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 December 31, 2009
-----------------
____TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________ to ____________
Commission file number 0-9347
ALANCO TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Arizona
(State or other jurisdiction of incorporation or organization)
86-0220694
----------
(I.R.S. Employer Identification No.)
15575 N. 83rd Way, Suite 3, Scottsdale, Arizona 85260
(Address of principal executive offices) (Zip Code)
(480) 607-1010
(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 February 9, 2010 there were 34,539,200 shares, net of treasury shares,
of common stock outstanding.
ALANCO TECHNOLOGIES, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 2009 (Unaudited) and June 30, 2009 4
Condensed Consolidated Statements of Operations
(Unaudited) For the three months ended December 31,
2009 and 2008 5
Condensed Consolidated Statements of Operations
(Unaudited) For the six months ended December 31, 2009
and 2008 6
Condensed Consolidated Statements of Changes in
Shareholders' Equity (Unaudited) For the six months
ended December 31, 2009 7
Condensed Consolidated Statements of Cash Flows
(Unaudited) For the six months ended December 31,
2009 and 2008 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 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Item 4T. Controls and Procedures 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds 32
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 6. Exhibits 34
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 DECEMBER 31, 2009 AND JUNE 30, 2009
December 31, 2009 June 30, 2009
------------------ --------------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 370,500 $ 413,500
Accounts receivable, net 2,300,500 2,303,000
Inventories, net 935,600 1,354,800
Assets held for sale 7,101,700 7,574,100
Prepaid expenses and other current assets 500,200 631,100
------------------ --------------
Total current assets 11,208,500 12,276,500
------------------ --------------
PROPERTY, PLANT AND EQUIPMENT, NET 271,600 320,900
------------------ --------------
OTHER ASSETS
Goodwill, net 12,575,400 12,575,400
Other intangible assets, net 985,600 1,201,100
Other assets 281,900 344,900
------------------ --------------
Total other assets 13,842,900 14,121,400
------------------ --------------
TOTAL ASSETS $ 25,323,000 $ 26,718,800
================== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,952,900 $ 2,539,300
Dividends payable 74,900 106,500
Notes payable, current 2,550,000 1,716,500
Capital leases, current 16,600 15,100
Customer advances 220,300 192,900
Liabilites related to assets held for sale 2,091,000 2,248,400
Deferred revenue, current 258,700 248,300
------------------ --------------
Total current liabilities 7,164,400 7,067,000
LONG TERM LIABILITIES
Notes payable, long term 4,200,000 3,394,700
Capital leases, long term 14,500 23,200
Deferred revenue, long term 269,400 256,000
------------------ --------------
TOTAL LIABILITIES 11,648,300 10,740,900
------------------ --------------
Preferred Stock - Series B, 105,800 and
100,700 shares issued and outstanding,
respectively 1,045,300 994,500
------------------ --------------
SHAREHOLDERS' EQUITY
Preferred Stock
Preferred - Series D - 500,000 shares
authorized, 131,300 and 285,500 shares
outstanding, respectively 1,322,600 2,847,700
Preferred - Series E Convertible - 750,000
shares authorized, 220,000 and 15,000
shares outstanding, respectively 916,500 67,500
Common Stock - 33,939,200 and 32,447,600
shares outstanding, net of 16,000 shares of
Treasury Stock outstanding at both
December 31, 2009 and June 30, 2009. 106,406,200 105,570,200
Accumulated deficit (96,015,900) (93,502,000)
------------------ --------------
Total shareholders' equity 12,629,400 14,983,400
------------------ --------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 25,323,000 $ 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 DECEMBER 31, (unaudited)
2009 2008
------------ ------------
NET SALES $ 3,627,200 $ 3,389,600
Cost of goods sold 2,159,300 2,447,200
------------ ------------
GROSS PROFIT 1,467,900 942,400
Selling, general and administrative expense 1,373,700 1,322,200
Corporate expense 269,700 304,500
Amortization of stock-based compensation 70,200 113,200
Depreciation and amortizaton 134,500 120,600
------------ ------------
OPERATING LOSS (380,200) (918,100)
OTHER INCOME & (EXPENSES)
Interest expense, net (205,400) (133,700)
Other income (expense), net (1,100) (1,400)
------------ ------------
LOSS FROM CONTINUING OPERATIONS (586,700) (1,053,200)
LOSS FROM DISCONTINUED OPERATIONS (603,600) (197,500)
------------ ------------
NET LOSS (1,190,300) (1,250,700)
Preferred stock dividends (117,700) (129,200)
------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (1,308,000) $ (1,379,900)
============ ============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
- Continuing operations $ (0.02) $ (0.03)
============ ============
- Discontinued operations $ (0.02) $ (0.01)
============ ============
- Preferred stock dividends $ (0.00) $ (0.00)
============ ============
- Net loss per share attributable to common
shareholders $ (0.04) $ (0.04)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
- Basic and diluted 33,931,000 31,823,600
============ ============
See accompanying notes to the condensed consolidated financial statements
5
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, (unaudited)
2009 2008
------------ ------------
NET SALES $ 6,604,100 $ 6,702,300
Cost of goods sold 3,747,000 4,955,400
------------ ------------
GROSS PROFIT 2,857,100 1,746,900
Selling, general and administrative expense 2,685,000 2,661,900
Corporate expense 430,500 306,900
Amortization of stock-based compensation 239,000 226,300
Depreciation and amortizaton 270,100 236,300
------------ ------------
OPERATING LOSS (767,500) (1,684,500)
OTHER INCOME & (EXPENSES)
Interest expense, net (379,900) (512,100)
Other income (expense), net (1,900) (184,800)
------------ ------------
LOSS FROM CONTINUING OPERATIONS (1,149,300) (2,381,400)
LOSS FROM DISCONTINUED OPERATIONS (1,106,400) (101,000)
------------ ------------
NET LOSS (2,255,700) (2,482,400)
Preferred stock dividends (258,200) (220,200)
------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (2,513,900) $ (2,702,600)
============ ============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
- Continuing operations $ (0.04) $ (0.08)
============ ============
- Discontinued operations $ (0.03) $ (0.00)
============ ============
- Preferred stock dividends $ (0.01) $ (0.01)
============ ============
- Net loss per share attributable to common
shareholders $ (0.08) $ (0.09)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
- Basic and diluted 33,264,700 31,589,100
============ ============
See accompanying notes to the condensed consolidated financial statements
6
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2009 (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 50,000 19,000 - - - - - 19,000
Shares issued for payment on note 1,287,800 510,000 - - - - - 510,000
Value of stock based compensation - 259,400 - - - - - 259,400
Private offering, net of expenses - - - (700) 205,000 849,000 - 848,300
Series D Preferred dividends, paid
as indicated 153,800 67,000 16,600 166,700 - - - 233,700
Series D Preferred Stock converted
to debt - - (170,800)(1,691,100) - - - (1,691,100)
Series B Preferred dividends, paid
in kind - - - - - - (50,700) (50,700)
Series D Preferred dividends, paid
or accrued - - - - - - (177,400) (177,400)
Series E preferred dividends, paid
or accrued - - - - - - (30,100) (30,100)
NASDAQ listing fees and other - (19,400) - - - - - (19,400)
Net loss - - - - - - (2,255,700) (2,255,700)
---------- ------------ -------- ---------- ------- --------- ------------- --------------
Balances, December 31 , 2009 33,939,200 $106,406,200 131,300 $1,322,600 220,000 $ 916,500 $(96,015,900) $ 12,629,400
========== ============ ======== ========== ======= ========= ============= ==============
See accompanying notes to the consolidated financial statements
7
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, (unaudited)
2009 2008
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations $ (2,255,700) $ (2,482,400)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 324,000 285,900
Stock-based compensation 259,400 240,500
Stock issued for services 19,000 18,800
Treasury shares adjustment related to
TSIN acquisition - 187,500
Impairment charge 325,000 -
Notes payable/receivable write-off
associated with TSIN settlement, net - (284,500)
Interest converted to equity 50,000 -
Fees and interest paid with debt 96,200 -
Changes in operating assets and liabilities:
Accounts receivable, net 2,500 445,600
Inventories, net 474,300 1,386,700
Costs in excess of billings and estimated
earnings on uncompleted contracts 55,000 (415,100)
Prepaid expenses and other current assets 119,900 (297,100)
Accounts payable and accrued expenses (1,421,800) (472,400)
Deferred revenue 91,600 259,200
Billings and estimated earnings in excess of
costs on uncompleted contracts (139,700) (208,100)
Customer advances 777,400 (40,800)
Other assets 63,000 105,900
------------- -------------
Net cash used in operations (1,159,900) (1,270,300)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (10,900) (87,700)
Patent renewal and other - (12,700)
------------- -------------
Net cash used in investing activities $ (10,900) $ (100,400)
------------- -------------
See accompanying notes to the condensed consolidated financial statements
8
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE SIX MONTHS ENDED DECEMBER 31, (continued)
2009 2008
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) advances on line of credit 162,700 500,000
Repayment on borrowings (51,200) (1,627,600)
Proceeds from debt 200,000 500,000
Repayment of capital lease (7,200) -
Proceeds from sale of equity instruments 848,300 2,039,200
Cash dividends paid (5,400) (174,200)
Other (19,400) (39,400)
------------- -------------
Net cash provided by financing activities 1,127,800 1,198,000
------------- -------------
NET DECREASE IN CASH (43,000) (172,700)
CASH AND CASH EQUIVALENTS, beginning of period 413,500 726,900
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 370,500 $ 554,200
============= =============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Net cash paid during the period for interest $ 171,500 $ 160,200
============= =============
Non-Cash Activities:
Value of shares issued for services and
credit line amendment $ 19,000 $ 18,800
============= =============
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
============= =============
Sharres issued in acquisition $ - $ 72,900
============= =============
Value of stock issued for payment of notes $ 460,000 $ -
============= =============
Series B preferred stock dividend,
paid in kind $ 50,700 $ 46,000
============= =============
Series D preferred stock dividend,
paid in kind $ 166,700 $ -
============= =============
Series D preferred stock dividend,
paid in common $ 67,000 $ -
============= =============
Series D preferred stock converted to
line of credit $ 1,691,100 $ -
============= =============
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. During the fiscal quarter ended
September 30, 2009, the Company expanded its divestiture plan to include the
RFID Technology segment. Accordingly, the "Assets Held for Sale" and
"Liabilities Related to Assets Held for Sale" presented in the attached balance
sheets as of December 31, 2009 and 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 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.
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 six
months ended December 31, 2009, 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 April 2009, the FASB issued guidance on interim disclosures about
fair value of financial instruments which are effective for interim and annual
reporting periods ending after June 15, 2009. The guidance amends the other-than
-temporary impairment guidance in GAAP for debt securities to modify the
requirement for recognizing other-than-temporary impairments and changes the
existing impairment model and modifies the presentation and frequency of related
disclosures. The Company has evaluated the impact of this guidance on our
financial statements, and has determined that it did not have a material impact
on its financial position and results of operations.
In August 2009, the FASB issued guidance clarifying the measurement of
liabilities at fair value. This guidance is effective for the first reporting
period (including interim periods) beginning after issuance. The Company has
evaluated the impact of this guidance on our financial statements, and has
determined that it did not have a material impact 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.
11
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
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 six months ended
December 31, 2009 were:
Awards granted
six months ended
December 31, 2009
-----------------
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 six months of fiscal 2010:
12
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Weighted Average Weighted Average Aggregate
Exercise Price Remaining Intrinsic
Shares Per Share Contractual Term (1) Value (2)
----------- ---------------- -------------------- ----------
Outstanding
July 1, 2009 6,044,700 $0.94 3.41 --
Granted 1,415,000 (3) $0.50 4.61 --
Exercised -- $0.00 -- --
Forfeited
or expired (201,200) $0.99 -- --
----------- ---------------- -------------------- ----------
Outstanding
December 31, 2009 7,258,500 $0.85 3.29 $0
========== ================ ==================== ==========
Exercisable
December 31, 2009 5,990,200 $0.89 3.19 $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 December 31, 2009, for those awards that
have an exercise price below the closing price as of December 31, 2009 of
$0.33.
(3) Options granted during the six months ended December 31, 2009 totaling
1,415,000 shares had an aggregate fair value of $205,200, or $.15 per
option share granted.
Note C - Inventories
Inventories are recorded at the lower of cost or market. The
composition of inventories as of December 31, 2009 and June 30, 2009 are
summarized as follows:
December 31, June 30,
2009 2009
------------ -----------
(unaudited)
Raw materials and purchased parts $ 1,535,600 $ 1,954,800
Work-in-process - -
------------ -----------
1,535,600 1,954,800
Less reserves for obsolescence (600,000) (600,000)
------------ -----------
$ 935,600 $ 1,354,800
============ ===========
Note D - Assets Held For Sale
During the quarter ended September 30, 2009 the Company expanded its
divestiture plan by including RFID Technology segment assets along with Data
Storage segment assets in its plan to divest certain assets and reinvest the
proceeds into the Company's Wireless Asset Management segment. Accordingly, the
"Assets Held for Sale" and "Liabilities Related to Assets Held for Sale"
presented in the attached balance sheets as of December 31, 2009 and 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. The Company has
entered into agreements with investment bankers to represent the Company in the
sale of those assets and liabilities; however, a firm acceptable offer has not
yet been received. In addition, the Company recorded, during the quarter ended
December 31, 2009, an impairment charge relative to the Data Storage segment of
$325,000, reducing "Assets Held for Sale" values to reflect the Company's latest
assessment of sales value relative to recorded asset values and increasing the
Loss from Discontinued Operations for the quarter ended December 31, 2009. The
Company is continuing to operate the segments and believes the net asset value
recorded for the business segments, as adjusted, are appropriate.
The operating results for Assets Held for Sale (Data Storage segment
and RFID Technology segment) for the six months and three months ended December
31, 2009 and 2008 were as follows:
13
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Operating Results -Assets Held for Sale
Six Months Ended December 31, Three Months Ended December 31,
2009 2008 2009 2008
------------- ------------- -------------- ---------------
Sales
Data Storage $ 829,500 $ 1,322,700 $ 358,700 $ 749,300
RFID Technology 563,700 3,358,000 331,800 1,216,200
------------- ------------- -------------- ---------------
Total Sales $ 1,393,200 $ 4,680,700 $ 690,500 $ 1,965,500
============= ============= ============== ===============
Gross Profit
Data Storage $ 284,200 $ 398,000 $ 112,000 $ 213,500
RFID Technology 114,300 844,300 123,000 249,800
------------- ------------- -------------- ---------------
Total Gross
Profit $ 398,500 $ 1,242,300 $ 235,000 $ 463,300
============= ============= ============== ===============
Gross Margin
Data Storage 34.3% 30.1% 31.2% 28.5%
RFID Technology 20.3% 25.1% 37.1% 20.5%
Total Gross Margin 28.6% 26.5% 34.0% 23.6%
Selling, General
and Adm. Expense
Data Storage $ 311,600 $ 555,500 $ 146,000 $ 260,400
Data Storage
impairment charge 325,000 - 325,000 -
RFID Technology 868,300 787,800 367,600 400,400
------------- ------------- -------------- ---------------
Total SG&A Expense 1,504,900 $ 1,343,300 $ 838,600 $ 660,800
============= ============= ============== ===============
Income (Loss) from
discontinued operations
Data Storage $ (352,400) $ (157,500) $ (359,000) $ (46,900)
RFID Technology (754,000) 56,500 (244,600) (150,600)
------------- ------------- -------------- ---------------
Total discontinued
operations $ (1,106,400) $ (101,000) $ (603,600) $ (197,500)
============= ============= ============== ===============
Capital Expenditures
Data Storage $ - $ - $ - $ -
RFID Technology 5,600 40,600 3,900 31,000
------------- ------------- -------------- ---------------
Total Capital
Expenditures $ 5,600 $ 40,600 $ 3,900 $ 31,000
============= ============= ============== ===============
Depreciation and
Amortization
Data Storage $ 13,600 $ 10,100 $ 6,700 $ 5,000
RFID Technology 42,300 39,500 20,200 19,700
------------- ------------- -------------- ---------------
Total
Depreciation and
Amortization $ 55,900 $ 49,600 $ 26,900 $ 24,700
============= ============= ============== ===============
14
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Assets Held for Sale at December 31, 2009 and June 30, 2009 consisted of the
following:
Net Assets Held for Sales Table
December 31, June 30,
2009 2009
------------ ------------
Assets held for sale
Inventory, net
Data Storage $ 414,700 $ 527,200
RFID Technology 1,037,400 980,000
------------ ------------
Total Inventory, net $ 1,452,100 $ 1,507,200
============ ============
Costs and estimated earnings in excess of
billings RFID Technology $ 117,600 $ 172,500
------------ ------------
Total costs and estimated earnings in excess of
billings $ 117,600 $ 172,500
============ ============
Prepaid expenses and other assets
Data Storage $ 92,300 $ 67,100
RFID Technology 302,100 326,300
------------ ------------
Total prepaid expenses and other assets $ 394,400 $ 393,400
============ ============
Property, plant and equipment, net
Data Storage $ 38,000 $ 49,900
RFID Technology 68,300 94,800
------------ ------------
Total property, plant and equipment, net $ 106,300 $ 144,700
============ ============
Goodwill
Data Storage $ 279,600 $ 279,600
Data Storage - impairment charge (325,000) -
RFID Technology 5,076,700 5,076,700
------------ ------------
Total goodwill $ 5,031,300 $ 5,356,300
============ ============
Total assets held for sale $ 7,101,700 $ 7,574,100
============ ============
Liabilities related to assets held for sale
Billings in excess of costs and estimated earnings
RFID Technology $ 105,800 $ 245,500
------------ ------------
Total billings in excess of costs and estimated
earnings $ 105,800 $ 245,500
============ ============
Deferred warranty revenue and customer advances
Data Storage $ 207,100 $ 231,200
RFID Technology 897,300 805,500
------------ ------------
Total deferred warranty revenue and customer
advances $ 1,104,400 $ 1,036,700
============ ============
Accounts payable and accrued expenses
Data Storage $ 136,600 $ 199,900
RFID Technology 744,200 766,300
------------ ------------
Total accounts payable and accrued expenses $ 880,800 $ 966,200
============ ============
Total liabilities related to assets held for sale $ 2,091,000 $ 2,248,400
============ ============
The Company believes that Data Storage and RFID Technology cash and accounts
receivable balances will not be included in the anticipated sales and
accordingly has included those balances in consolidated cash and accounts
receivable at December 31, 2009 and June 30, 2009.
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 December 31, 2009,
sales would have been $4,317,700 compared to $5,355,100 for the same period of
the prior year, a decrease of $1,037,400 or 19.4%. Gross profit would have
increased to $1,702,900, an increase of $297,200 or 21.1%, when compared to the
comparable quarter of the prior fiscal year. Selling, General and Administrative
expenses would have increased $200,000 to $2,417,000 compared to $2,217,000 in
the quarter ended December 31, 2008. The operating loss would have been
($983,800) compared to an operating loss of ($1,115,600) for the same quarter of
the prior year, a decrease of $131,800 or 11.8%. The improved operating results
were due primarily to improved margins (39.4% vs. 26.2%).
If Discontinued Operations had been included in the continuing
consolidated operating results for the six-months ended December 31, 2009, sales
would have been $7,997,300 compared to $11,383,000 for the same period of the
prior year, a decrease of $3,385,700 or 29.7%. 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 $3,255,600, an increase of
$266,400 or 8.9%, when compared to the comparable quarter of the prior fiscal
year. Selling, General and Administrative expenses would have increased $231,200
or 5.2% to $4,669,000 from $4,467,800 in the six-months ended December 31, 2008.
The operating loss would have been ($1,873,900) compared to an operating loss of
($1,785,500) for the same period of the prior year, a decrease of $85,500 or
5%. The improved operating results were due to improved margins (40.7% vs.
$26.3%).
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.
16
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Note E - Deferred Revenue
Deferred revenues at December 31, 2009 and June 30, 2009 consist of the
following:
December 31, June 30,
2009 2009
------------------- --------------------
(unaudited)
Deferred revenue $ 528,100 $ 504,300
Less - current portion (258,700) (248,300)
------------------- --------------------
Deferred revenue - long term $ 269,400 $ 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.
17
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
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 December 31, 2009, 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.
Note G - Equity
During the six months ended December 31, 2009, the Company issued a
total of 1,491,600 shares of Class A Common Stock. Included were 50,000 shares
issued for services valued at $19,000, 1,287,800 shares issued for payment of
notes and interest valued at $510,000, and 153,800 Common shares issued in
payment of certain Series D Preferred Dividend obligations, valued at $67,000.
The Company also issued 14,900 shares, valued at $149,500, of Class D Preferred
Stock as payment in-kind of certain Series D Preferred Dividend obligations.
The Company also completed a private offering to accredited investors
during the six months ended December 31, 2009, with the issuance of 205,000
shares of Series E Convertible Preferred Stock with a stated value of $4.50 per
share, receiving $849,000, net of expenses. 7.3%, or 15,000, of the 205,000
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.
The Company declared and paid dividends-in-kind on the Company's Series
B preferred shares through the issuance of 5,100 shares of Series B Preferred
Stock valued at $50,700. 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 six
months ended December 31, 2009 amounted to $259,400, compared to $240,500
recognized in the comparable six-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.
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 unsecured 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.
18
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
As discussed in the equity footnote above, during the six months ended
December 31, 2009, the Company issued a total of 153,800 shares of Class A
Common Stock, valued at $67,000 and 14,900 shares of Series D Preferred Stock,
valued at $149,500, in payment of Series D Preferred Stock dividends. Included
were 16,100 shares of Class A Common Stock, or approximately 10.5%, valued at
$7,500, issued to officers and directors of the Company. Officers and Directors
of the Company were issued 13,100, or approximately 88%, of the 14,900 Series D
Preferred shares issued as stock dividends. The Company also completed a private
offering to accredited investors during the six months ended December 31, 2009,
with the issuance of 205,000 shares of Series E Convertible Preferred Stock with
a stated value of $4.50 per share, receiving $849,000, net of expenses. 7.3%, or
15,000, of the 205,000 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.
19
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
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 December 31, 2009, 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 is due on 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. See subsequent footnote for additional amendments
under the ComVest term loan agreement.
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 $850,000 balance at $100,000 per
month for the months February through May 2010, with the final installment of
$450,000 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.
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 was a plaintiff in litigation initiated by its subsidiary,
StarTrak Systems, LLC, against former employees and others for violation of
certain non-disclosure covenants and for misappropriation of trade secrets. The
20
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Company also was a party to litigation arising from an expired property lease
between the Company's former subsidiary, Arraid, Inc., and Arraid Property
L.L.C., an Arizona limited liability company. Both actions have terminated and
are more fully described below.
StarTrak Systems Litigation - On July 12, 2007, the Company's
subsidiary, StarTrak Systems, LLC, commenced a lawsuit against Brian Hester,
Satamatics, Ltd., Satamatics, Inc., and Farruhk Shahzad in the United States
District Court, District of New Jersey, as case number 07-3203(DRD), claiming
misappropriation of trade secrets and violation of confidentiality agreements.
Brian Hester and Farruhk Shahzad were previously employees of StarTrak, and the
Company alleged that they employed and/or attempted to employ trade secrets of
StarTrak in connection with their association with Satamatics in direct
competition with StarTrak. StarTrak alleged that Satamatics misappropriated
trade secrets relating to StarTrak's ReeferTrak product -- a GPS tracking,
monitoring, and control system for transport refrigeration units -- in
connection with Satamatics' competing ReeferMatics product. Each defendant
expressly denied the allegations in the lawsuit. On November 17, 2009 the
Company and all defendants (other than Brian Hester) entered into a settlement
whereby all disputes among the parties were resolved and the lawsuit was
dismissed with prejudice. The settlement prohibits Satamatics or its affiliates
from selling or marketing ReeferMatics in certain regions including North
America, Europe, China and Australia through December 31, 2011. Satamatics has
never concluded a sale of ReeferMatics in these or other regions.
Arraid Litigation - On July 18, 2003, Arraid Property L.L.C., an
Arizona Limited Liability Company ("Arraid LLC"), filed a complaint in the
Arizona Superior Court in and for Maricopa County, Arizona (case number CV
2003-13999) against the Company and its wholly owned subsidiary, Arraid, Inc.,
alleging breach of lease and seeking substantial monetary damages in excess of
$3 million. The suit relates to an expired lease agreement for property
previously leased by Arraid. Following a trial, the Court found in favor of
Arraid LLC against the Company with respect to certain factual findings
resulting in damages owed by the Company in an amount of approximately $35,000,
less than one percent of the amount sought by the plaintiff. The court
determined that the plaintiff was the prevailing party, and awarded the
plaintiff approximately $95,000 in attorney's fees and costs. The Company
appealed the decision to the Arizona Court of Appeals. The Court of Appeals
vacated the award of attorney's fees against the Company as well as some of the
damages awarded to the plaintiff, awarded the Company $60,000 in appeal legal
fees and in excess of $10,000 in appeal costs, and returned the case to the
trial court to determine the final judgment. The trial court has issued its
final judgment in the matter resulting in a net judgment in favor of the Company
and against Arraid LLC in the approximate amount of $50,000.
The Company may also, from time to time, be involved in litigation
arising from the normal course of business. As of December 31, 2009 there was
no such litigation pending deemed material by the Company.
Note K - Subsequent Events
Subsequent to December 31, 2009, the Company issued 137,200 shares of
Class A Common Stock, valued at $38,400, and 1,200 shares of Series D Preferred
Stock, valued at $11,800, as payment for $50,200 in Series D Preferred Stock
dividends that had been accrued at December 31, 2009. None of the Class A Common
Shares and all 1,200 of the Series D Preferred Stock issued as dividends were
issued to officers and directors of the Company.
ComVest Capital LLC, pursuant to a December 30, 2009 term loan
amendment discussed in the equity footnote above, elected to convert a portion
of its note into 200,000 shares of the Company's Class A Common Stock at a price
equal to eighty (80%) of the five trading day weighted average closing price for
the Common Stock on the NASDAQ capital market immediately prior to January 1,
2010. The value of the conversion, which was applied to the February 2010
payment, was $52,180, or $.26 per share.
On January 13, 2010, the Company completed an additional private
offering of 15,000 shares of the Company's Series E Convertible Preferred Stock
($4.50 per share stated value) to an accredited investor for $67,500.
21
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
The Company entered into a Common Stock Purchase Agreement (the "Stock
Purchase Agreement") on January 18, 2010 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. The price per share for the Initial Closing was $0.28486, and the
Company raised gross proceeds of $56,972 at such Closing. The price per share
for the second closing was $0.26282, and the Company raised gross proceeds of
$52,564. The amounts to be raised in subsequent closings are not estimable as of
the date of this Form 10-Q. 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.
In a separate transaction 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.
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 will submit a plan by February
15, 2010 to regain compliance with the NASDAQ Rule. If the plan is accepted,
Nasdaq can grant an extension of up to 105 calendar days from the date of this
letter to evidence compliance.
The Company is currently obtaining amendments to the Series E
Convertible Preferred Stock purchase agreements modifying the voting rights to
comply with the Rule. Once the amendments have been executed, the Company will
amend the designation of the Series E Preferred Stock to comply with the Rule.
Note L - Liquidity
During the six months ended December 31, 2009, the Company reported a
Net Loss of approximately $2.3 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.
22
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-
ooking 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.
23
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 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.
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 December 31, 2009 versus three months ended
December 31, 2008
Net Sales
Net sales from continuing operations for the second fiscal quarter
ended December 31, 2009 were $3,627,200, an increase of $ 237,600, or 7.0%,
compared to net sales of $3,389,600 reported for the comparable quarter of the
prior year. The increase resulted from increased hardware shipments during the
quarter ended December 31, 2009 compared to the quarter ended December 31, 2008.
24
ALANCO TECHNOLOGIES, INC.
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.
Gross Profit
Gross profit from continuing operations for the quarter ended December
31, 2009 amounted to $1,467,900, an increase of $525,500, or 55.8% compared to
$942,400 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 40.5% compared to 27.8%
reported in the same period of the prior year. The increase in both gross profit
and gross margin was due to reduced warranty costs related to an early version
of ReeferTrak product that negatively effected margins in the quarter ended
December 31, 2008 and the completion of low margin hardware shipments 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 second quarter ended December 31, 2009.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the quarter
ended December 31, 2009 were $1,373,700, a $51,500, or 3.9%, increase when
compared to the $1,322,200 reported for the comparable period of the prior year.
The increase resulted primarily from increased sales expenses.
Corporate expenses reported for the current quarter of $269,700
represents a decrease of $ 34,800 compared to $304,500 reported for the quarter
ended December 31, 2008. Corporate expenses for the three months ended
December 31, 2009 decreased primarily due to a decrease in payroll expense as a
result of reduced staffing.
Amortization of stock-based compensation reported for the quarter ended
December 31, 2009 decreased to $70,200, a decrease of $43,000, or 38%. 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 to
$134,500, an increase of $13,900, or 11.5% due to additional production
equipment and leasehold improvements acquired in November 2008 at the Company's
facilities in Morris Plains, New Jersey.
Operating Loss
Operating Loss for the quarter ended December 31, 2009 was ($380,200)
compared to an Operating Loss of ($918,100) reported for the same quarter of the
prior year, an improvement of $537,900, or 58.6%. 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 $205,400, an increase
of $ 71,700, or 53.6%, compared to net interest expense of $133,700 for the same
quarter in the prior year. The increase was due to increased borrowing compared
to the comparable quarter ended December 31, 2008.
Loss From Continuing Operations
Loss from continuing operations for the quarter decreased $466,500,
or 44.3% to ($586,700) from ($1,053,200) in the quarter ended December 31, 2008.
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 December 31, 2009 of ($603,600), an increase of ($406,100)
compared to a loss from Discontinued Operations of ($197,500) reported for the
comparable quarter of the prior year. The significant increase in loss from
discontinued operations resulted primarily from a $325,000 impairment charge the
Company recorded to reflect the anticipated reduced value of the Data Storage
segment and a reduction in 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
expected to resume and accelerate in the quarter ended March 31, 2010.
25
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
second quarter was a loss of ($246,800) an improvement of $552,000 when compared
to an EBITDA loss of ($798,800) for the same quarter of the prior fiscal year.
EBITDA before Stock-based compensation and Corporate Expense for the current
quarter was $93,100, an improvement of $474,200, when compared to a loss of
($381,100) 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
December 31, December 31,
2009 2008
--------------- ---------------
EBITDA before Stock-based compensation
and Corporate Expense $ 93,100 $ (381,100)
Corporate Expense (269,700) (304,500)
Stock-based compensation (70,200) (113,200)
--------------- ---------------
EBITDA (246,800) (798,800)
Net interest expense (205,400) (133,700)
Depreciation and amortization (134,500) (120,600)
--------------- ----------------
NET LOSS FROM CONTINUING OPERATIONS $ (586,700) $ (1,053,100)
=============== ================
Dividends
Dividend expense for the three months ended December 31, 2009 was
$117,700, a decrease of $11,500, or 8.9%, compared to the $129,200 in preferred
stock dividends recorded in the comparable period of the prior fiscal year. The
decrease resulted primarily due to a reduction of Series D Preferred Stock
outstanding during the current quarter as compared to the quarter ended
December 31, 2008.
Net Loss Attributable to Common Shareholders
Net Loss Attributable to Common Shareholders for the quarter ended
December 31, 2009 amounted to ($1,308,000), or ($.04) per share, a $71,900
reduction when compared to a loss of ($1,379,900), or ($.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.
26
ALANCO TECHNOLOGIES, INC.
(B) Six months ended December 31, 2009 versus six months ended
December 31, 2008
Net Sales
Net sales from continuing operations for the six months ended December
31, 2009 were $6,604,100, a decrease of $98,200, or 1.5%, compared to net sales
of $6,702,300 reported for the comparable period of the prior year. The decrease
resulted from reduced hardware shipments under major contracts during the first
quarter of fiscal year 2010, ended September 30, 2009, compared to the
comparable quarter 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 six months ended
December 31, 2009 amounted to $2,857,100, an increase of $1,110,200, or 63.6%
compared to $1,746,900 in gross profit reported for the six month period ended
December 31, 2008. The gross profit increase was due to improved margins in both
hardware sales and monitoring services. Gross margin increased to 43.3% compared
to 26.1% 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 six month period ended December 31, 2009.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the six
months ended December 31, 2009 were $2,685,000, a $23,100, or 1%, increase
when compared to the $2,661,900 reported for the comparable period of the prior
year.
Corporate expenses reported for the six months ended December 31, 2009
were $430,500, an increase of $123,600, or 40.3%, compared to $306,900 reported
for the six months ended December 31, 2008. 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 Arriad 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 would reflect an increase of
$46,600, or 7.7%.
Amortization of stock-based compensation reported for the six months
ended December 31, 2009 increased to $239,000, an increase of $12,700, or 5.6%.
Depreciation and amortization expense for the six months ended December
31, 2009 increased to $270,100, an increase of $33,800, or 14.3% due to
additional production equipment and leasehold improvements at the Company's
facilities in Morris Plains, New Jersey.
Operating Loss
Operating Loss for the six months ended December 31, 2009 was
($767,500) compared to an Operating Loss of ($1,684,500) reported for the same
period of the prior year, an improvement of $917,000, or a reduction of 54.4%.
The improved operating results are due primarily to significant improvement in
gross margins offset by increases in corporate expenses.
Other Income and Expense
Net interest expense for the six months ended December 31, 2009
decreased to $379,900, a decrease of $132,200, or 25.8%, compared to net
interest expense of $512,100 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 the six months ended December 31, 2008
related to the prepayment on the ComVest term loan. Excluding the accelerated
payment, interest expense actually increased by $83,800, or 28.3% due to
additional borrowing during the current period compared to the prior year.
27
ALANCO TECHNOLOGIES, INC.
The Company reported a reduction in Other Expense from ($184,800) in
the first six month of the prior fiscal year to ($1,900) reported in the current
six month period ended December 31, 2009. 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 six months decreaed
$1,232,100, or 51.7% to ($1,149,300) from ($2,381,400) in the quarter ended
December 31, 2008. The improvement is primarily due to improved gross profit
as a results of improved sales and gross margins.
Discontinued Operations
The Company reported a loss from Discontinued Operations for the six
months ended December 31, 2009 of ($1,106,400), a significant increase compared
to the reported loss from discontinued operations of ($101,000) reported for
the comparable period of the prior year. The significant increase resulted
primarily from a $325,000 impairment charge 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 expected to
resume and accelerate during the quarter ended March 31, 2010.
(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 six months ended December 31,
2009 was a loss of ($499,300) an improvement of $1,133,700, or a 74% reduction,
when compared to an EBITDA loss of ($1,633,000) for the same period of the prior
fiscal year. EBITDA before Stock-based compensation and Corporate Expense for
the current six month period was $170,200, an improvement of $1,270,000, when
compared to a loss of ($1,099,800) for the comparable period of the prior year.
A reconciliation of the EBITDA calculations is presented below:
28
ALANCO TECHNOLOGIES, INC.
EBITDA RECONCILIATION to NET LOSS FROM CONTINUING OPERATIONS
(Unaudited)
6 months ended 6 months ended
December 31, December 31,
2009 2008
--------------- ---------------
EBITDA before Stock-based compensation
and Corporate Expense $ 170,200 $ (1,099,800)
Corporate Expense (430,500) (306,900)
Stock-based compensation (239,000) (226,300)
--------------- ---------------
EBITDA (499,300) (1,633,000)
Net interest expense (379,900) (512,100)
Depreciation and amortization (270,100) (236,300)
--------------- ---------------
NET LOSS FROM CONTINUING OPERATIONS $ (1,149,300) $ (2,381,400)
=============== ===============
Dividends
Dividend expense for the six months ended December 31, 2009 was
$258,200, an increase of $38,000, or 17.3%, over the $220,200 in preferred stock
dividends recorded in the comparable period of the prior fiscal year. The
increase resulted primarily due to additional Series D Preferred Stock
outstanding during the first six months of fiscal year 2010 as compared to the
six months ended December 31, 2008.
Net Loss Attributable to Common Shareholders
Net Loss Attributable to Common Shareholders for the six months ended
December 31, 2009 amounted to ($2,513,900), or ($.08) per share, an $188,700
reduction when compared to a loss of ($2,702,600), or ($.09) 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.
Liquidity and Capital Resources
The Company's current assets at December 31, 2009 exceeded current
liabilities by $4,044,100, resulting in a current ratio of 1.56 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 December 31, 2009 versus
June 30, 2009 resulted from reduced inventories and a reduction in net Assets
held for sale.
Consolidated accounts receivable of $2,300,500 at December 31, 2009
(including both continuing and discontinued operations) reflects a small
decrease compared to the $2,303,000 reported as consolidated accounts receivable
at June 30, 2009. If we review Wireless Asset Management segment's balances
separately, accounts receivables have increased from $1,484,600 at June 30, 2009
to $2,011,000 at December 31, 2009, an increase of $526,400, or 35.5%. The
Wireless Asset Management account receivable balance at December 31, 2009
reflects 56 days sales in receivables compared to 40 days sales in receivable at
June 30, 2009. The increase resulted from approximately 61% of the second fiscal
quarter hardware sales in the month of December 2009 compared to 34.7% recorded
in the last month of the comparable quarter of the prior year.
29
ALANCO TECHNOLOGIES, INC.
Inventories at December 31, 2009 amounted to $935,600, a decrease of
$419,200, or 30.9%, when compared to $1,354,800 at June 30, 2009. The inventory
balance at December 31, 2009 reflects only the Wireless Asset Management
segment and represents an inventory turnover of 8 at December 31, 2009 compared
to 7 as of June 30, 2009.
At December 31, 2009, 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 six-month period ended December 31,
2009 was $1,159,900, a decrease of $110,400, or 8.7%, when compared to cash used
in operations of $1,270,300 for the comparable period ended December 31, 2008.
The decrease in cash used in operating activities during the six-month period
resulted primarily from a decrease in net loss and the net decrease in accounts
payable and accrued expenses offset by an increase in customer advances.
During the six-months ended December 31, 2009, the Company reported
cash used by investing activities of $10,900 compared to $100,400 reported for
the same period in the prior fiscal year. The decrease in cash used by investing
activities is the result of a reduction in the purchase of property, plant and
equipment and a reduction in patent renewal costs compared to the prior fiscal
year period ended December 30, 2008.
Cash provided by financing activities for the six-months ended December
31, 2009 amounted to $1,127,800 compared to $1,198,000 for the six months ended
December 31, 2008, a decrease of $70,200, or 5.9%. The decrease in financing
activity resulted primarily from a net decrease in repayment of borrowings
offset by a decrease in proceeds from the sale of equity instruments as
compared to the prior period.
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 December 31, 2009. 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.
30
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 six month
period ended December 31, 2009. 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 six month period ended December 31, 2009 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
31
ALANCO TECHNOLOGIES, INC.
Item 1. LEGAL PROCEEDINGS
The Company was a plaintiff in litigation initiated by its subsidiary,
StarTrak Systems, LLC, against former employees and others for violation of
certain non-disclosure covenants and for misappropriation of trade secrets. The
Company also was a party to litigation arising from an expired property lease
between the Company's former subsidiary, Arraid, Inc., and Arraid Property
L.L.C., an Arizona limited liability company. Both actions have terminated and
are more fully described below.
StarTrak Systems Litigation - On July 12, 2007, the Company's
subsidiary, StarTrak Systems, LLC, commenced a lawsuit against Brian Hester,
Satamatics, Ltd., Satamatics, Inc., and Farruhk Shahzad in the United States
District Court, District of New Jersey, as case number 07-3203(DRD), claiming
misappropriation of trade secrets and violation of confidentiality agreements.
Brian Hester and Farruhk Shahzad were previously employees of StarTrak, and the
Company alleged that they employed and/or attempted to employ trade secrets of
StarTrak in connection with their association with Satamatics in direct
competition with StarTrak. StarTrak alleged that Satamatics misappropriated
trade secrets relating to StarTrak's ReeferTrak product -- a GPS tracking,
monitoring, and control system for transport refrigeration units -- in
connection with Satamatics' competing ReeferMatics product. Each defendant
expressly denied the allegations in the lawsuit. On November 17, 2009 the
Company and all defendants (other than Brian Hester) entered into a settlement
whereby all disputes among the parties were resolved and the lawsuit was
dismissed with prejudice. The settlement prohibits Satamatics or its affiliates
from selling or marketing ReeferMatics in certain regions including North
America, Europe, China and Australia through December 31, 2011. Satamatics has
never concluded a sale of ReeferMatics in these or other regions.
Arraid Litigation - On July 18, 2003, Arraid Property L.L.C., an
Arizona Limited Liability Company ("Arraid LLC"), filed a complaint in the
Arizona Superior Court in and for Maricopa County, Arizona (case number CV
2003-13999) against the Company and its wholly owned subsidiary, Arraid, Inc.,
alleging breach of lease and seeking substantial monetary damages in excess of
$3 million. The suit relates to an expired lease agreement for property
previously leased by Arraid. Following a trial, the Court found in favor of
Arraid LLC against the Company with respect to certain factual findings
resulting in damages owed by the Company in an amount of approximately $35,000,
less than one percent of the amount sought by the plaintiff. The court
determined that the plaintiff was the prevailing party, and awarded the
plaintiff approximately $95,000 in attorney's fees and costs. The Company
appealed the decision to the Arizona Court of Appeals. The Court of Appeals
vacated the award of attorney's fees against the Company as well as some of the
damages awarded to the plaintiff, awarded the Company $60,000 in appeal legal
fees and in excess of $10,000 in appeal costs, and returned the case to the
trial court to determine the final judgment. The trial court has issued its
final judgment in the matter resulting in a net judgment in favor of the Company
and against Arraid LLC in the approximate amount of $50,000.
The Company may also, from time to time, be involved in litigation
arising from the normal course of business. As of December 31, 2009 there was no
such litigation pending deemed material by the Company.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the six months ended December 31, 2009, the Company issued 5,100
Shares of Series B Preferred Stock as in-kind dividend payments, 16,600 shares
of Series D Preferred Stock as in-kind dividend payments, and a total of
1,491,600 shares of Class A Common Stock, including 50,000 shares for services
rendered, 1,287,800 shares issued for payment of notes and interest and 153,800
issues in payment of Series D Preferred Stock dividends.
32
ALANCO TECHNOLOGIES, INC.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on January 19, 2010, the
following proposals were voted upon and approved by the stockholders.
Proposal # 1 Election of Directors
For Withhold Total Voting
Harold S. Carpenter 19,134,271 2,614,881 21,749,152
Robert R. Kauffman 19,714,673 2,034,479 21,749,152
James T. Hecker 19,603,730 2,145,422 21,749,152
Thomas C. LaVoy 19,143,342 2,605,810 21,749,152
John A. Carlson 19,790,524 1,958,628 21,749,152
Donald E. Anderson 19,499,763 2,249,389 21,749,152
Timothy P. Slifkin 19,727,510 2,021,642 21,749,152
Proposal # 2 Approve a proposal to authorize the board of directors, only if
necessary and prudent, to issue to investors not more than 7.5 million shares of
Class A Common Stock, including shares potentially issuable upon exercise of
warrants, in excess of the limitation as specified in Nasdaq Rule 5635(d)(1-2).
The common shares may be sold at a discount not to exceed fifteen percent (15%)
of the market value at the time of issuance.
For Against Abstain Total Voting
19,003,317 2,452,126 294,109 21,749,552
33
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
34
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: February 16, 2010
/s/ Robert R. Kauffman
________________________
Robert R. Kauffman
Chairman and Chief Executive Officer
35
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: February 16, 2010
/s/ John A. Carlson
________________________
John A. Carlson
Executive Vice President and Chief Financial Officer
36
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 December 31, 2009, 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: February 16, 2010
37
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 December 31, 2009, 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: February 16, 2010
38