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| ALAN > SEC Filings for ALAN > Form 10KSB/A on 26-Feb-2009 | All Recent SEC Filings |
26-Feb-2009
Annual Report
Critical Accounting Policies
"Management's Discussion and Analysis of Financial Condition and Results of Operations" discusses our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, valuation allowances for inventory and receivables, estimated fair value of stock based compensation, warranty reserves and impairment of long-lived and intangible assets. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. The result of these estimates and judgments form the basis for making conclusions about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The SEC suggests that all registrants list their most "critical accounting policies" in Management's Discussion and Analysis. A critical accounting policy is one which is both important to the portrayal of the Company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management has identified the critical accounting policies presented below as those accounting policies that affect its more significant judgments and estimates in the preparation of its consolidated financial statements. The Company's Audit Committee has reviewed and approved the critical accounting policies identified.
These policies include, but are not limited to, revenue recognition, the carrying value of goodwill and other intangible assets, estimates related to the valuation of inventory and receivables, and the ultimate resolution of the current litigation with TSIN and Arraid L.L.C. that is more fully discussed in Item 3, Legal Proceedings.
Results of Operations
In accordance with accounting principles generally accepted in the United States of America, the Company is reporting consolidated revenues for fiscal years ended June 30, 2008 and 2007 from its Computer Data Storage segment, RFID Technology segment and Wireless Asset Management segment.
The following table is a summary of the results of operations and other
financial information by major segment:
Wireless
Asset RFID Data
Management Technology Storage Corporate Total
-------------- ------------ ----------- ----------- -----------
Fiscal year 2008
Sales $ 11,838,900 $ 1,639,400 $ 3,732,700 $ - $ 17,211,000
Cost of Goods Sold 8,319,800 1,408,100 2,734,500 - 12,462,400
------------ ------------ ------------ ------------ ------------
Gross Profit 3,519,100 231,300 998,200 - 4,748,600
Selling, General & Administrative 6,301,600 2,183,200 1,455,200 1,422,900 11,362,900
------------ ------------ ------------ ------------ ------------
Operating Loss $ (2,782,500) $ (1,951,900) $ (457,000) $ (1,422,900) $ (6,614,300)
============ ============ ============ =========== ===========
Gross Margin 29.7% 14.1% 26.7% 27.6%
============ ============ ============ ===========
Accounts Receivable, net $ 1,783,700 $ 910,600 $ 78,700 $ 17,600 $ 2,790,600
============ ============ ============ ============ ============
Inventory, net $ 2,024,100 $ 1,963,500 $ 803,300 $ - $ 4,790,900
============ ============ ============ ============ ============
Total Assets $ 18,701,600 $ 8,117,100 $ 1,403,600 $ 874,600 $ 29,096,900
============ ============ ============ ============ ============
Capital Expenditures $ 145,600 $ 15,500 $ 7,800 $ 1,000 $ 169,900
============ ============ ============ ============ ============
Research & Development $ 250,000 $ 400,000 $ 150,000 $ - $ 800,000
============ ============ ============ ============ ============
Depreciation & Amortization $ 455,600 $ 170,900 $ 26,700 $ 1,000 $ 654,200
============ ============ ============ ============ ============
Fiscal year 2007
Sales $ 12,976,600 $ 1,065,500 $ 4,432,000 $ - $ 18,474,100
Cost of Goods Sold 8,505,900 735,700 3,360,000 - 12,601,600
------------ ------------ ------------ ------------ ------------
Gross Profit 4,470,700 329,800 1,072,000 - 5,872,500
Selling, General & Administrative 5,192,200 2,314,600 1,504,600 1,310,800 10,322,200
------------ ------------ ------------ ------------ ------------
Operating Loss $ (721,500) $ (1,984,800) $ (432,600) $ (1,310,800) $ (4,449,700)
============ ============ ============ ============ ============
Gross Margin 34.5% 31.0% 24.2% 31.8%
============ ============ ============ ============
Accounts Receivable, net $ 1,561,300 $ 342,400 $ 327,300 $ 17,600 $ 2,248,600
============ ============ ============ ============ ============
Inventory, net $ 1,669,400 $ 1,279,100 $ 859,600 $ - $ 3,808,100
============ ============ ============ ============ ============
Total Assets $ 17,870,900 $ 7,247,400 $ 1,560,300 $ 1,253,300 $ 27,931,900
============ ============ ============ ============ ============
Capital Expenditures $ 64,000 $ 103,100 $ 38,800 $ - $ 205,900
============ ============ ============ ============ ============
Research & Development $ 300,000 $ 300,000 $ 150,000 $ - $ 750,000
============ ============ ============ ============ ============
Depreciation & Amortization $ 644,100 $ 303,400 $ 23,600 $ 2,700 $ 973,800
============ ============ ============ ============ ============
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Sales
Consolidated net sales for fiscal year 2008 were $17,211,000, a 6.8%
decrease when compared to $18,474,100 reported for fiscal year 2007. The
decrease in sales resulted from decreases in sales for both the Data Storage and
Wireless Asset Management segments offset by an increase in sales for the RFID
Technology segment. Sales for the fourth quarter of fiscal year 2008 amounted to
$4,720,300, a 42% increase when compared to $3,325,300 reported for the
comparable quarter of the prior fiscal year.
The Company's Wireless Asset Management segment incurred a sales decrease of $1,137,700, or 8.8%, when compared to the prior year due to a major contract with one customer that accounted for sales of approximately $5.3 million in fiscal year 2007 and only $1.5 million of sales in the current fiscal year. Excluding the major customer sales for both fiscal years 2008 and 2007, sales for the Wireless Asset Management segment increased by approximately 35%. In addition, delays in new product introductions targeted at the refrigerated truck/trailer market contributed to the Wireless Asset Management segment sales decrease. Although revenues on a quarter to quarter comparison may fluctuate, management believes that increases in hardware sales and monitoring revenues will be achieved in fiscal year ended June 30, 2009 through new product introductions and increased market penetration.
Sales for the RFID Technology segment increased by $573,900, or 53.9%, when compared to the prior fiscal year. The improvement in the RFID Technology segment sales reflects momentum in customer acceptance of the TSI PRSIM tracking and monitoring technology and reflects the completion of the long sales cycles required for customers to understand the advantages of the TSI PRISM technology and then secure budget approval for an acquisition This sales improvement has been achieved while maintaining the pricing structure it has utilized over the past few years. As further evidence of improved market penetration by the TSI PRISM technology, the RFID Technology segment had a backlog at June 30, 2008 in excess of $5 million, or more than three times the total sales recorded in fiscal year 2008. While fiscal year 2008 revenue has increased over 2007, it remains at an unacceptable level that must be significantly increased for the segment to become a viable business. The Company believes that additional revenues for this segment will be recognized as the tracking and monitoring technology becomes the accepted method for modern prison management effectiveness. The Company believes the lack of significant sales progress for the RFID Technology segment to date is due to an extraordinarily complex and lengthy bureaucratic procurement process that, in some cases, takes several years to complete. The sales process for the TSI PRISM products is protracted because it generally involves four separate phases: 1) product presentation to a state director of corrections, 2) obtaining the state director of correction's agreement to position the product among the top priorities of his budget, 3) competing with other state projects for funding and 4) publishing the RFP (request for proposal) and awarding the contract. RFID segment customers are currently at various phases in the procurement process, and we believe that TSI PRISM sales will increase significantly in fiscal year 2009 as the funding phase is completed and contracts are awarded.
Customers are also studying various methods to finance the adoption of RFID technology for their corrections facilities. Based upon meetings the Company has had with various State governments to discuss federal grants available to assist in funding the acquisition of the TSI PRISM system and actions taken to apply for those grants, we believe that numerous State governments have applied or are considering, in addition to their normal legislative funding, applying for federal grants under programs such as PREA (Prison Rape Elimination Act of 2003), grants awarded from VOIT/TIS funds available under a 1999 program to reduce prison violence administered by the U.S. Department of Justice and grants awarded by the National Institute of Justice. In addition, potential customers are reviewing available lease financing options.
The Company's Data Storage segment reported a decrease in sales of $699,300, or 15.8%. The Data Storage segment sales for both periods reflect only those revenues for Excel/Meridian Data, the Company's remaining business in this segment. As a result of adoption of SAB 108 during the quarter ended March 31, 2007, the Company recorded an adjustment to increase deferred revenue relative to extended warranty sales. The Company had previously recognized a portion of its extended warranty revenue in the period of sale, as opposed to over the term of the warranty coverage. The one-time adjustment, representing the cumulative effect, decreased net sales in fiscal year 2007 by approximately $150,000. Without the adjustment, the Data Storage segment fiscal 2007 sales would have been approximately $4,582,000, which, when comparing the current year fiscal year revenues, would reflect a decrease of approximately $850,000, or 18.6%. The decrease in Data Storage segment revenue resulted from a trend towards lower priced storage products, government redirecting military defense expenditures from computer system support to the war effort, reduced demand for storage products as a result of a weak economy and a general reduction in selling prices of data storage. In fiscal year 2007, the Data Storage segment recorded an unusually large sale ($945,000) that was not duplicated in the current period.
Gross Profit
The Company's gross profit for fiscal year 2008 was $4,748,600 (27.6% of sales), a decrease of $1,123,900 or 19.1%, when compared to $5,872,500 (31.8% of sales) for the prior year. The reduction in gross margin resulted primarily from reductions in sales and reduced gross margin in both the Wireless Asset Management and RFID Technology segments. Changes in fiscal year 2008 gross profit and gross margins compared to fiscal year 2007 for each of the Company's business segments are more fully discussed below.
Gross profits for the Wireless Asset Management segment decreased to $3,519,100 (29.7% of sales), a decrease of $951,600 or 21.3% compared to $4,470,700 (34.5% of sales) in gross profit reported for fiscal year ended June 30, 2007. The reduction in gross profit resulted from lower unit sales compared to the prior year, lower margins on the new hardware sales, additional costs required to convert customers from control channel to GSM products, and one time inventory obsolescence reserve adjustments of approximately $342,000 incurred due to the changeover to the new RT6000 product line.
The RFID Technology segment reported a $98,500, or 29.9%, decrease in gross profit to $231,300 from the $329,800 reported for the prior fiscal year. The decrease resulted primarily from the Company's strategic decision to install a system at a low margin that provided a significant opportunity test certain design concepts with an objective of developing a lower cost RFID system designed for a new market and not due to other changes in pricing strategy. We believe that reported gross margin for fiscal years 2008 and 2007 are not reflective of the gross margin percentage anticipated under higher sales levels.
The Data Storage segment reported fiscal year 2008 gross profits of $998,200, a decrease of $73,800, or 6.9%, compared to $1,072,000 reported for the prior year. Gross margin for fiscal year 2008 for the Data Storage segment was 26.7%, compared to 24.2% reported in the prior year. The reduction in gross profit resulted from reported sales decreases offset somewhat by an increase in margin. The gross margin increase resulted from changes in product mix and is not deemed to be a trend. The Data Storage segment is continually reselling new technology products and integrating those products to meet customer expectations. This constant product evolution results in continuous changes in product offerings and consequently gross margins.
Selling, General & Administrative Expense
Fiscal year 2008 Selling, general and administrative expense for the Company's business segments, excluding Corporate expenses, increased $928,600, or 10.3%, to $9,940,000, compared to $9,011,400 reported for fiscal year ended June 30, 2007. The Wireless Asset Management segment accounted for the entire increase, increasing Selling, general and administrative expenses to $6,301,600, an increase of $1,109,400, or 21.4%, compared to $5,192,200 reported in the prior year. The increase in the Wireless Asset Management segment was due to increased legal expense (see StarTrak Systems Litigation in Note 11 of Notes to Consolidated Financial Statements), increased warranty cost due to a defective product which has been rectified, additional sales expenses, additional IT expenditures required to upgrade the data services network and additional costs to complete product development necessary to commercialize its new product line targeted at the truck/trailer market. The Wireless Asset Management segment increase was offset by decreases of $49,400, or 3.3%, in the Data Storage segment and decreases of $131,400, or 5.7%, in the RFID Technology segment as a result of cost controls implemented during the year. Corporate administrative expenses increased by $112,100, or 8.6%, compared to the prior year primarily due to an insurance settlement of approximately $300,000 that reduced legal fees in fiscal year 2007. Excluding the insurance settlement, Corporate expense decreased by approximately $188,000, primarily due to legal expenses.
Operating Loss
The operating loss for fiscal year ended June 30, 2008 was ($6,614,300), a ($2,164,600), or 48.6%, increase when compared to the operating loss for the prior fiscal year of ($4,449,700). The increase in operating loss resulted primarily from increased operating losses in the Company's Wireless Asset Management segment who increased operating losses by ($2,061,000), reporting an operating loss of ($2,782,500) in fiscal year 2008 compared to ($721,500) in the prior fiscal year. The Data Storage segment also reported an increase in operating loss to ($457,000), an increase of ($24,400) from the ($432,600) reported in the prior fiscal year. The RFID Technology segment reported a slight reduction in operating loss to ($1,951,900), a 1.7% reduction compared to ($1,984,800) reported in the fiscal year ended June 30, 2007.
Loss From Continuing Operations
The loss from continuing operations for the fiscal year ended June 30, 2008 was ($7,309,100), a $2,193,500 or 42.9%, increase when compared to a loss of ($5,115,600) for the prior fiscal year. The increase in loss from continuing operations included $2,164,600 in increased operating loss explained above and an increase of $33,100 in net interest expense, offset slightly by a ($4,200) increase in other income. Fiscal year 2008 interest expense, net of interest income, was $792,900, compared to net interest expense of $759,800 for the previous year. The increase in net interest expense reflects increased average borrowing offset by reductions in interest rates under the Company's line of credit and loan agreements. Other income for the current fiscal year was $98,100 compared to $93,900 for fiscal year ended June 30, 2007. The current and prior years other income resulted primarily from gains on sale of "assets held for sale."
EBITDA
The Company believes that (loss) earnings before net interest income, income taxes, depreciation and amortization of intangible assets (EBITDA), is an important measure used by management to measure performance. EBITDA may also be used by certain investors to compare and analyze our operating results between accounting periods. However, EBITDA should not be considered in isolation or as a substitute for net income, cash flows or other financial statement data prepared in accordance with GAAP, or as a measure of our performance or liquidity. EBITDA for Alanco's fiscal year 2008 represents a loss of ($5,862,000) compared to a loss of ($3,382,000) for the same period of the prior year. EBITDA before stock-based compensation was ($5,439,000) compared to ($3,208,200) reported in the prior period. Reconciliation between EBITDA and Loss From Continuing Operations is presented below:
EBITA RECONCILIATION TO LOSS FROM CONTINUING OPERATIONS
Fiscal Years Ended
June 30, 2008 June 30, 2007
------------- -------------
EBITDA before Stock-based compensation $ (5,439,000) $ (3,208,200)
Stock-based compensation (423,000) (173,800)
------------- -------------
EBITDA $ (5,862,000) $ (3,382,000)
Net interest expense (792,900) (759,800)
Depreciation and amortization (654,200) (973,800)
------------- -------------
LOSS FROM CONTINUING OPERATIONS $ (7,309,100) $ (5,115,600)
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Dividends
Preferred Stock dividends paid in-kind for the year ended June 30, 2008 for both Series A and Series B Convertible Preferred Stock amounted to $2,432,900, a significant increase compared to Preferred Stock dividends of $672,900 for the prior year. In addition to normal dividend increases, the increase resulted primarily from the current fiscal year expense reflecting three regular semi-annual dividends compared to two dividends recorded in the prior fiscal year, the special imputed Series A Preferred Stock dividend recorded during the quarter ended March 31, 2008 of $264,000 related to the beneficial conversion feature calculated based upon the implied value of warrants issued in the Series A Preferred Stock Offering and the recording of a special 10% "in-kind" Series A Preferred Stock dividend valued at $896,400, associated with the conversion of all Series A into Class A Common Stock at June 30, 2008. See Note 12 - Shareholders' Equity for additional discussion of Preferred Stock transactions.
Net Loss Attributable to Common Stockholders
Consolidated net loss attributable to Common stockholders for fiscal year ended June 30, 2008 was ($9,748,600), or ($.42) per share, an increase of 66% when compared to a net loss attributable to Common stockholders of ($5,871,700), or ($.34) per share, for the prior year.
Net cash used in operating activities for the fiscal year ended June 30, 2008 was ($6,619,200) compared with net cash used in operating activities for the prior fiscal year of ($7,080,700). The decrease of $461,500, or 6.5%, resulted primarily from a decrease in customer advances, an increase in accounts payable, an increase in billings in excess of costs and estimated earnings on uncompleted contracts, offset by an increase in loss from operations. See "Liquidity and Capital Resources" below for management's discussion of major items affecting the Consolidated Statement of Cash Flow.
Any new Statements of the Financial Accounting Standards affecting the Company are disclosed in the "Notes to Consolidated Financial Statements."
Liquidity and Capital Resources
The Company's current assets exceeded current liabilities by $759,300 at June 30, 2008, representing a current ratio of 1.1 to 1. That was a significant improvement when compared to June 30, 2007 when the Company's current liabilities exceeded current assets by $248,300, resulting in negative working capital and a current ratio of .97 to 1.
Consolidated accounts receivable at June 30, 2008 of $2,790,600, fifty-nine days' sales in receivables, reflects an increase of $542,000, or 24.1%, compared to the $2,248,600, forty-four days' sales in receivables, reported at the end of fiscal year 2007. The increase in days' sales was reported in both the Wireless Asset Management and the RFID segments.
The Wireless Asset Management segment reported an Accounts Receivable balance at June 30, 2008 of $1,783,700, or 63.9% of the current fiscal year end consolidated balance, compared to 69.4% of the consolidated balance at the prior fiscal year end. The $1,783,700 June 30, 2008 balance for the Wireless Asset Management segment represented fifty-five days' sales compared to an accounts receivable balance at June 30, 2007 of $1,561,300, representing forty-four days' sales. The increase in days' sales resulted from an increase in sales in the last month of the fourth quarter compared to the prior year.
Receivables for the Data Storage segment decreased by $248,600, or 76%, and RFID Technology segment increased by $568,200, or 166%. The Data Storage segment accounts receivable balance at June 30, 2008 of $78,700 represented eight days' sales in receivables compared to $327,300, or twenty-seven days, at fiscal year end 2007. Days' sales in receivables for the Data Storage segment may be significantly affected by the percentage of credit card sales in a particular period versus a comparable period and therefore a change in days' sales in receivables is not considered a trend towards faster or slower receivable collection. Days' sales for the RFID Technology segment, two hundred and three days at June 30, 2008 and one hundred and seventeen days at June 30, 2007, are distorted due to a number of significant projects in process at June 30, 2008 compared to the end of the prior fiscal year and the lack of significant reported system sales for both fiscal years ended 2008 and 2007.
Consolidated inventories at June 30, 2008 amounted to $4,790,900 compared to $3,808,100 at the end of the prior fiscal year, an increase of $982,800, or 25.8%. $684,300, or 69.6% of the current year increase was reported by the RFID Technology segment, reporting inventories of $1,963,500 at June 30, 2008, an increase of $684,400, or 53.5%, from $1,279,100 at fiscal year end 2007. The increase in inventories was due to additional inventory required for new projects in the installation phase. A significant portion of the RFID Technology segment inventory was sold in the first quarter of fiscal year 2009. Due to low sales levels reported for both fiscal 2008 and 2007, turnover ratios are not considered significant. The Data Storage segment accounted for $803,300, or 16.8% of the consolidated inventory values, representing an inventory turn of 3.4 compared to 3.9 at June 30, 2007. The Wireless Asset Management segment inventory accounted for $2,024,100, or 42.2% of the consolidated balances, representing an inventory turn of 4.1 compared to 5.1 for the prior year. The Wireless Asset Management segment inventory levels increased due to new product introductions targeted at the refrigerated truck/trailer market. The Data Storage segment inventories decreased slightly and the Wireless Asset Management segment inventories increased in line with anticipated sales growth.
Net cash used in investing activities during the current year was ($90,500), compared to net cash provided from investing activities of $576,000, a decrease of $666,500, from the previous year. The current year decrease was due primarily to cash from sale of assets held for sale at June 30, 2007 of $747,400.
Net cash provided by financing activities during fiscal year ended June 30, 2008 amounted to $6,820,800, compared to $5,965,000 for the prior year. Significant items for the current year include $5,090,900 in net proceeds from the sale of Common Stock, $2,733,600 in net proceeds from the sale of Preferred Stock, reduced by net repayment on borrowing of $997,100. Significant items for fiscal year 2007 include $3,112,400 in net proceeds from the sale of Common Stock and $2,852,600 in net new borrowing (primarily the $4 million term loan offset by debt repayment).
The Company had a $2,000,000 line of credit balance under a $2 million line of credit agreement with a private trust that was last amended, prior to June 30, 2008, effective February 26, 2008. The secured line of credit is based upon accounts receivable and inventory values, and is secured by substantially all assets of the Company. The line of credit has an interest rate of prime plus 3% (8.0% at June 30, 2008). Under the amended line of credit agreement, the Company must maintain a balance due under the line of at least $1.5 million through June 2009. Due to the minimum borrowing requirement and the July 2010 expiration, the balance due is presented at June 30, 2008 and 2007 as notes . . .
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