)
---------- ------------ -------- ---------- ------- --------- ------------- --------------
Balances, March 31, 2010 35,511,300 $106,875,300 134,200 $1,333,800 235,000 $ 977,300 $(97,080,300) $ 12,106,100
========== ============ ======== ========== ======= ========= ============= ==============
See accompanying notes to the consolidated financial statements
7
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, (unaudited)
2010 2009
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations $ (3,276,500) $ (3,490,100)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 478,200 442,400
Stock-based compensation 341,800 360,800
Stock issued for services 14,800 23,600
Treasury share adjustment related to
TSIN acquisition - 187,500
Loss on sale of data storage assets 48,700 -
Impairment charge 325,000 -
Notes payable/receivable write-off
associated with TSIN settlement, net - (284,500)
Interest converted to equity 62,500 -
Fees and interest paid with debt 108,100 -
Changes in operating assets and liabilities:
Accounts receivable, net (758,500) 321,600
Inventories, net 370,500 1,698,400
Costs in excess of billings and estimated
earnings on uncompleted contracts 56,600 (373,200)
Prepaid expenses and other current assets 186,200 (738,100)
Accounts payable and accrued expenses (445,100) (424,800)
Deferred revenue (13,700) 101,900
Billings and estimated earnings in excess
of costs on uncompleted contracts (146,900) (112,600)
Customer advances 677,500 10,200
Other assets 143,600 278,400
------------ ------------
Net cash used in operations (1,827,200) (1,998,500)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (15,200) (220,500)
Cash received for sale of net data storage assets 61,500 -
Patent renewal and other - (12,700)
------------ ------------
Net cash provided (used) in investing
activities $ 46,300 $ (233,200)
------------ ------------
See accompanying notes to the condensed consolidated financial statements
8
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE NINE MONTHS ENDED MARCH 31, (continued)
2010 2009
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) advances on line of credit 162,700 1,250,000
Repayment on borrowings (305,500) (1,627,600)
Proceeds from debt 812,700 500,000
Repayment of capital lease (11,100) (8,300)
Proceeds from sale of equity instruments 965,500 2,049,200
Cash dividends paid (17,800) (125,000)
Other (25,000) (44,300)
------------ ------------
Net cash provided by financing activities 1,581,500 1,994,000
------------ ------------
NET DECREASE IN CASH (199,400) (237,700)
CASH AND CASH EQUIVALENTS, beginning of period 413,500 726,900
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 214,100 $ 489,200
============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Net cash paid during the period for interest $ 323,300 $ 261,100
============ ============
Non-Cash Activities:
Value of shares issued for services $ 14,800 $ 65,800
============ ============
Treasury stock adjustment related to TSIN
acquisition $ - $ 187,500
============ ============
Write-off of contingent notes payable
- TSIN settlement $ - $ 314,100
============ ============
Write-off of notes receivable-TSIN settlement $ - $ 29,600
============ ============
Shares issued in acquisition $ - $ 72,900
============ ============
Fixed assets purchased with a capital lease $ - $ 50,000
============ ============
Value of stock & warrants issued for line of
credit amendment $ - $ 62,400
============ ============
Value of stock issued for payment of notes $ 748,700 $ -
============ ============
Value of stock issued for payment of interest $ 67,300 $ -
============ ============
Dividends payable $ 29,600 $ 103,600
============ ============
Series B preferred stock dividend,
paid in kind $ 77,000 $ 69,600
============ ============
Series D preferred stock dividend,
paid in kind $ 178,500 $ -
============ ============
Series D preferred stock dividend,
paid in common $ 105,300 $ 49,100
============ ============
Series D preferred stock converted
to line of credit $ 1,691,100 $ -
============ ============
Net data storage assets sold $ 110,200 $ -
============ ============
See accompanying notes to the condensed consolidated financial statements
9
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note A - Basis of Presentation and Recent Accounting Pronouncements
Alanco Technologies, Inc., an Arizona corporation ("Alanco" or
"Company"), has in recent years reported three business segments: Data Storage,
Wireless Asset Management and RFID Technology. During fiscal year ended June 30,
2009, the Company implemented a plan to divest the operations of the Company's
Data Storage segment and reinvest the proceeds into the Company's Wireless Asset
Management and RFID Technology segments. The Company expanded its divestiture
plan during the quarter ended September 30, 2009 to include the RFID Technology
segment. During the current quarter ended March 31, 2010, the Company sold
assets of its Data Storage segment. Accordingly, the "Assets Held for Sale" and
"Liabilities Related to Assets Held for Sale" presented in the attached balance
sheets as of March 31, 2010 consist of the RFID Technology segment and as of
June 30, 2009 consist of both the Data Storage and the RFID Technology segment
assets and liabilities.
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-Q. 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, 2009 Annual Report filed on Form
10-K. Interim results are not necessarily indicative of results for a full year.
Certain reclassifications may have been made to conform prior period financials
to the presentation in the current reporting period. The reclassifications had
no effect on net loss.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
The Company has stock-based compensation plans and reports stock-based
compensation expense for all stock-based compensation awards based on the
estimated grant date fair value. The value of the compensation cost is amortized
at a minimum on a straight-line basis over the requisite service periods of the
award (generally 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 under the simplified method using an
average of the contractual term and vesting period of the award as
appropriate statistical data required to properly estimate the
expected term was not available;
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,
10
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
o Forfeitures are based on the history of cancellations of awards
granted by the Company and management's analysis of potential future
forfeitures.
Long-lived assets, goodwill 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.
The Company will complete a formal evaluation of goodwill and other
intangible asset values as of June 30, 2010, the Company's fiscal year end.
Although the Company is continuing to seek buyers for its RFID Technology
segment, the Company recognizes that as of the filing of this Form 10-Q it has
not received an acceptable offer, and that fact, coupled with the reduction in
state governments revenue reducing their ability to fund projects, and the
federal government action of putting on hold the significant DRO contract
previously announced by the RFID Technology segment, it appears that a
significant impairment charge may be required at year end. The Company
cannot currently estimate an appropriate value of that potential impairment
charge and therefore has not recorded an amount as of March 31, 2010. If no
acceptable offer is received, or economic conditions do not improve, by
June 30, 2010, the Company will reasses the goodwill value and may report
an impairment charge of part, or all, of the $5,076,700 goodwill value reported
at March 31, 2010 for the RFID Technology segment.
Fair value of financial instruments - The estimated fair values for
financial instruments are determined at discrete points in time based on
relevant market information. These estimates involve uncertainties and cannot be
determined with precision. The carrying amounts of accounts receivable, accounts
payable, accrued liabilities, and notes payable approximate fair value given
their short-term nature or with regards to long-term notes payable based on
borrowing rates currently available to the Company for loans with similar terms
and maturities.
Recent Accounting Pronouncements
With the exception of those discussed below, there have been no recent
accounting pronouncements or changes in accounting pronouncements during the
nine months ended March 31, 2010, that are of significance, or potential
significance, to us.
In October 2008, the EITF issued guidance which addresses the
accounting when entities enter into revenue arrangements with multiple payment
streams for a single deliverable or a single unit of accounting. The EITF could
not reach agreement on the transition of this guidance. The Company is currently
assessing the impact of this guidance on its financial position and results of
operations.
In October 2009, the FASB issued guidance on revenue recognition for
multiple-deliverable revenue arrangements. The guidance is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010 and addresses how to separate
deliverables and how to measure and allocate arrangement consideration to one or
more units of accounting. The Company is currently assessing the impact of this
guidance on its financial position and results of operations.
In October 2009, the FASB issued guidance on certain revenue
arrangements that include software elements which changes the accounting model
for revenue arrangements that include both tangible products and software
elements. The guidance is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after
June 15, 2010. The Company is currently assessing the impact of this guidance on
its financial position and results of operations.
In January 2010, the FASB issued guidance on improving disclosures
about fair value measurements. The guidance is effective for fiscal years
beginning after December 15, 2010 and for interim periods within those fiscal
years. The Company is currently assessing the impact of this guidance on its
financial position and results of operations.
In January 2010, the FASB issued guidance on the accounting for
distributions to shareholders with components of stock and cash. The guidance is
effective for fiscal years ending after December 15, 2009. The Company is
currently assessing the impact of this guidance on its financial position and
results of operations.
11
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
In January 2010, the FASB issued guidance on improving disclosures
about fair value measurements. The guidance is effective for fiscal years ending
after December 15, 2009 and December 15, 2010. The Company is currently
assessing the impact of this guidance on its financial position and results of
operations.
In February 2010, the FASB issued guidance stating that SEC filers need
not disclose the date through which subsequent events have been evaluated. The
guidance is effective upon issuance and the Company has adopted this guidance.
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 our Form 10-K for the year ended
June 30, 2009.
The Company uses the Black-Scholes option pricing model to estimate fair value
of stock-based awards.
Assumptions for awards of options granted during the nine months ended
March 31, 2010 were:
Awards granted
nine months ended
March 31, 2010
--------------
Dividend yield 0%
Expected volatility 62%
Weighted-average volatility 62%
Risk-free interest rate 4%
Expected life of options (in years) 3.75
Weighted average grant-date fair value $0.15
The following table summarizes the Company's stock option activity
during the first nine months of fiscal 2010:
Weighted Average
Weighted Average Remaining Aggregate
Exercise Price Contractual Intrinsic
Shares Per Share Term (1) Value (2)
---------- ----------- ------------- ------------
Outstanding July 1, 2009 6,044,700 $0.94 3.41 --
Granted 1,415,000 (3) $0.50 4.36 --
Exercised -- $0.00 -- --
Forfeited or expired (379,850) $0.98 -- --
---------- ----------- ------------- ------------
Outstanding March 31, 2010 7,079,850 $0.85 3.04 $0
========== =========== ============= ============
Exercisable March 31, 2010 5,939,500 $0.89 2.95 $0
========== =========== ============= ============
(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, 2010, for those awards that have an
exercise price below the closing price as of March 31, 2010 of $0.23.
(3) Options granted during the nine months ended March 31, 2010 totaling
1,415,000 shares had an aggregate fair value of $205,200, or $.15 per
option share granted.
12
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Note C - Inventories
Inventories are recorded at the lower of cost or market. The
composition of inventories as of March 31, 2010 and June 30, 2009 are summarized
as follows:
March 31, June 30,
2010 2009
---------------- ---------------
(unaudited)
Raw materials and purchased parts $ 1,439,700 $ 1,954,800
Work-in-process -- --
---------------- ---------------
1,439,700 1,954,800
Less reserves for obsolescence (415,000) (600,000)
---------------- ---------------
$ 1,024,700 $ 1,354,800
================ ===============
Note D - Assets Held For Sale
During fiscal year ended June 30, 2009, the Company implemented a plan
to divest the operations of its Data Storage segment and reinvest the proceeds
into the Company's Wireless Asset Management and RFID Technology segments. The
Company expanded its divestiture plan during the quarter ended September 30,
2009 to include the RFID Technology segment. The Company entered into agreements
with investment bankers to represent the Company in the sale of those assets and
liabilities. During the quarter ended March 31, 2010, the Company executed an
agreement to sell substantially all of the assets and liabilities of its Data
Storage segment. Accordingly, the "Assets Held for Sale" and "Liabilities
Related to Assets Held for Sale" presented in the attached balance sheets as of
March 31, 2010 consist primarily of the RFID Technology segment and as of
June 30, 2009 consist of both the Data Storage and the RFID Technology segment
assets and liabilities. The reclassification of those segment assets and
liabilities to "Assets Held for Sale" and "Liabilities Related to Assets Held
for Sale" does not affect the reported net loss for the periods presented.
During the quarter ended March 31, 2010, the Company recorded a loss on
the sale of approximately ($48,700) reducing "Assets Held for Sale" values to
reflect the Company's latest assessment of sales value of the Data Storage
segment assets. The loss on sale was in addition to the $325,000 impairment
charge recorded during the quarter ended December 31, 2009. The loss on sale
increased the Loss from Discontinued Operations for the quarter ended March 31,
2010. The Company is continuing to operate the RFID Technology segment and
believes the net asset value recorded for the business segment is appropriate.
However, at March 31, 2010, a firm acceptable offer has not yet been received
for the RFID Technology segment assets and liabilities.
The operating results for Assets Held for Sale (Data Storage segment
and RFID Technology segment) for the nine months and three months ended
March 31, 2010 and 2009 were as follows:
13
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Operating Results -Assets Held for Sale
Nine Months Ended Three Months Ended
March 31, March 31
2010 2009 2010 2009
----------- ----------- ----------- -----------
Sales
Data Storage $ 974,100 $ 1,777,200 $ 144,600 $ 454,500
RFID Technology 674,000 4,209,700 110,300 851,700
----------- ----------- ----------- -----------
Total Sales $ 1,648,100 $ 5,986,900 $ 254,900 $ 1,306,200
=========== =========== =========== ===========
Gross Profit
Data Storage $ 321,000 $ 533,800 $ 36,700 $ 135,800
RFID Technology 86,500 1,272,600 (27,700) 428,200
----------- ----------- ----------- -----------
Total Gross Profit $ 407,500 $ 1,806,400 $ 9,000 $ 564,000
=========== =========== =========== ===========
Gross Margin
Data Storage 33.0% 30.0% 25.4% 29.9%
RFID Technology 12.8% 30.2% -25.1% 50.3%
Total Gross Margin 24.7% 30.2% 3.5% 43.2%
Selling, General and Adm.
Expense
Data Storage $ 410,400 $ 783,800 $ 98,800 $ 228,300
Data Storage impairment
charge 325,000 - - -
RFID Technology 1,239,800 1,180,300 371,500 392,600
----------- ----------- ----------- -----------
Total SG&A Expense $ 1,975,200 $ 1,964,100 $ 470,300 $ 620,900
=========== =========== =========== ===========
Income (Loss) from
discontinued operations
Data Storage $ (414,400) $ (250,000) $ (62,100) $ (92,500)
Loss on Sale
- Data Storage segment (48,700) - (48,700) -
RFID Technology (1,153,300) 92,200 (399,200) 35,600
----------- ----------- ----------- -----------
Total discontinued
operations $(1,616,400) $ (157,800) $ (510,000) $ (56,900)
=========== =========== =========== ===========
Capital Expenditures
Data Storage $ - $ 1,000 $ - $ -
RFID Technology 5,600 83,000 - 40,500
----------- ----------- ----------- -----------
Total Capital Expenditures $ 5,600 $ 84,000 $ - $ 40,500
=========== =========== =========== ===========
Depreciation and Amortization
Data Storage $ 18,200 $ 15,000 $ 4,600 $ 4,900
RFID Technology 57,100 61,600 14,800 22,100
----------- ----------- ----------- -----------
Total Depreciation and
Amortization $ 75,300 $ 76,600 $ 19,400 $ 27,000
=========== =========== =========== ===========
14
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Assets Held for Sale at March 31, 2010 and June 30, 2009 consisted of the
following:
Net Assets Held for Sales Table
March 31, June 30,
2010 2009
----------- -----------
Assets held for sale
Inventory, net
Data Storage $ 50,000 $ 527,200
RFID Technology 992,600 980,000
----------- -----------
Total Inventory, net $ 1,042,600 $ 1,507,200
=========== ===========
Costs and estimated earnings in excess of billings
RFID Technology $ 115,800 $ 172,500
----------- -----------
Total costs and estimated earnings in excess of
billings $ 115,800 $ 172,500
=========== ===========
Prepaid expenses and other assets
Data Storage $ - $ 67,100
RFID Technology 299,800 326,300
----------- -----------
Total prepaid expenses and other assets $ 299,800 $ 393,400
=========== ===========
Property, plant and equipment, net
Data Storage $ - $ 49,900
RFID Technology 58,300 94,800
----------- -----------
Total property, plant and equipment, net $ 58,300 $ 144,700
=========== ===========
Goodwill
Data Storage $ - $ 279,600
RFID Technology 5,076,700 5,076,700
----------- -----------
Total goodwill $ 5,076,700 $ 5,356,300
=========== ===========
Total assets held for sale $ 6,593,200 $ 7,574,100
=========== ===========
Liabilities related to assets held for sale
Billings in excess of costs and estimated earnings
RFID Technology $ 98,700 $ 245,500
----------- -----------
Total billings in excess of costs and estimated
earnings $ 98,700 $ 245,500
=========== ===========
Deferred warranty revenue and customer advances
Data Storage $ - $ 231,200
RFID Technology 811,400 805,500
----------- -----------
Total deferred warranty revenue and customer
advances $ 811,400 $ 1,036,700
=========== ===========
Accounts payable and accrued expenses
Data Storage $ - $ 199,900
RFID Technology 811,100 766,300
----------- -----------
Total accounts payable and accrued expenses $ 811,100 $ 966,200
=========== ===========
Total liabilities related to assets held for sale $ 1,721,200 $ 2,248,400
=========== ===========
The Company believes that cash and accounts receivable balances of entities
held for sale will not be included in the anticipated sales and accordingly
has included those balances in consolidated cash and accounts receivable
balances presented.
15
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
If Discontinued Operations had been included in the continuing
consolidated operating results for the three-months ended March 31, 2010, sales
would have been $4,080,700 compared to $5,064,200 for the same period of the
prior year, a decrease of $983,500 or 19.4%. Gross profit would have increased
to $1,646,400, an increase of $108,500 or 7.1%, when compared to the comparable
quarter of the prior fiscal year. Selling, General and Administrative expenses
would have increased $34,500 to $2,389,000 compared to $2,354,500 in the quarter
ended March 31, 2009. The operating loss would have been ($742,600) compared to
an operating loss of ($816,600) for the same quarter of the prior year, a
decrease of $74,000 or 9.1%. The improved operating results were due primarily
to improved margins (40.3% vs. 30.4%).
If Discontinued Operations had been included in the continuing
consolidated operating results for the nine-months ended March 31, 2010, sales
would have been $12,078,100 compared to $16,447,200 for the same period of the
prior year, a decrease of $4,369,100 or 26.6%. The change in sales is primarily
due to decreases in both the Data Storage segment and the RFID Technology
segment. Gross profit would have increased to $4,902,000, an increase of
$374,900 or 8.3%, when compared to the comparable quarter of the prior fiscal
year. Gross margins for the nine months ended March 31, 2010 improved to 40.6%
from 27.5% for the same period of the prior year. Selling, General and
Administrative expenses would have increased $389,300 or 5.5% to $7,518,500 from
$7,129,200 in the nine-months ended March 31, 2009. The operating loss would
have been ($2,616,500) compared to an operating loss of ($2,602,100) for the
same period of the prior year, an increase of $14,400.
Effective February 28, 2010, the Company sold its Data Storage
operation to an entity controlled by an investment banking group located in Los
Angeles, California. The net book value of assets sold, net of liabilities
assumed by buyer, amounted to $110,200. The Company retained the accounts
receivables at February 28, 2010 and the agreement requires the buyer to collect
accounts receivable balances and transmit proceeds collected to the Company in a
timely manner. The sale, net of costs, resulted in a loss on sale of
approximately ($48,700).
The reclassification of the Data Storage and RFID Technology segments
to Discontinued Operations does not affect the reported net loss for the periods
presented as both segments' results are reflected in Income (Loss) From
Discontinued Operations.
Note E - Deferred Revenue
Deferred revenues at March 31, 2010 and June 30, 2009 consist of the following:
March 31, June 30,
2010 2009
---------------- ---------------
(unaudited)
Deferred revenue $ 620,400 $ 504,300
Less - current portion (329,800) (248,300)
---------------- ---------------
Deferred revenue - long term $ 290,600 $ 256,000
================ ===============
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, warrants, and convertible debt 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, 2010, there were zero potentially dilutive securities
included in the weighted average shares of common stock outstanding as inclusion
of outstanding stock options, warrants, and stock issuable upon conversion of
debt or preferred stock would be anti-dilutive.
16
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Note G - Equity
During the nine months ended March 31, 2010, the Company issued a total
of 3,063,700 shares of Class A Common Stock. Included were 30,000 shares issued
for services valued at $14,800, 290,900 Common shares issued in payment of
certain Series D Preferred Dividend obligations,1,000,000 Common shares, valued
at $410,000, issued to Tenix Holding, Inc. for payment of a note and related
interest, 542,800 Common shares, valued at $166,500, issued to ComVest Capital,
LLC in partial payment of notes payable and interest, and 1,200,000 Common
shares (discussed below) issued to Seaside in connection with a stock purchase
agreement discussed below. The Company also issued 17,800 shares, valued at
$178,500, of Class D Preferred Stock as payment in-kind of certain Series D
Preferred Dividend obligations.
ComVest Capital LLC, pursuant to a December 30, 2009 term loan
amendment discussed in the equity footnote above and in Note I - Line of Credit
and Term Loan, elected during the nine months ended March 31, 2010 to convert a
portion of its note into 542,800 shares of the Company's Class A Common Stock,
valued at $166,500. The average value per share of the conversion payments was
approximately $0.31 per share.
On January 18, 2010, the Company entered into a Common Stock Purchase
Agreement (the "Stock Purchase Agreement") with Seaside 88, LP, a Florida
limited partnership ("Seaside"), relating to the sale of up to 2,000,000 shares
of the Company's common stock. The Stock Purchase Agreement requires the Company
to issue and sell, and Seaside to purchase, up to 200,000 shares of Common Stock
once every two (2) weeks, subject to the satisfaction of customary closing
conditions, beginning on January 19, 2010 (the "Initial Closing") and ending on
or about the date that is eighteen (18) weeks subsequent to the Initial Closing.
The purchase price of the Common Stock at each closing is an amount equal to the
lower of (i) the volume weighted average of actual trading prices of the Common
Stock on the NASDAQ Capital Market (the "VWAP") for the ten consecutive trading
days immediately prior to a Closing Date multiplied by 0.86 and (ii) the VWAP
for the trading day immediately prior to a Closing Date multiplied by 0.88. The
Stock Purchase Agreement provides that the Company may terminate the agreement
at any time, so long as all other obligations of the Company to Seaside, if any,
have been retired or satisfied in full, upon ten days' prior written notice to
Seaside. Expenses related to the transactions amount to $25,000 for the first
closing and $2,500 for each additional closing.
The Offering is made pursuant to the Company's shelf registration
statement on Form S-3 (File No. 333-163288), which was declared effective by the
Securities and Exchange Commission on December 30, 2009. The Company, pursuant
to Rule 424(b) under the Securities Act of 1933, has filed with the Securities
and Exchange Commission a prospectus supplement relating to the Offering.
During the quarter ended March 31, 2010, the Company sold 1.2 million
Class A Common shares under the Seaside Agreement for a gross amount of
$298,600, or approximately $.25 per share. Expense related to the transaction
amount to approximately $30,000. The amounts to be raised in subsequent closings
are not estimable as of the date of this Form 10-Q.
In a separate transaction during the quarter ended March 31, 2010 with
Seaside, Seaside loaned the Company $350,000 pursuant to the Company's
promissory note in said amount, payable on or before May 1, 2010 (the
"Promissory Note"). If not sooner paid, the net proceeds of the sale of the
Shares to Seaside will be applied to reduce the outstanding balance of the
Promissory Note. The note has been paid in full.
The Company also completed a private offering to accredited investors
during the nine months ended March 31, 2010, with the issuance of 220,000 shares
of Series E Convertible Preferred Stock with a stated value of $4.50 per share,
receiving $909,800, net of expenses. 6.8%, or 15,000, of the 220,000 Series E
Preferred Shares were sold to a director and officer of the Company.
17
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
On October 6, 2009, the Company's board of directors modified certain
warrants, scheduled to expire on November 16, 2009, to purchase 300,000 shares
of the Company's Class A Common Stock (issued in a previous preferred stock
offering) by reducing the exercise price from $1.25 to $.50 per share. Warrants
to purchase 90,000 Class A Common Shares, or 30%, were held by officers and
directors of the Company. Prior to expiration, the Company extended the
expiration date of the warrants to November 16, 2010.
During the nine months ended March 31, 2010, the Company declared and
paid dividends-in-kind on the Company's Series B preferred shares through the
issuance of 7,700 shares of Series B Preferred Stock valued at $77,100. The
Company's Preferred Stocks are more fully discussed in Form 10-K for the year
ended June 30, 2009.
The value of employee stock-based compensation recognized for the nine
months ended March 31, 2010 amounted to $341,800, compared to $360,800
recognized in the comparable nine-month period of the prior fiscal year. See
Note A - Basis of Presentation and Recent Accounting Pronouncements for
additional discussion of the Company's policies related to employee stock-based
compensation.
On January 29, 2010, the Company received a letter from NASDAQ
indicating that the Company was out of compliance with NASDAQ rules pertaining
to voting rates relative to the issuance of 205,000 shares of Series E Preferred
Stock that has a heavier voting rate than the Company's outstanding Class A
Common Stock, in violation of NASDAQ's voting rights rule and policy set forth
in Listing Rule 5640 and IM-5640 ("the Rule"). The Series E Preferred Stock
issued allowed the investors to vote the number of votes equal to the number of
Class A Common Shares into which the Series E Preferred Stock is convertible.
Under the Rule the holder of Series E Preferred Stock would be limited to the
lesser of (i) the number of shares of Class A Common Stock into which the
Preferred Stock is convertible, or (ii) that number which is equal to the
purchase price per share of Series E Convertible Preferred Stock paid by the
shareholder to the Company divided by the closing consolidated bid price of the
Class A Common Stock on the trading day immediately previous to the issuance of
the shares of Series E Convertible Preferred Stock. The maximum voting effect,
assuming the maximum votes by the Preferred E stockholders, would be less than
1% of the outstanding voting rights. The Company submitted a plan to regain
compliance with the NASDAQ Rule which NASDAQ has accepted.
The Company has obtained amendments to the Series E Convertible
Preferred Stock purchase agreements modifying the voting rights to comply with
the Rule and has amended the designation of the Series E Preferred Stock to
comply with the Rule.
During the quarter ended March 31, 2010, the Company completed an
agreement with the Series D Preferred Stock shareholders to amend the Powers,
Preferences, Rights and Limitations reducing dividends from 15% per annum to 5%
and to provide a conversion feature into shares of the Company's Class A Common
Stock at a rate of $0.50 per share.
Note H - Related Party Transactions
The Company has a line of credit agreement ("Agreement"), more fully
discussed in the Company's Form 10-K for the year ended June 30, 2009, with a
private trust controlled by Mr. Donald Anderson, a greater than five percent
shareholder of the Company and member of the Company's Board of Directors. Mr.
Anderson was also the holder of a $500,000 unsecured note issued by StarTrak
Systems LLC (a wholly owned subsidiary of the Company) and had disclosed
beneficial ownership of approximately $1.69 million in Series D Preferred Stock
owned by the trust and several related corporations. During the quarter ended
December 31, 2009, the Company amended the Agreement increasing the credit line
to $5.7 million and converting the $1.69 million of Series D Preferred Stock,
the $500,000 note and approximately $96,200 of accrued interest and
fees into the line of credit balance. The transaction resulted in a $5,537,300
balance due under the Agreement, leaving $162,700 available which the company
had drawn as of December 31, 2009.
As discussed in the equity footnote above, during the nine months ended
March 31, 2010, the Company issued a total of 290,900 shares of Class A Common
Stock, valued at $105,300 and 17,800 shares of Series D Preferred Stock, valued
at $178,500, in payment of Series D Preferred Stock dividends. Included were
22,000 shares of Class A Common Stock, or approximately 8%, valued at $10,600,
issued to officers and directors of the Company. Officers
18
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
and Directors of the Company were issued 14,200, or approximately 88%, of the
16,100 Series D Preferred shares issued as stock dividends. The Company also
completed a private offering to accredited investors during the nine-months
ended March 31, 2010, with the issuance of 220,000 shares of Series E
Convertible Preferred Stock with a stated value of $4.50 per share, receiving
$909,800, net of expenses. 6.8%, or 15,000, of the 220,000 Series E Preferred
Shares were sold to a director and officer of the Company.
On October 6, 2009, the Company's board of directors modified certain
warrants, scheduled to expire on November 16, 2009, to purchase 300,000 shares
of the Company's Class A Common Stock (issued in a previous preferred stock
offering) by reducing the exercise price from $1.25 to $.50 per share. Warrants
to purchase 90,000 Class A Common Shares, or 30%, were held by officers and
directors of the Company. Prior to expiration, the Company extended the
expiration date of the warrants to November 16, 2010.
On March 31, 2010, the Company issued a $100,000 note payable to an
officer and director for an additional $100,000 of working capital provided to
the Company. The note is unsecured, bears interest at a rate of 12% and is
payable within thirty (30) days following written demand for such payment by the
Holder.
Note I - Line of Credit and Term Loan
During the quarter ended December 31, 2009, the Company modified its
line of credit agreement with a private trust, initially entered into in June
2002, (the "Agreement") increasing the credit line from $3.25 million to $5.7
million. The Agreement amendment converted $1,691,100 of Series D Preferred
Stock held by the Lender or related entities, $96,200 of accrued interest and
fees due the trust and a $500,000 term loan (issued by the Company's wholly
owned subsidiary, StarTrak Systems LLC and held by the trust) into the line of
credit balance, resulting in an available balance under the line of $162,700.
Under the Agreement, the Company must maintain a minimum balance due of at least
$2.5 million through the January 1, 2011 maturity date. Interest is accrued at
the prime rate plus 3% for any balance up to $2 million and 12% on balances in
excess of $2 million. At March 31, 2010, the Company had drawn the maximum
balance under the Agreement.
In November of 2009, the Company issued a $200,000 note payable to a
private investor for additional working capital. The note is unsecured, bears
interest at a rate of 10% and was paid subsequent to March 31, 2010.
The Company had amended its term loan agreement with ComVest Capital
LLC in September 2009, reducing the principal payments required under the loan
agreement for the months of September and October 2009 from $100,000 to $25,000
per month and for the months of November 2009 to January 2010 from $100,000 to
$50,000. Under the amended agreement, ComVest has the right to convert any
outstanding principal amount and/or accrued interest thereon into Class A Common
Stock at a price of $.65 per share. In addition, ComVest has an option to (i)
convert up to $100,000 of principal and interest due into Class A Common Stock
at the conversion rate of $.3474 per share any time through October 31, 2009,
(ii) convert an additional $100,000 at the conversion price of $.378 per share
during the period November 1, 2009 to December 31, 2009 and (iii) convert an
additional $100,000 of principal and interest due into Class A Common Stock at
a conversion price equal to ninety (90%) percent of the weighted average closing
price for the Common Stock on the NASDAQ capital market for the five (5) trading
days immediately before January 1, 2010, anytime between January 1, 2010 and
February 28, 2010. The note shall bear interest at the rate of ten and one-half
(10.5%) percent per annum, however, that during the continuance of any Event of
Default, the interest rate hereunder shall increase to fifteen and one-half
(15.5%) percent per annum.
On December 30, 2009, the Company again amended its term loan agreement
with ComVest Capital LLC, modifying the principal payments required. Payments
were restructured by eliminating a $50,000 payment due in January 2010 and
stipulating the repayment of the remaining balance at $100,000 per month for the
months February through May 2010, with the final installment due on June 1,
2010. The amendment reduced the conversion price of up to $100,000 of principal
and interest balance convertible anytime between January 1, 2010 and
February 28, 2010 from ninety (90%) percent to eighty (80%) of the weighted
average closing price for the Common Stock on the NASDAQ capital market for the
five (5) trading days immediately before January 1, 2010.
19
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
On September 16, 2009, the Company amended a note issued to Tenix
Holding Inc. with a remaining principal balance of $360,000. The amended note
converted the remaining $360,000 principal balance plus all accrued interest
into 1,000,000 shares of Class A Common Stock of the Company with a value of
$410,000. The agreement further provides for the possible issuance of additional
shares (not to exceed 150,000 shares) in the event the weighted average closing
price for the shares of Alanco's Class A Common Stock for the period from
October 1, 2009 through November 30, 2009 ("Measuring Period") is less than $.45
per share. The weighted average closing price for the period October 1, 2009 to
November 30, 2009 was in excess of $.45 and therefore, no additional shares will
be issued under the amended agreement.
Note J - Litigation
The Company may, from time to time, be involved in litigation arising
from the normal course of business. As of March 31, 2010, there was no such
litigation pending deemed material by the Company.
Note K - Subsequent Events
Subsequent to March 31, 2010, the Company announced a major strategic
investment by ORBCOMM, Inc., a global satellite data Communications Company
focused on two-way Machine-to-Machine (M2M) communications and leading provider
of space-based Automatic Identification System (AIS) services. ORBCOMM purchased
500,000 shares of Alanco Series E Convertible Preferred Stock for a total
investment of $2,250,000 ($4.50 per preferred share convertible into twelve
Class A Common Shares), and entered into a Product/Software Development
Cooperation Agreement for Alanco's StarTrak Systems subsidiary to develop,
manufacture and market new products featuring dual-mode cellular and ORBCOMM
satellite communications capabilities, to operate over the ORBCOMM communication
networks.
Subsequent to March 31, 2010, the Company paid Series E Preferred Stock
dividends of $12,900 in cash and issued 72,700 shares of Class A Common Stock,
valued at $16,700 as payment for Series D Preferred Stock dividends that had
been accrued at March 31, 2010. 6.4% of the Series E dividend was paid to an
officer and director of the Company and 17,300, or 23.8%, of the shares were
issued to officers and directors of the Company.
In compliance with the terms of the Seaside Stock Purchase Agreement
discussed in Note G - Equity above, the Company issued subsequent to March 31,
2010, 600,000 Class A Common shares, valued at $156,300.
Note L - Liquidity
During the nine months ended March 31, 2010, the Company reported a Net
Loss of approximately $3.3 million. During fiscal year ended June 30, 2009 the
Company reported Net Loss of approximately $5.5 million.
Although the Company raised additional capital during the current
period, the significant losses raise doubt about the ability of the Company to
continue as a going concern. During fiscal 2010, the Company expects to meet
its working capital and other cash requirements with its current cash reserves,
cash generated from operations, its borrowing capacity under its credit
facility, and other financing as required. While the Company believes that it
will succeed in attracting additional capital and generate capital from
operations, there can be no assurance that the Company's efforts will be
successful. The Company's continued existence is dependent upon its ability to
achieve and maintain profitable operations. As a result, the Company's
independent registered public accounting firm issued a going concern opinion on
the consolidated financial statements of the Company for the fiscal year ended
June 30, 2009. The condensed consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
20
ALANCO TECHNOLOGIES, INC.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements: 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. Forward-
looking statements include statements concerning plans, objectives, goals,
strategies, future events or performance, and underlying assumptions and other
statements, which are other than statements of historical facts. The words
"believe," "may," "estimate," "continue," "anticipate," "intend," "should,"
"plan," "could," "target," "potential," "is likely," "will," "expect" and
similar expressions, as they relate to the Company are intended to identify
forward-looking statements within the meaning of the "safe harbor" provisions of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. From time to time, the Company may
publish or otherwise make available forward-looking statements of this nature.
All such forward-looking statements are based on the expectations of management
when made and are subject to, and are qualified by, 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, among others, that could affect the outcome of the
Company's forward-looking statements: 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; unfavorable result of current pending 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; the ability to maintain satisfactory relationships with
suppliers; federal and/or state regulatory and legislative actions; customer
preferences and spending patterns; the ability to implement or adjust to new
technologies and the ability to secure and maintain key contracts and
relationships. New risk factors emerge from time to time and it is not possible
to accurately predict all such risk factors, nor can we assess the impact of all
such risk factors on our business or the extent to which any risk factor, or
combination of risk factors, may cause results to differ materially from those
contained in any forward-looking statements. Except as otherwise required by
applicable law, we undertake no obligation to publicly update or revise any
forward-looking statements or the risk factors described in this Quarterly
Report or in the documents we incorporate by reference, whether as a result of
new information, future events, changed circumstances or any other reason after
the date of this Quarterly Report on Form 10-Q.
21
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 and pursuant to the rules and
regulations of the United States Securities and Exchange Commission. 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
and estimated percent complete 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 materially 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, 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 that
extend 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 is known, the entire amount of the
estimated ultimate loss is accrued.
Long-lived assets, goodwill 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 cash flows.
Fair value of financial instruments - The estimated fair values for
financial instruments are determined at discrete points in time based on
relevant market information. These estimates involve uncertainties and cannot be
determined with precision. The carrying amounts of accounts receivable, accounts
payable, accrued liabilities, and notes payable approximate fair value given
their short-term nature or with regards to long-term notes payable based on
borrowing rates currently available to the Company for loans with similar terms
and maturities.
Results of Operations
(A) Three months ended March 31, 2010 versus three months ended
March 31, 2009
Net Sales
Net sales from continuing operations for the third fiscal quarter ended
March 31, 2010 were $3,825,800, an increase of $67,800, or 1.8%, compared to net
sales of $3,758,000 reported for the comparable quarter of the prior year. The
slight increase resulted from increased hardware shipments during the current
quarter compared to the quarter ended March 31, 2009. Although revenues are
affected by general economic conditions and may fluctuate on a quarter to
quarter comparison, management believes that both hardware sales and monitoring
revenues will continue to increase throughout fiscal year 2010 through new
product introductions and increased market penetration.
22
ALANCO TECHNOLOGIES, INC.
Gross Profit
Gross profit from continuing operations for the quarter ended March 31,
2010 amounted to $1,637,400, an increase of $663,500, or 68.1% compared to
$973,900 in gross profit reported for the comparable quarter of the prior year.
The gross profit increase was due to improved margins in both hardware sales and
monitoring services. Gross margin increased to 42.8% compared to 25.9% reported
in the same period of the prior year. The increase in both gross profit and
gross margin was due primarily to reduced warranty costs related to an early
version of ReeferTrak product that negatively effected margins in the quarter
ended March 31, 2009 and the completion of low margin hardware shipments in the
prior year required to convert several major customers from analog to digital
products. Gross margin can be impacted in all business segments by economic
conditions and specific market pressures. As a result, the changes in gross
margins reported for the current quarter are not considered to be trends.
Management does expect current fiscal year gross margins will continue to
improve compared to the same periods in the prior year, although the gross
margin improvement may not be as significant as was reported for the third
quarter ended March 31, 2010.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the quarter
ended March 31, 2010 were $1,437,400, a $255,400, or 21.6%, increase when
compared to the $1,182,000 reported for the comparable period of the prior year.
The increase resulted primarily from increases in engineering, customer service
and sales expense.
Corporate expenses reported for the current quarter of $227,100
represents a decrease of $82,000 compared to $309,100 reported for the quarter
ended March 31, 2009. Corporate expenses for the three months ended March 31,
2010 decreased primarily due to a reduction in payroll expense as a result of
reduced staffing and reduced legal expense.
Amortization of stock-based compensation reported for the quarter ended
March 31, 2010 decreased to $72,500, a decrease of $40,600, or 35.9%, from
$113,100 reported in the comparable quarter of the prior year. The reduction
relates primarily to the Company's election to accelerate vesting of certain
officer, director and employee stock options in prior periods.
Depreciation and amortization expense for the quarter increased
slightly to $133,000 from $129,400 in the same quarter of the prior period.
Operating Loss
Operating Loss for the quarter ended March 31, 2010 was ($232,600)
compared to an Operating Loss of ($759,700) reported for the same quarter of the
prior year, an improvement of $527,100, or 69.4%. The improved operating results
are due to a significant improvement in gross margins.
Other Income and Expense
Net interest expense for the quarter increased to $277,400, an increase
of $86,800, or 45.5%, compared to net interest expense of $190,600 for the same
quarter in the prior year. The increase was due to increased borrowing compared
to the comparable quarter ended March 31, 2009.
Loss From Continuing Operations
Loss from continuing operations for the quarter decreased $440,000, or
46.3% to ($510,800) from ($ 950,800) in the quarter ended March 31, 2009. The
improvement is primarily due to improved gross profit as a result of improved
sales and gross margins.
Discontinued Operations
The Company reported a loss from Discontinued Operations for the
quarter ended March 31, 2010 of ($510,000), an increase of ($453,100) compared
to a loss from Discontinued Operations of ($56,900) reported for the comparable
quarter of the prior year. The significant increase in loss from discontinued
operations resulted primarily from the approximately $48,700 loss the Company
recorded on the sale of the Data Storage segment and a reduction in
sales and related gross profits in the RFID segment operations due to delays in
the previously announced project to provide RFID inmate tracking systems for
nineteen U.S. Immigration Detention Facilities. This project is currently on
hold.
23
ALANCO TECHNOLOGIES, INC.
(Loss) Earnings before Interest, Taxes, Dividends, Depreciation & Amortization
(EBITDA)
The Company believes that earnings (loss) before net interest expense,
income taxes, depreciation and amortization (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 from Continuing Operations for Alanco's 2010 fiscal year third quarter
was a loss of ($100,400) an improvement of $597,700 when compared to an EBITDA
loss of ($698,100) for the same quarter of the prior fiscal year. EBITDA before
Stock-based compensation and Corporate Expense for the current quarter was
$199,200, an improvement of $407,800, when compared to a loss of ($208,600) for
the comparable quarter of the prior year. A reconciliation of the EBITDA
calculations is presented below:
EBITDA RECONCILIATION to NET LOSS FROM CONTINUING OPERATIONS
(Unaudited)
3 months ended 3 months ended
March 31, March 31,
2010 2009
-------------- ---------------
EBITDA before Stock-based compensation
and Corporate Expense $ 199,200 $ (208,600)
Corporate Expense (227,100) (309,100)
Stock-based compensation (72,500) (180,400)
-------------- ---------------
EBITDA (100,400) (698,100)
Net interest expense (277,400) (190,600)
Depreciation and amortization (133,000) (62,100)
-------------- ---------------
NET LOSS FROM CONTINUING OPERATIONS $ (510,800) $ (950,800)
============== ===============
Dividends
Dividend expense for the three months ended March 31, 2010 was $43,600,
a decrease of $83,600, or 65.7%, compared to the $127,200 in preferred stock
dividends recorded in the comparable period of the prior fiscal year. The
decrease resulted primarily due to the transfer of approximately $1.7 million of
Series D Preferred Stock to Notes Payable during the quarter ended December 31,
2009.
Net Loss Attributable to Common Shareholders
Net Loss Attributable to Common Shareholders for the quarter ended
March 31, 2010 amounted to ($1,064,400), or ($.03) per share, a $70,500
reduction when compared to a loss of ($1,134,900), or ($.04) per share, in the
comparable quarter of the prior year. The Company anticipates improved future
operating results, however, actual results 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.
The Company will complete a formal evaluation of goodwill and other
intangible asset values as of June 30, 2010, the Company's fiscal year end.
Although the Company is continuing to seek buyers for its RFID Technology
segment, the Company recognizes that as of the filing of this Form 10-Q it has
not received an acceptable offer, and that fact, coupled with the reduction in
state governments revenue reducing their ability to fund projects, and the
federal government action of putting on hold the significant DRO contract
previously announced by the RFID Technology segment, it appears that a
significant impairment charge may be required at year end. The Company
cannot currently estimate an appropriate value of that potential impairment
charge and therefore has not recorded an amount as of March 31, 2010. If no
acceptable offer is received, or economic conditions do not improve, by
June 30, 2010, the Company will reasses the goodwill value and may report
an impairment charge of part, or all, of the $5,076,700 goodwill value reported
at March 31, 2010 for the RFID Technology segment.
24
ALANCO TECHNOLOGIES, INC.
(B) Nine months ended March 31, 2010 versus nine months ended
March 31, 2009
Net Sales
Net sales from continuing operations for the nine months ended
March 31, 2010 were $10,430,000, a slight decrease of $30,300, or .3%, compared
to net sales of $10,460,300 reported for the comparable period of the prior
year. The decrease resulted from reduced hardware shipments under major
contracts during the current year compared to the same period of fiscal year
2009. Although revenues are affected by general economic conditions and may
fluctuate on a quarter to quarter comparison, management believes that both
hardware sales and monitoring revenues will increase throughout fiscal year 2010
through new product introductions and increased market penetration.
Gross Profit
Gross profit from continuing operations for the nine months ended
March 31, 2010 amounted to $4,494,500, an increase of $1,773,700, or 65.2%
compared to $2,720,800 in gross profit reported for the nine month period ended
March 31, 2009. The gross profit increase was due to improved margins in both
hardware sales and monitoring services. Gross margin increased to 43.1% compared
to 26.0% reported in the same period of the prior year. The increase in gross
profit and gross margin was primarily due to reduced warranty costs related to
an early version of ReeferTrak product, the completion of shipments required to
convert several major customers from analog to digital hardware products and a
one time credit to data services cost of sales related to a vendor adjustment.
Gross margin can be impacted by economic conditions and specific market
pressures. As a result, the changes in gross margins reported for the current
quarter are not considered to be trends. Management does expect current fiscal
year gross margins will continue to improve compared to the same periods in the
prior year, although the gross margin improvement may not be as significant as
was reported for the nine month period ended March 31, 2010.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the nine
months ended March 31, 2010 were $4,122,400, a $278,600, or 7.2%, increase when
compared to the $3,843,800 reported for the comparable period of the prior year.
The increase resulted primarily from increases in engineering, customer service
and sales expense.
Corporate expenses reported for the nine months ended March 31, 2010
were $657,700, an increase of $41,600, or 6.8%, compared to $616,100 reported
for the nine months ended March 31, 2009. Corporate expenses in the prior year
were unusually low due to an approximate $297,000 credit from the recovery of
legal fees relative to the TSIN lawsuit that was settled during the quarter
ended September 30, 2008. The current period corporate expenses also included
credits related to lawsuits. During the quarter ended September 30, 2009, the
Arizona Court of Appeals vacated an award of attorney's fees and damages awarded
to the Plaintiff in the Arraid Property lawsuit resulting in the reversal of
related accruals in the amount of $126,800. If both quarters were adjusted for
the unusual credits, the corporate expenses for the nine months ended March 31,
2010 would reflect a decrease of $128,600, or 14%, due primarily to staff
reductions.
Amortization of stock-based compensation reported for the nine months
ended March 31, 2010 decreased to $311,400, a decrease of $28,000, or 8.2%. The
reduction relates primarily to the Company's election to accelerate vesting
of certain officer, director and employee stock options in prior periods.
Depreciation and amortization expense for the nine months ended March
31, 2010 increased to $403,100, an increase of $37,300, or 10.2% due to
additional production equipment and leasehold improvements at the Company's
facilities in Morris Plains, New Jersey.
Operating Loss
Operating Loss for the nine months ended March 31, 2010 was
($1,000,100) compared to an Operating Loss of ($2,444,300) reported for the same
period of the prior year, an improvement of $1,444,200, or a reduction of 59.1%.
The improved operating results are due primarily to significant improvement in
gross margins offset by increases in corporate expenses.
25
ALANCO TECHNOLOGIES, INC.
Other Income and Expense
Net interest expense for the nine months ended March 31, 2010 decreased
to $657,300, a decrease of $45,400, or 6.4%, compared to net interest expense
of $702,700 for the same period in the prior year. The decrease was due to a
one-time accelerated amortization of deferred loan costs of approximately
$216,000 recorded in fiscal year 2009 related to the prepayment on the ComVest
term loan. Excluding the accelerated amortization, interest expense actually
increased by $170,600 due to additional borrowing during the current period
compared to the prior year.
The Company reported a reduction in Other Expense from ($185,300) in
the first nine month of the prior fiscal year to ($2,700) reported in the
current nine month period ended March 31, 2010. Other Expense for the prior year
period included an $187,500 charge related to reduction in estimated value of
the Company's 8.9% investment in TSIN as explained below.
The operations of TSI were acquired in May of 2002 by the issuance of
2.4 million (post October 16, 2006 reverse split) shares of the Company's Class
A Common Stock and the assumptions of certain specific liabilities. In
anticipation of the transaction, the Company had acquired approximately 8.9% of
the then outstanding shares of TSIN. TSIN had stated it was its intent to
liquidate enough shares of the Alanco stock to pay off all TSIN liabilities and
to distribute the remaining Alanco shares to the TSIN stockholders. To reflect
the 8.9% investment in TSIN subsequent to the acquisition, the Company estimated
that approximately 2.25 million shares would be remaining after payment of all
TSIN liabilities and that an 8.9% ownership would receive approximately 200,000
shares upon distribution. Therefore, the Company recorded 200,000 treasury
shares valued at market price on the transaction date.
On January 30, 2003, a shareholder of TSIN filed suit naming as
defendants the Company and its wholly owned subsidiary, ATSI. The complaint set
forth various allegations and sought damages arising out of the Company's
acquisition of substantially all of the assets of TSIN. Eventually, the lawsuit
was transferred to TSIN who became the plaintiff and continued the legal process
until September 2007 when the parties to the lawsuit entered into a Settlement
Agreement. From 2003 through September 2007, TSIN incurred significant legal
expenses associated with the lawsuit, which reduced the number of Alanco shares
available to TSIN shareholders upon distribution. To reflect that reduction in
investment value of the Company's 8.9% ownership in TSIN, the Company reduced
the estimated number of treasury shares to be acquired upon distribution from
200,000 shares to 100,000 shares and recorded a charge to other expenses of
$187,500 during the quarter ended September 30, 2008.
Loss From Continuing Operations
Loss from continuing operations for the nine months ended March 31,
2010 decreased $1,672,200, or 50.2% to ($1,660,100) from ($3,332,300) in the
nine month period ended March 31, 2009. The improvement is primarily due to
improved gross profit as a result of improved gross margins.
Discontinued Operations
The Company reported a loss from Discontinued Operations for the nine
months ended March 31, 2010 of ($1,616,400), a significant increase compared to
the reported loss from discontinued operations of ($157,800) reported for the
comparable period of the prior year. The significant increase in loss resulted
primarily from a $325,000 impairment charge and $48,700 loss on sale that the
Company recorded to reflect the anticipated reduced value of the data storage
segment and a significant reduction in revenues in the RFID segment operations
due to delays in the previously announced project to provide RFID inmate
tracking systems for nineteen U.S. Immigration Detention Facilities. This
project is currently on hold.
(Loss) Earnings before Interest, Taxes, Dividends, Depreciation & Amortization
(EBITDA)
The Company believes that earnings (loss) before net interest expense,
income taxes, depreciation and amortization (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 from Continuing Operations for Alanco's nine months ended March 31, 2010
was a loss of ($599,700), an improvement of $1,664,100, or a 73.5% reduction,
when compared to an EBITDA loss of ($2,263,800) for the same period of the prior
fiscal year. EBITDA before Stock-based compensation and Corporate Expense for
the current nine month period was $369,400, an improvement of $1,677,700, when
compared to a loss of ($1,308,300) for the comparable period of the prior year.
A reconciliation of the EBITDA calculations is presented below:
26
ALANCO TECHNOLOGIES, INC.
EBITDA RECONCILIATION to NET LOSS FROM CONTINUING OPERATIONS
(Unaudited)
9 months ended 9 months ended
March 31, March 31,
2010 2009
-------------- --------------
EBITDA before Stock-based compensation
and Corporate Expense $ 369,400 $ (1,308,300)
Corporate Expense (657,700) (616,100)
Stock-based compensation (311,400) (339,400)
-------------- --------------
EBITDA (599,700) (2,263,800)
Net interest expense (657,300) (702,700)
Depreciation and amortization (403,100) (365,800)
-------------- --------------
NET LOSS FROM CONTINUING OPERATIONS $ (1,660,100) $ (3,332,300)
============== ==============
Dividends
Dividend expense for the nine months ended March 31, 2010 was $301,800,
a decrease of $45,500, or 13.1%, over the $347,300 in preferred stock dividends
recorded in the comparable period of the prior fiscal year. The decrease
resulted primarily due to the transfer of approximately $1.7 million of Series
D Preferred Stock to Notes Payable during the quarter ended December 31, 2009.
Net Loss Attributable to Common Shareholders
Net Loss Attributable to Common Shareholders for the nine months ended
March 31, 2010 amounted to ($3,578,300), or ($0.11) per share, a $259,100
reduction when compared to a loss of ($3,837,400), or ($0.12) per share, in the
comparable quarter of the prior year. The Company anticipates improved future
operating results, however, actual results 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.
The Company will complete a formal evaluation of goodwill and other
intangible asset values as of June 30, 2010, the Company's fiscal year end.
Although the Company is continuing to seek buyers for its RFID Technology
segment, the Company recognizes that as of the filing of this Form 10-Q it has
not received an acceptable offer, and that fact, coupled with the reduction in
state governments revenue reducing their ability to fund projects, and the
federal government action of putting on hold the significant DRO contract
previously announced by the RFID Technology segment, it appears that a
significant impairment charge may be required at year end. The Company
cannot currently estimate an appropriate value of that potential impairment
charge and therefore has not recorded an amount as of March 31, 2010. If no
acceptable offer is received, or economic conditions do not improve, by
June 30, 2010, the Company will reasses the goodwill value and may report
an impairment charge of part, or all, of the $5,076,700 goodwill value reported
at March 31, 2010 for the RFID Technology segment.
Liquidity and Capital Resources
The Company's current assets at March 31, 2010 exceeded current
liabilities by $3,755,100, resulting in a current ratio of 1.49 to 1. The
comparable working capital at June 30, 2009 was $5,209,500, reflecting a current
ratio of 1.74 to 1. The reduction in working capital at March 31, 2010 versus
June 30, 2009 resulted primarily from reduced inventories, a reduction in net
Assets held for sale and an increase in current portion of notes payable.
Consolidated accounts receivable of $3,061,500 at March 31, 2010
(including both continuing and discontinued operations) reflects an increase
compared to the $2,303,000 reported as consolidated accounts receivable at
June 30, 2009. Wireless Asset Management segment's accounts receivable balances,
representing $2,894,700, or 94.6% of the consolidated balance, have increased
from $1,484,600 at June 30, 2009 to $2,894,700 at March 31, 2010, an increase of
$1,410,100, or 95.0%. The Wireless Asset Management accounts receivable balance
at March 31, 2010 reflects 76 days sales in receivables compared to 40 days
sales in receivables at June 30, 2009. The increase resulted from an approximate
$850,000 increase (79%) in March 2010 billings compared to billings in June
2009, special payment terms for approximately $500,000 receivable balance and
the delayed payment of a large receivable balance related to international
hardware shipments that has subsequently been paid.
27
ALANCO TECHNOLOGIES, INC.
Inventories at March 31, 2010 amounted to $1,024,700, a decrease of
$330,100, or 24.4%, when compared to $1,354,800 at June 30, 2009. The inventory
balance at March 31, 2010 reflects only the Wireless Asset Management segment
and represents an inventory turnover of 8 at March 31, 2010 compared to 7 as of
June 30, 2009.
At March 31, 2010, the Company had fully drawn available funds under a
$5.7 million line of credit agreement. See Note J - Line of Credit and Term Loan
for additional discussion of the existing line of credit agreement.
Cash used in operations for the nine-month period ended March 31,
2010 was $1,827,200, a decrease of $171,300, or 8.6%, when compared to cash used
in operations of $1,998,500 for the comparable period ended March 31, 2009.
The decrease in cash used in operating activities during the nine-month period
resulted primarily from a decrease in net cash operating loss and a decrease in
inventories, offset by an increase in accounts receivable.
During the nine-months ended March 31, 2010, the Company reported
cash provided by investing activities of $46,300 compared to cash used by
investing activities of ($233,200) reported for the same period in the prior
fiscal year. The increase in cash provided by investing activities is the
result of a reduction in the purchase or property, plant and equipment,
cash received for sale of net Data Storage assets and a reduction in patent
renewal costs compared to the prior fiscal year period ended March 31, 2009.
Cash provided by financing activities for the nine-months ended
March 31, 2010 amounted to $1,581,500 compared to $1,994,000 for the nine-months
ended March 31, 2009, a decrease of $412,500, or 20.7%. The decrease in
financing activity resulted primarily from a net decrease in proceeds from the
sale of equity instruments.
The Company believes that additional cash resources may be required for
working capital to achieve planned operating results for fiscal year 2010 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, 2010. 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 2010.
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 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to smaller reporting company.
Item 4T - CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company carried out, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer
and the Company's Chief Financial Officer, an evaluation of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities and Exchange Act of 1934, as amended). Based on their
evaluation, the Company's Chief Executive Officer and its Chief Financial
Officer concluded that, the Company's disclosure controls and procedures
were not effective as of the end of the period covered by this report,
because of the material weaknesses identified as of June 30, 2009.
Notwithstanding the existence of the material weaknesses identified as of
June 30, 2009, management has concluded that the condensed consolidated
financial statements in this Form 10-Q fairly present, in all material
respects, the Company's financial position, results of operations and cash
flows for the periods and dates presented.
28
ALANCO TECHNOLOGIES, INC.
(b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting that
occurred during our last fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over
financial reporting.
The Company is continuing the process of developing and implementing a
remediation plan to address the material weaknesses as described in Item
9(A)T of our June 30, 2009 Form 10-K.
The Company has taken or will be taking the following actions to improve
internal control over financial reporting:
o During the remaining period through the year ending June 30, 2010, we
intend to devote resources to properly assess, and remedy if needed, our
control environment and entity-level controls.
o During the remaining period through the year ending June 30, 2010, we
will enhance our risk assessment, internal control design and documentation
and develop a plan for testing in accordance with applicable standards.
o The Company plans to continue to enhance the staffing and competency
level within the department with training and periodic reviews.
o The Company has implemented additional review procedures relative to
payments to ST Wireless, an India based company that provides software
engineering services to StarTrak Systems LLC, to enhance internal controls
relative to issues discussed in the Company's Form 10-K filed on
September 30, 2009.
In addition, the following are specific remedial actions to be taken for
matters related to inventory transactions including significant and
non-routine adjustments.
o The Company requires that all significant or non-routine inventory
adjustments be thoroughly researched, analyzed, and documented by qualified
warehouse personnel, and to provide for complete review of the resulting
transaction by the Warehouse Supervisor prior to recording the transactions.
In addition, all major transactions will require the additional review and
approval of the Materials Manager.
o Develop and implement focused monitoring controls and other procedures
in the Internal Audit function.
In light of the aforementioned material weakness, management conducted a
thorough review of all significant or non-routine adjustments for the nine month
period ended March 31, 2010. As a result of this review, management believes
that there are no material inaccuracies or omissions of material fact and, to
the best of its knowledge, believes that the condensed consolidated financial
statements for the nine month period ended March 31, 2010 fairly present in all
material respects the financial condition and results of operations for the
Company in conformity with U.S. generally accepted accounting principles.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Company may, from time to time, be involved in litigation arising from
the normal course of business. As of March 31, 2010, there was no such
litigation pending deemed material by the Company.
29
ALANCO TECHNOLOGIES, INC.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the nine months ended March 31, 2010, the Company issued 7,700
Shares of Series B Preferred Stock as in-kind dividend payments, 17,800 shares
of Series D Preferred Stock as in-kind dividend payments, and a total of
1,863,700 shares of unregistered Class A Common Stock, including 30,000 shares
for services rendered, 1,542,800 shares issued for payment of notes and interest
and 290,900 issued in payment of Series D Preferred Stock dividends. Also
during the nine months ended March 31, 2010 the Company issued 220,000 shares of
Series E Preferred Stock. During the nine months ended March 31, 2010, the
Company also issued 1.2 million shares of registered Class A Common Stock.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
30
ALANCO TECHNOLOGIES, INC.
Item 6. EXHIBITS
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer
32.2 Certification of 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
31
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-Q 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 small business
issuer as of, and for, the period presented in this report;
4. The small business issurer'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 small
business issuer 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 small business issuer,
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 small business issuer'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 small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer'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 small business issuer'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 small business issuer's
internal control over financial reporting.
Date: May 17, 2010
/s/ Robert R. Kauffman
________________________
Robert R. Kauffman
Chairman and Chief Executive Officer
32
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-Q 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 small business
issuer as of, and for, the period presented in this report;
4. The small business issuer'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 small business issuer,
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 small business issuer'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 small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer'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 small business issuer'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 small business issuer's
internal control over financial reporting.
Date: May 17, 2010
/s/ John A. Carlson
________________________
John A. Carlson
Executive Vice President and Chief Financial Officer
33
ALANCO TECHNOLOGIES, INC.
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Alanco Technologies, Inc. (the
"Company") on Form 10-Q for the period ending March 31, 2010, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Robert
R. Kauffman, Chairman and Chief Executive Officer of the Company, certify to the
best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15
(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company for the periods presented.
/s/ Robert R. Kauffman
----------------------
Robert R. Kauffman
Chairman and Chief Executive Officer
Alanco Technologies, Inc.
Dated: May 17, 2010
34
ALANCO TECHNOLOGIES, INC.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Alanco Technologies, Inc. (the
"Company") on Form 10-Q for the period ending March 31, 2010, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, John A.
Carlson, Executive Vice President and Chief Financial Officer of the Company,
certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15
(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company for the periods presented.
/s/ John A. Carlson
-------------------
John A. Carlson
Chief Financial Officer
Alanco Technologies, Inc.
Dated: May 17, 2010
35