2
ALANCO TECHNOLOGIES, INC.
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
____TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________ to ____________
Commission file number 0-9347
ALANCO TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Arizona
(State or other jurisdiction of incorporation or organization)
86-0220694
(I.R.S. Employer Identification No.)
15575 N. 83rd Way, Suite 3, Scottsdale, Arizona 85260
(Address of principal executive offices) (Zip Code)
(480) 607-1010
(Issuer's telephone number)
----------------------------------------------------------------------
(Former name,former address and former fiscal year,if changed since last report)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
As of February 11, 2005 there were 25,489,200 shares, net of treasury shares,
of common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes ___ No X_
Forward-Looking Statements: Some of the statements in this Form 10-QSB Quarterly
Report, as well as statements by the Company in periodic press releases, oral
statements made by the Company's officials to analysts and shareholders in the
course of presentations about the Company, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Words or phrases denoting the anticipated results of future events such
as "anticipate," "believe," "estimate," "will likely," "are expected to," "will
continue," "project," "trends" and similar expressions that denote uncertainty
are intended to identify such forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. Such factors include,
among other things, (i) general economic and business conditions; (ii) changes
in industries in which the Company does business; (iii) the loss of market share
and increased competition in certain markets; (iv) governmental regulation
including environmental laws; and (v) other factors over which the company has
little or no control.
ALANCO TECHNOLOGIES, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
December 31, 2004 and June 30, 2004 .....................3
Condensed Consolidated Statements of Operations (Unaudited)
For the three months ended December 31,
2004 and 2003............................................4
Condensed Consolidated Statements of Operations (Unaudited)
For the six months ended December 31,
2004 and 2003 ...........................................5
Changes in Certain Equity and Preferred Stock Accounts
(Unaudited)
For the six months ended December 31,
2004 and 2003............................................6
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the six months ended December 31,
2004 and 2003............................................7
Notes to Condensed Consolidated Financial Statements (Unaudited) ....9
Note A - Basis of Presentation and Recent Accounting
Announcements
Note B - Inventories
Note C - Contracts in Process
Note D - Deferred Revenue
Note E - Loss per Share
Note F - Equity
Note G - Industry Segment Data
Note H - Related Party Transactions
Note I - Line of Credit
Note J - Litigation
Note K - Subsequent Event
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................12
Item 3. Controls and Procedures....................................15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................16
Item 2. Changes in Securities......................................16
Item 6. Exhibits ..................................................17
2
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND JUNE 30, 2004
Dec 31, 2004 June 30, 2004
------------ ------------
ASSETS (unaudited)
CURRENT ASSETS
Cash and Cash Equivalents $ 1,468,700 $ 1,975,600
Accounts receivable, net 991,600 657,200
Inventories, net 2,260,400 2,282,300
Cost and est earnings in excess of billings
on uncompleted contracts 55,500 -
Prepaid expenses and other current assets 185,900 110,600
------------ ------------
Total Current Assets 4,962,100 5,025,700
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 265,000 247,500
------------ ------------
OTHER ASSETS
Goodwill and other intangible assets, net 5,939,900 6,048,000
Long-term notes receivable, net 13,000 68,000
Net assets held for sale 126,400 156,100
Other assets 35,300 40,600
------------ ------------
Total Other Assets 6,114,600 6,312,700
------------ ------------
TOTAL ASSETS $ 11,341,700 $ 11,585,900
============ ============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,515,900 $ 1,246,500
Notes payable and capital leases, current 501,700 5,200
Billings in excess of cost and est earnings
on uncompleted contracts - 25,800
Deferred revenue, current 150,300 27,200
------------ ------------
Total Current Liabilities 2,167,900 1,304,700
LONG TERM LIABILITIES
Notes payable and capital leases, long term 314,100 814,100
------------ ------------
TOTAL LIABILITIES 2,482,000 2,118,800
------------ ------------
Preferred Stock - Series B, 63,200 and
60,200 shares issued and outstanding,
respectively 632,800 602,800
------------ ------------
SHAREHOLDERS' EQUITY
Preferred Stock - Series A Convertible,
2,624,600 and 2,476,800 shares issued and
outstanding, respectively 3,177,900 2,956,100
Common Stock, 25,478,500,and 23,232,800
shares outstanding, net of 500,000
shares of Treasury Stock 70,132,000 68,959,600
Accumulated deficit (65,083,000) (63,051,400)
------------ ------------
Total shareholders' equity 8,226,900 8,864,300
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 11,341,700 $ 11,585,900
============ ============
See accompanying notes to the consolidated financial statements
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ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, (Unaudited)
2004 2003
============ ============
NET SALES $ 2,085,500 $ 1,234,100
Cost of goods sold 1,402,400 755,900
------------ ------------
GROSS PROFIT 683,100 478,200
Selling, general and administrative expense 1,548,900 1,144,700
------------ ------------
OPERATING LOSS (865,800) (666,500)
OTHER INCOME & EXPENSES
Interest expense, net (11,200) (32,000)
Other income, net 5,800 37,100
------------ ------------
LOSS FROM OPERATIONS (871,200) (661,400)
Preferred stock dividends - in kind (15,000) (14,500)
------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (886,200) $ (675,900)
============ ============
NET LOSS PER SHARE - BASIC AND DILUTED
- Net loss attributable to common shareholders $ (0.03) $ (0.04)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 25,416,700 16,402,100
============ ============
See accompanying notes to the consolidated financial statements
4
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, (Unaudited)
2004 2003
------------ ------------
NET SALES $ 3,822,700 $ 2,271,500
Cost of goods sold 2,518,200 1,400,600
------------ ------------
GROSS PROFIT 1,304,500 870,900
Selling, general and administrative expense 3,067,600 2,264,500
------------ ------------
OPERATING LOSS (1,763,100) (1,393,600)
OTHER INCOME & EXPENSES
Interest expense, net (27,600) (114,700)
Other income, net 10,800 39,200
------------ ------------
LOSS FROM OPERATIONS (1,779,900) (1,469,100)
Preferred stock dividends - in kind (251,700) (27,000)
------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (2,031,600) $ (1,496,100)
============ ============
NET LOSS PER SHARE - BASIC AND DILUTED
- Net loss attributable to common shareholders $ (0.08) $ (0.09)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 24,887,000 15,789,200
============ ============
See accompanying notes to the consolidated financial statements
5
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN CERTAIN SHAREHOLDERS' EQUITY AND PREFERRED
STOCK ACCOUNTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (Unaudited)
Common Stock Preferred Stock - Ser A Preferred Stock - Ser B Treasury Stock
Shares Dollars Shares Dollars Shares Dollars Shares Dollars
---------- ------------ --------- ----------- ------ --------- ------- ----------
Balances at 06/30/04 23,732,800 $ 69,334,700 2,476,800 $ 2,956,100 60,200 $ 602,800 500,000 $ (375,100)
Preferred dividends in kind - - 147,800 221,800 3,000 30,000 - -
Shares issued for services 57,500 59,900 - - - - - -
Options and Warrants exercised 2,188,200 1,145,600 - - - - - -
Other - (33,200) - - - - - -
---------- ------------ --------- ----------- ------ --------- ------- ----------
Balances at 12/31/04 25,978,500 $ 70,507,000 2,624,600 $ 3,177,900 63,200 $ 632,800 500,000 $ (375,100)
See accompanying notes to the consolidated financial statements
6
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED DECEMBER 31,
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from operations $ (1,779,900) $ (1,469,100)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 168,100 172,800
Stock and warrants issued for services 59,900 60,200
Income from assets held for sale (10,800) (8,600)
Gain on disposal of asset - (1,000)
Changes in:
Accounts receivable, net (334,400) (100)
Inventories, net 21,900 366,700)
Costs in excess of billings and estimated
earnings on uncompleted contracts (55,500) -
Prepaid expenses and other current assets (75,300) (76,800)
Accounts payable and accrued expenses 269,400 185,500)
Deferred revenue 123,100 (16,600)
Billings and estimated earnings in excess
of costs on uncompleted contracts (25,800) -
Other assets 5,300 6,100
------------ ------------
Net cash used in operating activities (1,634,000) (885,300)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash from assets held for sale 40,500 43,900
Collection of notes receivable 55,000 142,500
Purchase of property, plant and equipment (75,500) (14,000)
Proceeds from the sale of property, plant
and equipment - 5,200
Goodwill, acquisition - (5,000)
Patent renewal and other (1,800) -
------------ ------------
Net cash provided by investing activities 18,200 172,600
------------ ------------
See accompanying notes to the consolidated financial statements
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ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED DECEMBER 31, (Continued)
2004 2003
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on borrowings - 1,205,000
Repayment on borrowings (3,500) (1,780,800)
Subscriptions receivable - 899,200
Net proceeds from sale of Preferred Stock - 102,400
Net proceeds from sale of Common Stock 1,112,400 1,248,300
------------ ------------
Net cash provided by financing activities 1,108,900 1,674,100
------------ ------------
NET DECREASE IN CASH (506,900) (38,600)
CASH AND CASH EQUIVALENTS, beginning of period 1,975,600 97,700
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,468,700 $ 59,100
============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Net cash paid during the period for interest $ 16,700 $ 114,700
============ ============
Non-Cash Activities:
Value of stocks and warrants issued for
services $ 59,900 $ 60,200
============ ============
Series B preferred stock dividend, in kind $ 30,000 $ 27,000
============ ============
Series A preferred stock dividend, in kind $ 221,800 $ -
============ ============
Value of treasury stock redeemed in
preferred stock and warrant issuance $ - $ 198,300
============ ============
Value of treasury stock cancelled $ - $ 1,907,200
============ ============
Conversion of debt to equity $ - $ 250,000
============ ============
See accompanying notes to the consolidated financial statements
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ALANCO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2004
Note A - Basis of Presentation and Recent Accounting Pronouncements
Alanco Technologies, Inc., an Arizona corporation ("Alanco" or
"Company"), operates in two business segments: Computer Data Storage Segment
and RFID Technology Segment.
The unaudited condensed consolidated balance sheet as of December 31,
2004 and the related unaudited condensed consolidated statements of operations
and cash flows for the three months and six months ended December 31, 2004
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in accordance with the instructions to Form 10-QSB. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. In our opinion, the accompanying condensed
consolidated financial statements include all adjustments necessary for a fair
presentation of such condensed consolidated financial statements. Such necessary
adjustments consist of normal recurring items and the elimination of all
significant intercompany balances and transactions.
These interim condensed consolidated financial statements should be
read in conjunction with the Company's June 30, 2004, Annual Report on Form
10-KSB. Interim results are not necessarily indicative of results for a full
year. Certain reclassifications have been made to conform prior period
financials to the presentation in the current reporting period. The
reclassifications had no effect on net loss.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
All stock options issued to employees have an exercise price not less
than the fair market value of the Company's Common Stock on the date of grant.
In accordance with accounting for such options utilizing the intrinsic value
method under APB 25, there is no related compensation expense recorded in the
Company's financial statements for the six months ended December 31, 2004 and
2003. Had compensation cost for stock-based compensation been determined based
on the fair value of the options at the grant dates consistent with the method
of SFAS 123, the Company's net loss and loss per share would have been increased
to the pro forma amounts presented below.
9
ALANCO TECHNOLOGIES, INC.
6 months ended December 31,
2004 2003
------------ ------------
Net loss, as reported $ (2,031,600) $ (1,496,100)
Add: Stock-based Employee compensation expense
included in reported income, net of related
tax effects - -
Deduct: Total stock-based Employee compensation
expense determined under fair value based
methods for all awards, net of related tax
effects $ (43,500) $ (245,700)
------------ -------------
Pro forma net loss $ (2,075,100) $(1,741,800)
============ ============
Net loss per common share, basic and diluted
as reported $ (0.08) $ (0.09)
============ ============
Pro forma $ (0.08) $ (0.11)
============ ============
Weighted average common shares 24,887,000 16,402,100
============ ============
During the six months ended December 31, 2004, the Company granted employee
stock options to purchase 75,000 shares of the Company's Class A Common Stock at
an average purchase price of $1.20, market price on date granted. The fair value
of option grants is estimated as of the date of grant, in accordance with SFAS
123, utilizing the Black-Scholes option-pricing model, with the assumptions
substantively utilized in the year-end financial statements.
Recent Accounting Pronouncements -In November 2004, the FASB issued Statement
No. 151 ("SFAS 151"), "Inventory Cost - An Amendment of ARB No. 43, Chapter 4."
SFAS 151 clarifies accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material. It requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of abnormal. Currently, we do not have any inventory items that fall
into the classifications discussed, accordingly, adoption of SFAS 151 does not
have a significant impact on our financial statements.
In December 2004, the FASB issued Statement No. 152 ("SFAS 152"), "Accounting
for Real Estate Time-Sharing Transactions -- An Amendment of Statements 66 and
67." SFAS 152 amends SFAS 66 and 67 to reference the financial accounting and
reporting guidance for real estate time-sharing transactions and to state that
the guidance for incidental operations and costs incurred to sell real estate
projects does not apply to real estate time-sharing transactions. SFAS 152 is
effective for financial statements for fiscal years beginning after June 15,
2005. Currently, the Company does not have any real estate transactions.
Accordingly, adoption of SFAS 152 does not have a significant impact on our
financial statements.
In December 2004, the FASB issued Statement No. 153 ("SFAS 153"), "Exchanges of
Nonmonetary Assets - An Amendment of APB Opinion No. 29." SFAS 153 amends APB
Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. Adoption of SFAS 153 does not
have a significant impact on our financial statements.
In December 2004, the FASB issued Statement No. 123R ("SFAS 123R"), "Share-Based
Payment". This Statement focuses primarily on accounting for transactions in
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ALANCO TECHNOLOGIES, INC.
which an entity obtains employee services in share-based payment transactions.
It requires that the fair-value-based method be used to account for these
transactions for all public entities. This Statement is effective for small
business issuers for the first reporting period after December 15, 2005 and will
effect any stock based compensation for options issued after that date, or not
vested as of that date..
Note B - Inventories
Inventories have been recorded at the lower of cost or market. The
composition of inventories as of December 31 and June 30, 2004 are summarized as
follows:
December 31, June 30,
2004 2004
------------ ------------
(unaudited)
Raw materials and purchased parts $ 2,186,000 $ 1,894,700
Work-in-progress 141,700 198,300
Finished goods 203,700 279,300
------------ ------------
2,531,400 2,372,300
Less reserves for obsolescence (271,000) (90,000)
------------ ------------
$ 2,260,400 $ 2,282,300
============ ============
Note C - Contracts In Process
Costs incurred, estimated earnings and billings in the RFID Technology
segment, related to contracts for the installation of TSI PRISM system in
process at December 31, 2004 and June 30, 2004 consist of the following:
December 31, June 30,
2004 2004
------------ ------------
(unaudited)
Costs incurred on uncompleted contracts $ 240,200 $ 117,300
Estimated gross profit earned to date 168,000 58,200
------------ ------------
Revenue earned to date 408,200 175,500
Less Billing to date (352,700) (201,300)
------------ ------------
Costs and estimated earnings in excess of
Billing (billing in excess of costs and
earnings) $ 55,500 $ (25,800)
============ ============
Note D - Deferred Revenue
Deferred Revenues at December 31, 2004 and June 30, 2004 consist of the
following:
December 31, June 30,
2004 2004
------------ ------------
(unaudited)
Extended warranty revenue $ 150,300 $ 27,200
Less - current portion (150,300) (27,200)
------------ ------------
$ - $ -
============ ============
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ALANCO TECHNOLOGIES, INC.
Note E - Loss Per Share
Basic loss per share of common stock was computed by dividing net loss
by the weighted average number of shares of common stock outstanding.
Diluted earnings per share are computed based on the weighted average
number of shares of common stock and dilutive securities outstanding during the
period. Dilutive securities are options and warrants that are freely exercisable
into common stock at less than the prevailing market price. Dilutive securities
are not included in the weighted average number of shares when inclusion would
increase the earnings per share or decrease the loss per share. As of December
31, 2004 there were 3,803,750 potentially dilutive securities outstanding.
Note F - Equity
During the six months ended December 31, 2004, the Company issued a
total of 2,245,700 shares of the Company's Class A Common Stock. Included were
2,188,200 shares issued upon exercise of outstanding warrants and options
generating $1,145,600 in proceeds to the Company. The balance of 57,500 shares,
valued at $59,900 fair market value, were issued in exchange for services
rendered to the Company.
The Company declared dividends on the Company's preferred shares during
the six months and paid the dividends-in-kind through the issuance of 147,800
shares of Series A Preferred Stock valued at $221,800 and 3,000 shares of Series
B Preferred Stock valued at $30,000. The Preferred Stock is more fully discussed
in the Form-10KSB for the year ended June 30, 2004.
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ALANCO TECHNOLOGIES, INC.
Note G -Industry Segment Data
Information concerning operations by industry segment follows (unaudited):
Six Months Ended 12/31 Three Months Ended 12/31
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenue
Data Storage $ 3,187,500 $ 2,246,700 $ 1,821,800 $ 1,211,300
RFID Technology 635,200 24,800 263,700 22,800
----------- ----------- ----------- -----------
Total Revenue 3,822,700 2,271,500 2,085,500 1,234,100
=========== =========== =========== ===========
Gross Profit
Data Storage 1,047,000 863,900 567,100 468,000
RFID Technology 257,500 7,000 116,000 10,200
----------- ----------- ----------- -----------
Total Gross Profit 1,304,500 870,900 683,100 478,200
----------- ----------- ----------- -----------
Gross Margin
Data Storage 32.8% 38.5% 31.1% 38.6%
----------- ----------- ----------- -----------
RFID Technology 40.5% 28.2% 44.0% 44.7%
----------- ----------- ----------- -----------
Overall Gross Margin 34.1% 38.3% 32.8% 38.7%
----------- ----------- ----------- -----------
Selling, General & Administrative
Expense
Data Storage 878,500 822,100 433,300 404,000
RFID Technology 1,393,900 993,700 703,900 497,400
----------- ----------- ----------- -----------
Total Segment Operating Expense 2,272,400 1,815,800 1,137,200 901,400
----------- ----------- ----------- -----------
Operating Profit (Loss)
Data Storage 168,500 41,800 133,800 64,000
RFID Technology (1,136,400) (986,700) (587,900) (487,200)
Corporate Expense (795,200) (448,700) (411,700) (243,300)
----------- ----------- ----------- -----------
Operating Loss (1,763,100) (1,393,600) (865,800) (666,500)
=========== =========== =========== ===========
Depreciation & Amortization
Data Storage 8,000 15,500 4,400 7,500
RFID Technology 158,700 153,800 80,300 76,900
Corporate 1,400 3,500 700 1,100
----------- ----------- ----------- -----------
Total Depreciation & Amortization $ 168,100 $ 172,800 $ 85,400 $ 85,500
=========== =========== =========== ===========
Note H - Related Party Transactions
The Company has a line of credit agreement ("Agreement"), more fully
discussed in the Company's Form 10-KSB for the year ended June 30, 2004, with a
private trust controlled by Mr. Donald Anderson, a greater than five percent
stockholder and a member of the Company's Board of Directors.
13
ALANCO TECHNOLOGIES, INC.
Note I - Line of Credit
At December 31, 2004, the Company had an outstanding balance of
$500,000, which is presented as line of credit balance due. The balance is under
a $1.3 million line of credit agreement with a private trust ("Lender"), entered
into in June 2002 and modified in April and October of 2003. Under the
Agreement, the Company must maintain a minimum balance due under the line of at
least $500,000 through the July 1, 2005 expiration date. At December 31, 2004,
the Company had $800,000 available under the line of credit agreement.
Note J - Litigation
The Company continues to be a defendant in litigation that relates to
the acquisition, in May of 2002, of substantially all the assets of Technology
Systems International, Inc., a Nevada corporation. No significant new activity
has occurred subsequent to our report of litigation in our Form 10-KSB filed for
the year ended June 30, 2004. The Company's management, in consultation with
legal counsel, believes the plaintiff's claims are without merit and the Company
will aggressively defend against the action. Litigation previously reported as
arising from an expired property lease between the Company's subsidiary, Arraid,
Inc., and Arraid Property L.L.C., a Limited Liability Company, has been deemed
immaterial. The Company intends to pursue legal expense reimbursement from both
the Company's insurance carrier and the Plaintiffs in the litigation matters.
Note K - Subsequent Events
In January 2005, Arraid, Inc., a wholly owned subsidiary in the
Company's Data Storage segment, was awarded a $655,000 contract by the United
States Air Force to provide Arraid's proprietary emulation module (AEM) disc
drive replacements for ground-based testing equipment supporting the Cruise
Missile Program. Arraid is scheduling this contract for completion during the
second half of the current fiscal year ended June 30, 2005.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for historical information, the statements contained herein are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. All such forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed or implied by those
statements. These risks and uncertainties include, but are not limited to, the
following factors: general economic and market conditions; reduced demand for
information technology equipment; competitive pricing and difficulty managing
product costs; development of new technologies which make the Company's products
obsolete; rapid industry changes; failure by the Company's suppliers to meet
quality or delivery requirements; the inability to attract, hire and retain key
personnel; failure of an acquired business to further the Company's strategies;
the difficulty of integrating an acquired business; undetected problems in the
Company's products; the failure of the Company's intellectual property to be
adequately protected; unforeseen litigation; the ability to maintain sufficient
liquidity in order to support operations; the ability to maintain satisfactory
relationships with lenders and to remain in compliance with financial loan
covenants and other requirements under current banking agreements; and the
ability to maintain satisfactory relationships with suppliers and customers.
General
Information on industry segments is incorporated by reference from Note
G - Segment Reporting to the Condensed Consolidated Financial Statements.
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
14
ALANCO TECHNOLOGIES, INC.
accepted in the United States of America. The preparation of our financial
statements requires the use of estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent liabilities. On an ongoing basis, estimates are revalued, including
those related to areas that require a significant level of judgment or are
otherwise subject to an inherent degree of uncertainty. These areas include
allowances for doubtful accounts, inventory valuations, carrying value of
goodwill and intangible assets, estimated profit on uncompleted contracts in
process, income and expense recognition, income taxes, ongoing litigation, and
commitments and contingencies. Our estimates are based upon historical
experience, observance of trends in particular areas, information and/or
valuations available from outside sources and on various other assumptions that
we believe to be reasonable under the circumstances and which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual amounts may differ from these
estimates under different assumptions and conditions.
Accounting policies are considered critical when they are significant
and involve difficult, subjective or complex judgments or estimates. We
considered the following to be critical accounting policies:
Principles of consolidation - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Revenue recognition - The Company recognizes revenue from the Data
Storage Segment, net of anticipated returns, at the time products are shipped to
customers, or at the time services are provided. Revenue from material long-term
contracts (in excess of $250,000 and over a 90-day completion period) in both
the Data Storage Segment and the RFID Technology Segment are recognized on the
percentage-of-completion method for individual contracts, commencing when
significant costs are incurred and adequate estimates are verified for
substantial portions of the contract to where experience is sufficient to
estimate final results with reasonable accuracy. Revenues are recognized in the
ratio that costs incurred bear to total estimated costs. Changes in job
performance, estimated profitability and final contract settlements would result
in revisions to cost and income, and are recognized in the period in which the
revisions were determined. Contract costs include all direct materials,
subcontracts, labor costs and those direct and indirect costs related to
contract performance. General and administrative costs are charged to expense as
incurred. At the time a loss on a contract becomes known, the entire amount of
the estimated ultimate loss is accrued.
Long-lived assets and intangible assets - The Company reviews carrying
values at least annually or whenever events or circumstances indicate the
carrying values may not be recoverable through projected discounted cash flows.
Results of Operations
(A) Three months ended 12/31/2004 versus 12/31/2003
Sales
Consolidated sales for the quarter ended December 31, 2004 was
$2,085,500, compared to $1,234,100 for the comparable quarter of the previous
year, an increase of $851,400, or 69%. The increase is attributed to sales
increases in the Data Storage segment, which increased $610,500 to $1,821,800 in
the current quarter from $1,211,300 reported for the three months ended December
31, 2003; and the RFID Technology segment, which reported a sales increase to
$263,700 in the quarter ended December 31, 2004 compared to $22,800 for the
comparable quarter in the prior fiscal year. The increase in Data Storage
segment sales compared to the previous year resulted from increased demand for
the Company's data storage products as companies increased technology
expenditures in reaction to improving economic conditions. Sales of the RFID
Technology segment increased due to system warranty revenue and revenue from the
current contract in progress. The same quarter in the prior fiscal year had been
negatively affected by prison contract and funding postponements caused by
fiscal budgetary constraints.
Gross Profit and Operating Expenses
Gross profit generated during the quarter amounted to $683,100, an
increase of $204,900, or 43%, when compared to the same quarter of the prior
year. Gross margins decreased from 39% for the quarter ended
15
ALANCO TECHNOLOGIES, INC.
December 31, 2003 to 33 for the current quarter. The decrease in gross margin
resulted primarily from a change in product mix to lower gross margin products
in the Data Storage segment.
Selling, general and administrative expenses for the current quarter
increased to $1,548,900, a $404,200 increase, or 35%, when compared to
$1,144,700 incurred in the comparable quarter of fiscal year 2004. The major
components of the increase in selling, general and administrative expense were
increases of approximately $134,000 in legal expense related to the litigation
in which the Company is currently involved (See Litigation Footnote), an
increase in R&D expenditures of $100,000 related to new technology in the RFID
Technology segment that reduced the value of existing inventory, increases in
sales commissions related to Data Storage segment sales growth and TSI
Technology segment's continued aggressive development in the core United States
prison market.
Operating Loss
The Operating Loss for the quarter was ($865,800) compared to a loss of
($666,500) for the same quarter of the prior year, an increase of 30%. The
increased loss resulted primarily from increased legal expenses and R&D
expenditures for the current quarter compared to the comparable quarter of the
prior fiscal year.
Interest and Dividends Expense
Interest expense for the quarter amounted to $11,200 compared to
interest expense of $32,000 for the same quarter in the prior year. The interest
expense reduction resulted from a decrease in average borrowing during the
quarter accomplished by the Company's effort in raising additional working
capital. The Company paid quarterly in-kind Series B Preferred Stock dividends
with values of $15,000 and $14,500 in the quarters ended December 31, 2004 and
2003, respectively.
Net Loss Attributable to Common Stockholders
Net Loss Attributable to Common Stockholders for the quarter ended
December 31, 2004 amounted to ($886,200), or ($.03) per share, compared to a
loss of ($675,900), or ($.04) per share, in the comparable quarter of the prior
year. Although the Company has shown improved operating results in its Data
Storage segment and anticipates improved future operating results in its RFID
Technology segment as the economy improves, actual results in both the Data
Storage segment and the RFID Technology segment may be affected by unfavorable
economic conditions and reduced capital spending budgets. If the economic
conditions in the United States worsen or if a wider or global economic slowdown
occurs, Alanco may experience a material adverse impact on its operating results
and business conditions.
(B) Six months ended 12/31/2004 versus 12/31/2003
Sales
Consolidated Sales for the six months ended December 31, 2004 was
$3,822,700, an increase of $1,551,200, or 68%, compared to $2,271,500 reported
for the comparable period of the previous year. The increase is attributed to
revenue increases in the Company's Data Storage segment which reported sales for
the six months of $3,187,500, an increase of $940,800, or 42%, compared to
$2,246,700 reported for the six months ended December 31, 2003, and the RFID
Technology segment, which reported six months' sales of $635,200 compared to
$24,800 for the comparable period in the prior fiscal year.
16
ALANCO TECHNOLOGIES, INC.
Gross Profit and Operating Expenses
Gross profit generated during the six months amounted to $1,304,500, an
increase of $433,600, or 50% when compared to the same period of the prior year.
Gross margins decreased from 38% for the six months ended December 31, 2003 to
34% for the current period. The decrease in gross margin resulted primarily
from a change in product mix to lower gross margin products in the Data Storage
segment.
Selling, general and administrative expenses for the six months ended
December 31, 2004 increased to $3,067,600, a $803,100 increase, or 36%, when
compared to $2,264,500 incurred in the comparable period of fiscal year 2004.
The major components of the increase in selling, general and administrative
expense were increases of approximately $303,000 in legal expense, an increase
in R&D expenditures of $175,000 related to new technology in the RFID Technology
segment that reduced the value of existing inventory, increases in sales
commissions related to increases in Data Storage segment sales and TSI
Technology segment's continued aggressive development in the core United States
prison market, including the recently established lobbying activities in key
states.
Operating Loss
The Operating Loss for the six-month period was ($1,763,100) compared
to a loss of ($1,393,600) for the same six-month period of the prior fiscal
year, an increase of 27%. The increased loss resulted from increased legal
expenses and R&D expenditures for the current period compared to the comparable
six-month period of the prior year.
Interest and Dividends Expense
Interest expense for the six months ended December 31, 2004 amounted to
$27,600 compared to interest expense of $114,700 for the same six-month period
in the prior year. The reduction in interest expense resulted from a decrease in
average borrowing during the period accomplished by the Company's successful
effort in raising additional working capital. The Company paid in-kind Preferred
Stock dividends with values of $251,700 and $27,000 in the six months ended
December 31, 2004 and 2003, respectively.
Net Loss Attributable to Common Stockholders
Net Loss Attributable to Common Stockholders for the six months ended
December 31, 2004 amounted to ($2,031,600), or ($.08) per share, compared to a
loss of ($1,496,100), or ($.09) per share, in the comparable period of the prior
year. Although the Company has shown improved operating results in its Data
Storage segment and anticipates improved future operating results in its RFID
Technology segment as the economy improves, actual results in both the Data
Storage segment and the RFID Technology segment may be affected by unfavorable
economic conditions and reduced capital spending budgets. If the economic
conditions in the United States worsen or if a wider or global economic slowdown
occurs, Alanco may experience a material adverse impact on its operating results
and business conditions.
Liquidity and Capital Resources
The Company's current assets at December 31, 2004 exceeded current
liabilities by $2,794,200, resulting in a current ratio of 2.29 to 1. At June
30, 2004 the Company's current assets exceeded current liabilities by
$3,721,000, reflecting a current ratio of 3.85 to 1. The decrease in the current
ratio at December 31, 2004 when compared to June 30, 2004 resulted from losses
incurred during the period and the reclassification of $500,000 credit line
payable to current liabilities at December 31, 2004 from long-term notes payable
at June 30, 2004. The reclassification was required to reflect the July 1, 2005
termination date of the existing line of credit agreement. Accounts receivable
of $991,600 at December 31, 2004, reflects an increase of $334,400, or 50%,
when compared to the $657,200 reported as consolidated accounts receivable at
June 30, 2004. The accounts receivable balance at December 31, 2004 represented
forty-seven days' sales in receivables compared to forty-eight days' sales at
June 30, 2004.
17
ALANCO TECHNOLOGIES, INC.
Consolidated inventories at December 31, 2004 amounted to $2,260,400, a
decrease of $21,900, or 1%, when compared to $2,282,300 at June 30, 2004. The
December 31, 2004 reflects an inventory turnover of 2.5 compared to 1.4 at June
30, 2004. Although the December 31, 2004 balance reflects only a slight decrease
from the June 30, 2004 balance, it is a much larger increase when compared to
inventory levels of prior reporting periods and reflects management's continued
anticipated revenue increases for both the Data Storage segment and the RFID
Technology segment.
At December 31, 2004, the Company had an outstanding balance of
$500,000 under a $1.3 million formula-based revolving bank line of credit
agreement with interest calculated at prime plus 4%. The line of credit
agreement formula is based upon current asset values and is used to finance
working capital. At December 31, 2004, the Company had $800,000 available under
the line of credit. See Line of Credit Footnote I for additional discussion of
the existing line of credit agreement.
Cash used in operations for the six-month period was $1,634,000, a
decrease of $251,300 when compared to cash used in operations of $1,885,300 for
the comparable period ended December 31, 2003. The decrease was due primarily to
increases in accounts payable offset by an increase in loss from operations for
the period.
During the six months ended December 31, 2004, the Company reported
cash flows from investing activities of $18,200, including collecting $55,000 in
notes receivable, purchasing $75,500 of additional equipment and raising $40,500
from the sale of assets held for sale. For the six months ended December 31,
2003, the Company reported $172,600 of cash flow from investing activities,
including collecting notes receivable of $142,500, purchasing additional
equipment in the amount of $14,000 and raising $49,100 from the sale of
property, plant & equipment and assets held for sale.
Cash provided by financing activities for the six months ended December
31, 2004 consisted primarily of $1.1 million in proceeds received from the sale
of common stock. Cash provided by financing activities during the same period in
the prior fiscal year included the collection of subscription receivables in the
amount of $899,200 and net proceeds from the sale of common and preferred stock
of $1,350,700, offset by net repayment on borrowings during the period of
$575,800.
The Company believes that additional cash resources may be required for
working capital to achieve planned operating results for fiscal year 2005 and,
if working capital requirements exceed current availability, the Company
anticipates raising capital through additional borrowing or sale of stock. The
additional capital would supplement the projected cash flows from operations and
the line of credit agreement in place at December 31, 2004. If additional
working capital was required and the Company was unable to raise the required
additional capital, it may materially affect the ability of the Company to
achieve its financial plan. See Footnote F - Equity for additional information
related to working capital raised by the Company during the six months ended
December 31, 2004, necessary to achieve planned operating results for the
current fiscal year.
Item 3 - CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to
ensure that it is able to collect the information it is required to disclose in
the reports it files with the Securities and Exchange Commission (SEC), and to
process, summarize and disclose this information within the time periods
specified in the rules of the SEC. Based on various evaluations of the Company's
disclosure controls and procedures, some of which occurred during the 90 days
prior to the filing date of this report, the Chief Executive and Chief Financial
Officers believe that these controls and procedures are effective to ensure that
the Company is able to collect, process and disclose the information it is
required to disclose in the reports it files with the SEC within the required
periods.
18
ALANCO TECHNOLOGIES, INC.
The Company also maintains a system of internal controls designed to
provide reasonable assurance that: transactions are executed in accordance with
management's general or specific authorization; transactions are recorded as
necessary (1) to permit preparation of financial statements in conformity with
generally accepted accounting principles, and (2) to maintain accountability for
assets. Access to assets is permitted only in accordance with management's
general or specific authorization; and the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
Since the date of the most recent evaluation of the Company's internal
controls by the Chief Executive and Chief Financial Officers, there have been no
significant changes in such controls or in other factors that could have
significantly affected those controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS
The Company continues to be a defendant in litigation that relates to
the acquisition, in May of 2002, of substantially all the assets of Technology
Systems International, Inc., a Nevada corporation. No significant new activity
has occurred subsequent to our report of litigation in our Form 10-KSB filed for
the year ended June 30, 2004. The Company's management, in consultation with
legal counsel, believes the plaintiff's claims are without merit and the Company
will aggressively defend the actions. Litigation previously reported as arising
from an expired property lease between the Company's subsidiary, Arraid, Inc.
and Arraid Property L.L.C., a Limited Liability Company, has been deemed
immaterial. The Company intends to pursue legal expense reimbursement from both
the Company's insurance carrier and the Plaintiffs in the litigation matters.
Item 2. CHANGES IN SECURITIES
During the six months ended December 31, 2004, the Company issued
147,800 shares of Series A Preferred Stock and 3,000 Shares of Series B
Preferred Stock as dividend in-kind payments, 2,188,200 shares of Class A Common
Stock for the exercise of existing warrants and options and 57,500 shares of
Common Stock for services rendered.
Item 6. EXHIBITS
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer and Chief Financial
Officer
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
ALANCO TECHNOLOGIES, INC.
(Registrant)
/s/ John A. Carlson
John A. Carlson
Executive Vice President and
Chief Financial Officer
19
ALANCO TECHNOLOGIES, INC.
EXHIBIT 31.1
Certification of
Chairman and Chief Executive Officer
of Alanco Technologies, Inc.
I, Robert R. Kauffman, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Alanco
Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: February 11, 2005
/s/ Robert R. Kauffman
---------------------
Robert R. Kauffman
Chairman and Chief Executive Officer
20
ALANCO TECHNOLOGIES, INC.
EXHIBIT 31.2
Certification of
Vice President and Chief Financial Officer
of Alanco Technologies, Inc.
I, John A. Carlson, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Alanco
Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: February 11, 2005
/s/ John A. Carlson
---------------------
John A. Carlson
Executive Vice President and Chief Financial Officer
21
ALANCO TECHNOLOGIES, INC.
EXHIBIT 32.1
Certification of
Chief Executive Officer and Chief Financial Officer
of Alanco Technologies, Inc.
This certification is provided pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and accompanies this quarterly report of Form 10-QSB
(the "Report") for the period ended December 31, 2004 of Alanco Technologies,
Inc. (the "Issuer").
Each of the undersigned, who are the Chief Executive Officer and Chief
Financial Officer, respectively, of Alanco Technologies, Inc., hereby certify
that, to the best of each such officer's knowledge:
(i) the Report fully complies with the requirements of Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or
78o(d)); and
(ii) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Issuer.
Dated: February 11, 2005
/s/ Robert R. Kauffman
----------------------
Robert R. Kauffman
Chief Executive Officer
/s/ John A. Carlson
----------------------
John A. Carlson
Chief Financial Officer