FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-12727
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SENTRY TECHNOLOGY CORPORATION
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(Exact name of small business issuer as specified in its charter)
Delaware 96-11-3231714
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1881 Lakeland Avenue, Ronkonkoma, NY 11779
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(Address of principal executive offices) (Zip Code)
631-739-2000
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(Registrant's telephone number, including area code)
not applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Check 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 for the past
90 days.
Yes X No
---- ----
Indicate by check mark whether the registrant is a large accelerated filer, a
non-accelerated filer, or a small reporting company. See the definitions of
"large accelerated filer" and "small reporting company" in Rule 12b-2 of the
Exchange Act.
Large accelerated filer Accelerated filer
---- ----
Non-accelerated filer (Do not check if a small reporting company)
----
Small reporting company X
-----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
---- ----
As of May 14, 2008, there were 120,743,804 shares of Common Stock outstanding.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
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INDEX
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Page No.
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets --
March 31, 2008 (Unaudited) and December 31, 2007 3
Consolidated Statements of Operations and Comprehensive Loss --
Three Months Ended March 31, 2008 and 2007 (Unaudited) 4
Consolidated Statements of Cash Flows --
Three Months Ended March 31, 2008 and 2007 (Unaudited) 5
Notes to Condensed Consolidated Financial
Statements - March 31, 2008 6 - 12
Item 2. Management's Discussion and Analysis of Plan of Operation 13 - 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Item 4T. Controls and Procedures 18
PART II. OTHER INFORMATION
- ----------------------------
Item 6. Exhibits 18
Signature 19
PART I. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements (Unaudited)
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par Value Amounts)
MARCH 31, December 31,
2008 2007
-------------- ---------------
(UNAUDITED) (Audited)
ASSETS
------
Current Assets:
Cash and cash equivalents $ 1,221 $ 256
Short-term investments 101 202
Accounts receivable, less allowance for doubtful
accounts of $214 and $209, respectively 1,358 3,014
Inventory 3,328 3,299
Prepaid expenses and other assets 595 858
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Total current assets 6,603 7,629
PROPERTY AND EQUIPMENT, net 582 634
OTHER ASSETS 268 269
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TOTAL ASSETS $ 7,453 $ 8,532
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Bank indebtedness, demand loan and revolving line of credit $ 4,504 $ 4,551
Accounts payable 1,220 1,223
Accrued liabilities 1,479 1,539
Obligations under capital leases - current portion 2 2
Deferred income 140 145
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Total current liabilities 7,345 7,460
OBLIGATIONS UNDER CAPITAL LEASES - less current portion 6 7
DEFFERED TAX LIABILITY 113 117
CONVERTIBLE DEBENTURE 1,997 1,986
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Total liabilities 9,461 9,570
MINORITY INTEREST 1,197 1,200
STOCKHOLDERS' (DEFICIT) EQUITY
Preferred stock, $0.001 par value; authorized 10,000
(2007 - 10,000) shares; none issued and outstanding
Common stock, $0.001 par value; authorized 190,000
(2007 - 190,000) shares; issued and outstanding 120,744
and 120,744 shares, respectively 121 121
Additional paid-in capital 49,424 49,420
Accumulated deficit (53,277) (52,390)
Accumulated other comprehensive income 527 611
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Total stockholders' (deficit) equity (3,205) (2,238)
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TOTAL LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY $ 7,453 $ 8,532
========== =========
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In Thousands, Except Per Share Amounts)
Three Months Ended
March 31,
------------------
2008 2007
---- ----
(Unaudited)
REVENUES:
Sales $ 1,712 $ 2,329
Service, installation and other revenues 330 339
--------- ---------
2,042 2,668
COST OF SALES AND EXPENSES:
Cost of sales 1,019 1,270
Customer service expenses 550 455
Selling, general and administrative expenses 979 1,197
Research and development 147 206
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2,695 3,128
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OPERATING LOSS (653) (460)
INTEREST AND FINANCING EXPENSE, net 237 213
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LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (890) (673)
INCOME TAX EXPENSE --- 27
--------- ---------
LOSS BEFORE MINORITY INTEREST (890) (700)
MINORITY INTEREST (3) 24
--------- ---------
NET LOSS $ (887) $ (724)
========= =========
OTHER COMPREHENSIVE LOSS:
Foreign Currency Translation Adjustments 84 (12)
--------- ---------
COMPREHENSIVE LOSS $ (971) $ (712)
========= =========
LOSS PER SHARE
Basic and diluted $ (0.01) $ (0.01)
========= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING
Basic and diluted 120,744 120,744
========= =========
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months Ended
March 31,
------------------
2008 2007
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(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (887) $ (724)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation 30 32
Amortization of intangibles and other assets 16 31
Non-cash consideration
Stock based compensation 4 6
Warrant amortization included in interest 118 79
Amortization of convertible debenture included in interest 10 10
Minority interest in net income of consolidated subsidiary (3) 37
Changes in operating assets and liabilities:
Accounts receivable 1,584 549
Inventory (47) (317)
Prepaid expenses and other assets 139 (33)
Accounts payable 5 255
Accrued liabilities (54) 70
Deferred income (4) (3)
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Net cash provided by (used in) operating activities 911 (8)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Changes in short-term investments 96 (3)
Purchase of property and equipment 2 (21)
Other assets (15) (4)
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Net cash provided by (used in) investing activities 83 (28)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing on the demand loan and revolving line of credit 71 (47)
Repayment of obligations under capital leases (1) (1)
--------- --------
Net cash provided by (used in) financing activities 70 (48)
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (99) ---
--------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 965 (84)
CASH AND CASH EQUIVALENTS, beginning of period 256 360
--------- --------
CASH AND CASH EQUIVALENTS, end of period $ 1,221 $ 276
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 163 $ 125
========= ========
Income taxes $ --- $ 74
========= ========
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2008 and 2007
NOTE 1 -- Basis of Presentation
- ------------------------------------
The accompanying unaudited condensed consolidated financial statements include
the accounts of Sentry Technology Corporation ("Sentry") and its majority-owned
subsidiaries (the "Company"). All intercompany accounts and transactions have
been eliminated on consolidation.
The interim financial information as of March 31, 2008 and for the three month
periods ended March 31, 2008 and 2007 have been prepared without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission (the
"SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although we believe that the disclosures made are adequate to
provide for fair presentation. The interim financial information should be read
in conjunction with the Financial Statements and the notes thereto, included in
the Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 2007, previously filed with the SEC.
In the opinion of management, all adjustments (which include normal recurring
adjustments) necessary to present a fair statement of financial position as of
March 31, 2008, and results of operations, and cash flows for the three month
periods ended March 31, 2008 and 2007, have been made. The interim results of
operations are not necessarily indicative of the operating results for the full
fiscal year or any future periods.
Certain prior period amounts have been reclassified to conform to current period
presentation.
NOTE 2 -- Going Concern
- ---------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America with the assumption that the Company will be able to
realize its assets and discharge its liabilities in the normal course of
business.
The Company has incurred operating losses and decreased financial position as a
result of not meeting its business plan. The Company had losses of
approximately $0.9 million for the period ended March 31, 2008 (March 31, 2007 -
$0.7 million) and as of March 31, 2008, the Company had an accumulated deficit
of approximately $53.3 million (December 31, 2007 - $52.4 million). The
Company's continuation as a going concern is uncertain. The Company is in
discussion with its primary lenders who have agreed to waive certain breaches in
the lending agreement at April 11, 2008 on the basis that a forbearance
agreement be finalized. The Company's convertible debenture holders have agreed
to extend maturity to December 31, 2008. Management's plan is to pursue raising
additional funds through future equity or debt financing to satisfy its
commitments to its primary lenders and meet its obligations to the convertible
debenture holders until it achieves profitable operations. Although the Company
plans to pursue additional financing, there can be no assurance that the Company
will be able to secure financing when needed or obtain such on terms
satisfactory to the Company, if at all. The Company's continuation as a going
concern depends upon its ability to raise funds and achieve and sustain
profitable operations.
The accompanying unaudited condensed consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the inability of the Company to continue as a
going concern.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2008 and 2007
NOTE 3 -- Recent Accounting Pronouncements
- -----------------------------------------------
In April 2008, Financial Accounting Standards Board ("FASB") issued FASB Staff
Position ("FSP") SFAS No. 142-3, "Determination of the Useful Life of Intangible
Assets" ("FSP SFAS No. 142-3"). FSP SFAS No. 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognizable intangible asset under SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"). The intent of FSP SFAS
No. 142-3 is to improve the consistency between the useful life of a
recognizable intangible asset under SFAS No. 142 and the period of expected cash
flows used to measure the fair value of the asset under SFAS No. 141(R),
"Business Combinations" and other U.S. generally accepted accounting principles.
FSP SFAS No. 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. Early adoption is prohibited. The Company does not anticipate that the
adoption of FSP SFAS No. 142-3 will have an impact on its financial position or
results of operations.
NOTE 4 -- Inventory
- -------------------
Inventory consisted of the following: MARCH 31, December 31,
--------- ------------
2008 2007
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(In thousands)
--------------
Raw materials $ 1,257 $ 1,288
Work-in-process 215 193
Finished goods 1,856 1,818
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$ 3,328 $ 3,299
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Reserves for excess and obsolete inventory totaled $1,334,000 and $1,350,000 as
of March 31, 2008 and December 31, 2007, respectively, and have been included as
a component of the above amounts.
NOTE 5 - Bank Indebtedness, Demand Loan and Revolving Line of Credit
- --------------------------------------------------------------------
MARCH 31, December 31,
--------- ------------
2008 2007
---- ----
(In thousands)
--------------
Royal Bank of Canada ("RBC") - Bank indebtedness $ 4 $ 13
RBC - Demand loan 3,450 3,488
Tradition Capital Bank - Revolving line of credit 1,050 1,050
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$ 4,504 $ 4,551
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a) Royal Bank of Canada
-----------------------
In November 2006, the Company and certain of its subsidiaries amended its
secured credit facility with RBC by converting the facility to a demand loan,
increasing the interest rate and eliminating financial covenants. In addition,
during 2006, the maximum borrowing under the facility was reduced to Canadian
$3.6 million (U.S. $3.5 million). However, RBC increased the borrowing base
formula by Canadian $1.0
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2008 and 2007
million (U.S. $973,000) in exchange for additional security provided by two of
the Company's directors in the second quarter of 2006. Borrowings under the
facility are subject to certain limitations based on a percentage of eligible
accounts receivable and inventory as defined in the agreement. Interest is
payable at a rate of RBC's prime rate (5.25% at March 31, 2008), plus 2.75% per
annum. Borrowings under this facility are secured by substantially all of the
Company's assets. As of March 31, 2008, the Company had borrowings of $3.5
million, which exceeded the maximum available (subject to the above limitations)
under the demand loan. RBC agreed to temporarily increase the availability to
the Company by Canadian $300,000 (U.S. $292,000) until March 31, 2008 in
consideration of a further guarantee by certain directors.
In consideration for these guarantees, as described above, Mr. Murdoch and Mr.
Furst received a fee of $43,000, shared between them, paid in twelve equal
monthly installments. As additional consideration, they received fully vested,
two year warrants to purchase approximately 2.9 million shares of the Company's
common stock, at an exercise price of $0.10 per share. The fair value of these
warrants of $120,000 was determined in accordance with SFAS No. 123R and
beginning in June 2006 was taken into income over the period of the guarantee,
which was one year. These guarantees expired in June 2007 and were subsequently
renewed in July 2007 until April 30, 2008. In consideration of these guarantee
renewals, Mr. Murdoch and Mr. Furst will receive a fee of $40,000 shared between
them paid in ten equal monthly installments. As additional consideration, they
received fully vested, two year warrants to purchase approximately 7.4 million
common shares of the Company at an exercise price of $0.065 per share. The fair
value of these warrants of $164,000 was determined in accordance with SFAS No.
123R and beginning in July 2007 is being taken into income over the period of
the guarantee, which is ten months. During the three month period ended March
31, 2008, $49,000 (March 31, 2007 - $30,000) has been recorded in interest and
financing expense related to these warrants and $17,000 will be expensed in the
second quarter of 2008.
As of March 31, 2008, the Company exceeded the maximum borrowing available
(subject to above limitations) by approximately $1.0 million under the demand
loan. RBC agreed to temporarily waive the violation; but reserves all of its
rights and remedies under the loan agreement on the basis that a forbearance
agreement be finalized.
b) Tradition Capital Bank
------------------------
In December 2006, the Company entered into a secured revolving credit agreement
with Tradition Capital Bank. From December 15, 2006 through the expiration of
the facility on June 15, 2007, the Company drew up to a maximum of $550,000
under the facility. Interest was payable at Tradition Capital Bank's prime rate
(7.0% at March 31, 2008), plus 1% per annum. Borrowings under this facility were
secured by substantially all of the Company's assets in a second position to
RBC. In addition, the loan was fully secured by personal guarantees of Mr.
Murdoch and Mr. Furst. In consideration of these guarantees, Mr. Murdoch and Mr.
Furst received a fee of $14,000, shared between them, paid in six equal monthly
installments beginning in December 2006. As additional consideration, they
received fully vested, two year warrants to purchase approximately 5.2 million
shares of the Company's common stock, at an exercise price of $0.053 per share.
The fair value of these warrants of $91,000 was determined in accordance with
SFAS No. 123R and beginning in December 2006 was taken into income over the
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2008 and 2007
period of the guarantee, which was six months. The credit facility and related
guarantees expired in June 2007 and were subsequently renewed in July 2007 until
April 30, 2008. In consideration of the guarantee renewals, Mr. Murdoch and Mr.
Furst will receive a fee of $23,000 shared between them paid in ten
equal monthly installments. As additional consideration, they received fully
vested, two year warrants to purchase approximately 4.2 million common shares of
the Company at an exercise price of $0.065 per share. The fair value of these
warrants of $94,000 was determined in accordance with SFAS No. 123R and
beginning in July 2007 is being taken into income over the period of the
guarantee, which is ten months.
On September 25, 2007, Mr. Murdoch and Mr. Furst agreed to provide Tradition
Capital Bank additional personal guarantees totaling $500,000, which increased
the maximum the Company can draw to $1,050,000, until April 30, 2008 under the
same terms and conditions as listed above. As of March 31, 2008 borrowings were
at the maximum amount available. In consideration of the guarantees, Mr.
Murdoch and Mr. Furst will receive a fee of $15,000 shared between them paid in
seven equal monthly installments. As additional consideration, they received
fully vested, two year warrants to purchase approximately 2.5 million common
shares of the Company at an exercise price of $0.10 per share. The fair value
of these warrants of $89,000 was determined in accordance with SFAS No. 123R and
beginning in October 2007 will be taken into income over the period of the
guarantee, which is seven months. During the three month period ended March 31,
2008, $66,000 (March 31, 2007 - $46,000) has been recorded in interest and
financing expense related to these warrants and $22,000 will be expensed in the
second quarter of 2008.
c) Palm Beach Public Library - Letter of Credit
---------------------------------------------------
In August 2007, Mr. Murdoch agreed to provide a personal guarantee for a Letter
of Credit of $49,350 for a period of one year in favor of Palm Beach Public
Library that the Company was unable to obtain on its own in order to complete a
sale of the Company's self service library systems. In consideration of this
guarantee Mr. Murdoch will receive a fee of $2,000 paid in twelve equal monthly
installments. As additional consideration, he received fully vested, two year
warrants to purchase approximately 0.2 million common shares of the Company at
an exercise price of $0.10 per share. The fair value of these warrants of
$10,000 was determined in accordance with SFAS No. 123R "Share-Based Payment"
and beginning in August 2007 is being taken into income over the period of the
guarantee, which is twelve months. Interest and financing expense recorded was
$3,000 for the three month period ended March 31, 2008 and $3,000 will be
expensed in the second quarter of 2008.
d) Airport - Bid Bond
---------------------
In December 2007, Mr. Murdoch and Mr. Furst agreed to lend the Company $141,000
($81,000 and $60,000, respectively) to secure a bid that the Company was unable
to obtain on its own to sell products to an airport facility. In consideration
of the loans, Mr. Murdoch and Mr. Furst received interest for the period of the
loan at the Bank of America's prime rate (7.25%) plus 1% per annum. During the
three month period ended March 31, 2008, $1,000 has been recorded in interest
and finance expense related to the loans. The loans were repaid in January 2008.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2008 and 2007
NOTE 6 -- Accrued Liabilities
- -----------------------------
Accrued liabilities consist of the following: MARCH 31, December 31,
--------- ------------
2008 2007
---- ----
(In thousands)
--------------
Accrued salaries, employee benefits and payroll taxes $ 276 $ 280
Customer deposit payables 531 305
Other accrued liabilities 672 954
---------- ----------
$ 1,479 $ 1,539
========== ==========
NOTE 7 -- Related Party Transactions
- -----------------------------------------
Transactions between related parties are in the normal course of operations and
are measured at the exchange amount, which is the amount of consideration
established and agreed to by the related parties.
Certain of Sentry's key shareholders and directors personally guaranteed bank
debt to the Company. Please refer to Note 5 for details.
In December 2007, Mr. Murdoch, Sentry's CEO and director, and Mr. Furst, a
Sentry director, agreed to lend the Company $141,000 ($81,000 and $60,000,
respectively) to secure a bid that the Company was unable to obtain on its own
to sell products to an airport facility. In consideration of the loans, Mr.
Murdoch and Mr. Furst received interest for the period of the loan at the Bank
of America's prime rate (7.25%) plus 1% per annum. During the three month
period ended March 31, 2008, $1,000 has been recorded in interest and finance
expense related to the loans. The loans were repaid in January 2008. Included
in accrued liabilities at December 31, 2007 for this transaction is $142,000.
NOTE 8 -- Stock Based Compensation
- ----------------------------------
a) Stock Options
--------------
The Company's 1997 Stock Incentive Plan of Sentry (the "1997 Plan"), which is
shareholder approved, permits the granting of common share options and shares to
its employees for up to 6,369,365 shares of common stock as stock-based
compensation. This plan expired as of January 14, 2007 and as such, there were
no remaining shares available for grant under this plan at March 31, 2008. The
plan was renewed on May 18, 2007 (the "2007 Plan"), is shareholder approved and
permits the granting of common share options and shares to its employees for up
to 5,000,000 shares of common stock as stock-based compensation. The stock
option committee may grant awards to eligible employees in the form of stock
options, restricted stock awards, phantom stock awards or stock appreciation
rights. Stock options may be granted as incentive stock options or
non-qualified stock options. Such options normally become exercisable at a rate
of 20% per year over a five-year period and expire ten years from the date of
grant.
There was no cash received from exercise of options during the three month
period ended March 31, 2008 and the three month period ended March 31, 2007.
The following table represents the Company's stock options granted, forfeited or
expired and exercised during the three-months ended March 31, 2008:
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2008 and 2007
Weighted
Number of Weighted Average Aggregate
Shares Average Remaining Intrinsic
Subject to Exercise Contractual Value
Issuance Price Term ($000)
----------- --------- ----------- ---------
Outstanding at January 1, 2007 2,057,000 $ 0.10
Granted --- ---
Exercised --- ---
Forfeited (122,000) 0.16
Expired (3,000) 2.37
----------- ---------
OUTSTANDING AT MARCH 31, 2008 1,932,000 $ 0.09 7.2 YEARS ---
=========== ========= ========= ========
EXERCISABLE AT MARCH 31, 2008 1,162,000 $ 0.09 6.8 YEARS ---
=========== ========= ========= ========
The aggregate intrinsic value of options has been shown as $0 because the
exercise price of the outstanding and exercisable option shares exceeded the
period end market price of the Company's common stock.
The compensation cost recognized in income for stock-based compensation was
$4,000 and $6,000 for the three-month periods ended March 31, 2008 and 2007,
respectively.
As of March 31, 2008, there was $44,000 of total unrecognized compensation cost,
net of estimated forfeitures, related to all unvested stock options, which is
expected to be recognized over a weighted average period of approximately 2.8
years.
There were no stock options issued during the three-month periods ended March
31, 2008 and March 31, 2007.
At March 31, 2008, options for 4,508,500 common shares were available for future
grants under the 2007 Stock Option Plan. On January 14, 2007 the 1997 Plan
expired. There were no common shares available for future grant under this
Plan.
b) Warrants
--------
As of March 31, 2008, Sentry has outstanding warrants for 27,718,123 (March 31,
2007 - 13,788,680) common shares issued in connection with various financing
arrangements. The warrants have exercise prices ranging from $0.05 to $0.17
(March 31, 2007 - $0.05 to $0.20) and expire from April 28, 2008 through
September 25, 2009.
NOTE 9 - Fair Value Measurements
- -------------------------------------
Effective January 1, 2008, the Company adopted SFAS 157, except as it applies to
the nonfinancial assets and nonfinancial liabilities subject to FSP SFAS 157-2.
SFAS 157 clarifies that fair value is an exit price, representing the amount
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants. As such, fair value is a
market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or a liability. As a basis
for considering such assumptions, SFAS 157 establishes a three-tier value
hierarchy, which prioritizes the inputs used in the valuation methodologies in
measuring fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for
identical assets or liabilities in active markets.
Level 2 - Include other inputs that are directly or indirectly
observable in the marketplace.
Level 3 - Unobservable inputs which are supported by little or no
market activity.
The fair value hierarchy also requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring
fair value.
Cash and cash equivalents (level 1), accounts payable and accrued liabilities
(level 2) are reflected in the consolidated balance sheets at carrying value,
which approximates fair value due to the short-term nature of these instruments.
NOTE 10 - Subsequent Events
- --------------------------
As of April 11, 2008, Mr. Robert Furst extended his personal guarantee relating
to the RBC loan agreement to December 31, 2008. In consideration of this
guarantee renewal, Mr. Furst will receive a fee of $13,333 paid in eight equal
monthly installments. As additional consideration he will receive fully vested
warrants for the purchase of approximately 2 million common shares of the
Company, exercisable until April 30, 2010, at an exercise price of $0.10 per
share.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
March 31, 2008 and 2007
As of April 11, 2008, Brookfield extended its maturity of the debenture to
December 31, 2008 subject to fully vested warrants for the purchase of up to 5
million common shares of the Company, exercisable until April 30, 2010, at an
exercise price of $0.10 per share, registered in the name of Brookfield.
As of April 30, 2008, Mr. Peter Murdoch extended his personal guarantee relating
to the RBC loan agreement to December 31, 2008. In consideration of this
guarantee renewal, Mr. Murdoch will receive a fee of $20,000 paid in eight equal
monthly installments. As additional consideration he will receive fully vested
warrants for the purchase of approximately 3 million common shares of the
Company, exercisable until April 30, 2010, at an exercise price of $0.10 per
share.
As of April 30, 2008, Mr. Peter Murdoch and Mr. Robert Furst agreed to extend
their personal guarantees relating to the Tradition Capital Bank loan agreement
to December 31, 2008. In consideration of these guarantee renewals, Mr. Murdoch
and Mr. Furst will receive a fee of $35,000 shared between them in eight equal
monthly installments. As additional consideration they will receive fully
vested warrants for the purchase of approximately 5.3 million common shares of
the Company, to be shared equally, exercisable until April 30, 2010, at an
exercise price of $0.10 per share.
Item 2. Management's Discussion and Analysis of Plan of Operation.
- -------------------------------------------------------------------
Certain Factors That May Affect Future Results
- ----------------------------------------------
Information contained or incorporated by reference in this periodic report on
Form 10-Q and in other SEC filings by Sentry contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 which can be identified by the use of forward-looking terminology such
as "believes," "expects," "may," "will," "should" or "anticipates" or the
negative thereof, other variations thereon or comparable terminology, or by
discussions of strategy. These forward-looking statements involve certain
significant risks and uncertainties, and actual results may differ materially
from the forward-looking statements. For further details and discussion of these
risks and uncertainties see Sentry Technology Corporation's SEC filings
including, but not limited to, its annual report on Form 10-KSB. No assurance
can be given that future results covered by the forward-looking statements will
be achieved, and other factors could also cause actual results to vary
materially from the future results covered in such forward-looking statements.
We do not undertake to publicly update or revise any of our forward-looking
statements even if experience or future changes show that the indicated results
or events will not be realized.
Results of Operations:
- ------------------------
Consolidated revenues were 23% lower in the quarter ended March 31, 2008 as
compared to the quarter ended March 31, 2007. Our backlog of orders, which we
expect to deliver within the next twelve months, was $5.6 million at March 31,
2008, an increase of 229% as compared to $1.7 million at March 31, 2007. Total
revenues for the periods presented are broken out as follows:
Q-1 Q-1 % Change
2008 2007 Incr (Decr)
------ ------ -----------
(in thousands)
Electronic Article Surveillance (EAS) $ 979 $ 1,653 (41%)
Closed Circuit Television (CCTV) 86 96 (10%)
SentryVision 647 580 12%
------- -------- -----
Total sales 1,712 2,329 (26%)
Service, maintenance and installation 330 339 (3%)
------- -------- -----
Total revenues $2,042 $ 2,668 (23%)
====== ======== =====
Sales in the first quarter of 2008 were 26% lower than the same period in 2007.
Both domestic and international sales were lower for EAS mainly due to low sales
volume at our 51% owned labeling plant as well as lower domestic QuickCheck
sales. There was an increase in domestic SentryVision sales, which was partially
offset by lower international sales. Service income was lower due to a reduced
number of service calls offset slightly by higher installation revenue while
maintenance revenue remained constant. In general, the shortfall in sales
revenue was a result of several large orders received too late in the quarter to
be installed. This resulted in an increase in the order backlog of $2.8 million
over the $2.8 million backlog as of December 31, 2007, equaling a total order
backlog of $5.6 million as of March 31, 2008.
Cost of sales were 60% of total sales in the three-month period ended March 31,
2008 as compared to 55% in the three-month period ended March 31, 2007. The
increase in the cost of sales percentage is mainly due to extremely low sales at
our 51% owned labeling plant.
The 21% increase in customer service expenses in the first quarter of 2008
compared to the first quarter of 2007 is primarily due to an increase in
subcontractor labor and salary expenses. The Company is continuing to use
outside service contractors to supplement our field service employees in order
to better manage total customer service costs during fluctuations in activity
levels between periods.
Selling, general and administrative expenses were 18% lower in the three-month
period ended March 31, 2008 when compared to the same period of the previous
year. This decrease is principally the result of foreign exchange gains of
$141,000 and a decrease in salary and warranty expenses, which were partially
offset by higher sales promotion costs and professional fees. Foreign exchange
gains resulted from the strengthening of the U.S. dollar valuation of the
Company's Canadian dollar bank loan as well as receivables denominated in U.S.
dollars from our Canadian subsidiary.
The decrease in research and development costs of 29% in the first quarter of
2008 when compared to the first quarter of 2007 is primarily a result of reduced
consulting fees. The Company continues to develop both hardware and software
products for its core library and traveling camera system markets.
Total interest and financing costs increased in the three-month period ended
March 31, 2008 primarily as a result of financing costs (including the non-cash
amortization of warrants issued of $118,000 and $76,000 in the three-month
period ended March 31, 2008 and 2007, respectively) related to the loan
guarantees provided by the Company's directors as well as increased interest
expenses on a higher average outstanding debt offset slightly by interest income
earned on past due receivable balances.
There was no income tax provision needed at March 31, 2008 as a result of our
51% owned labeling plant having a loss for the quarter. The income tax expense
in the 2007 period was principally a result of the taxable income of this
Canadian subsidiary, which cannot be offset by Sentry's net operating loss
carryforwards.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
March 31, 2008 and 2007
As a result of the foregoing, Sentry had losses of $887,000 in the quarter ended
March 31, 2008 as compared to losses of $724,000 in the quarter ended March 31,
2007.
Liquidity and Capital Resources as of March 31, 2008
At March 31, 2008, we had cash and short-term investments of $1,322,000, working
capital of ($742,000) and total assets of $7,453,000. While we had a loss of
$0.9 million in the first three months of 2008, we generated net cash from
operating activities of $0.9 million. This was primarily a result of collecting
a large receivable balance the last week of the quarter.
Cash provided by investing activities was $83,000 during the first three months
of 2008 due to use of short term investments, partially offset by changes in
other assets.
Cash provided by financing activities was $70,000 during the first quarter of
2008 primarily due to increased borrowings under our RBC credit facilities.
Borrowing availability under the credit facilities has been based upon the
combined levels of receivables and inventory, which was slightly higher in the
first three months of 2008. The extra availability under the credit facility
above the maximum allowable limit resulted from the $1.0 million loan guarantees
provided by our directors as well as RBC allowing the Company to exceed the
maximum allowable borrowing by an additional $1.0 million. The Company is
currently in negotiations with RBC to finalize a forbearance with the bank.
In November 2006, the Company and certain of its subsidiaries amended its
secured credit facility with RBC by converting the facility to a demand loan,
increasing the interest rate and eliminating financial covenants. In addition,
during 2006, the maximum borrowing under the facility was reduced to Canadian
$3.6 million (U.S. $3.5 million). However, RBC increased the borrowing base
formula by Canadian $1.0 million (U.S. $973,000) in exchange for additional
security provided by two of the Company's directors in the second quarter of
2006. Borrowings under the facility are subject to certain limitations based on
a percentage of eligible accounts receivable and inventory as defined in the
agreement. Interest is payable at a rate of RBC's prime rate (5.25% at March
31, 2008), plus 2.75% per annum. Borrowings under this facility are secured by
substantially all of the Company's assets. As of March 31, 2008, the Company
had borrowings of $3.5 million, which exceeded the maximum available (subject to
the above limitations) under the demand loan. RBC agreed to temporarily
increase the availability to the Company by Canadian $300,000 (U.S. $292,000)
until March 31, 2008 in consideration of a further guarantee by certain
directors.
In consideration for these guarantees, as described above, Mr. Murdoch and Mr.
Furst received a fee of $43,000, shared between them, paid in twelve equal
monthly installments. As additional consideration, they received fully vested,
two year warrants to purchase approximately 2.9 million shares of the Company's
common stock, at an exercise price of $0.10 per share. The fair value of these
warrants of $120,000 was determined in accordance with SFAS No. 123R and
beginning in June 2006 was taken into income over the period of the guarantee,
which was one year. These guarantees expired in June 2007 and were subsequently
renewed in July 2007 until April 30, 2008. In consideration
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
March 31, 2008 and 2007
of these guarantee renewals, Mr. Murdoch and Mr. Furst will receive a fee of
$40,000 shared between them paid in ten equal monthly installments. As
additional consideration, they received fully vested, two year warrants to
purchase approximately 7.4 million common shares of the Company at an exercise
price of $0.065 per share. The fair value of these warrants of $164,000 was
determined in accordance with SFAS No. 123R and beginning in July 2007 is being
taken into income over the period of the guarantee, which is ten months. During
the three month period ended March 31, 2008, $49,000 (March 31, 2007 - $30,000)
has been recorded in interest and financing expense related to these warrants
and $17,000 will be expensed in the second quarter of 2008.
As of April 11, 2008, Mr. Robert Furst extended his personal guarantee relating
to the RBC loan agreement to December 31, 2008. In consideration of this
guarantee renewal, Mr. Furst will receive a fee of $13,333 paid in eight equal
monthly installments. As additional consideration he will receive fully vested
warrants for the purchase approximately to 2 million common shares of the
Company, exercisable until April 30, 2010, at an exercise price of $0.10 per
share.
As of April 30, 2008, Mr. Peter Murdoch extended his personal guarantee relating
to the RBC loan agreement to December 31, 2008. In consideration of this
guarantee renewal, Mr. Murdoch will receive a fee of $20,000 paid in eight equal
monthly installments. As additional consideration he will receive fully vested
warrants for the purchase of approximately 3 million common shares of the
Company, exercisable until April 30, 2010, at an exercise price of $0.10 per
share.
As of March 31, 2008, the Company exceeded the maximum borrowing available
(subject to above limitations) by approximately $1.0 million under the demand
loan. RBC agreed to temporarily waive the violation; but reserves all of its
rights and remedies under the loan agreement on the basis that a forbearance
agreement be finalized.
In December 2006, the Company entered into a secured revolving credit agreement
with Tradition Capital Bank. From December 15, 2006 through the expiration of
the facility on June 15, 2007, the Company drew up to a maximum of $550,000
under the facility. Interest was payable at Tradition Capital Bank's prime rate
(7.0% at March 31, 2008), plus 1% per annum. Borrowings under this facility were
secured by substantially all of the Company's assets in a second position to
RBC. In addition, the loan was fully secured by personal guarantees of Mr.
Murdoch and Mr. Furst. In consideration of these guarantees, Mr. Murdoch and Mr.
Furst received a fee of $14,000, shared between them, paid in six equal monthly
installments beginning in December 2006. As additional consideration, they
received fully vested, two year warrants to purchase approximately 5.2 million
shares of the Company's common stock, at an exercise price of $0.053 per share.
The fair value of these warrants of $91,000 was determined in accordance with
SFAS No. 123R and beginning in December 2006 was taken into income over the
period of the guarantee, which was six months. The credit facility and related
guarantees expired in June 2007 and were subsequently renewed in July 2007 until
April 30, 2008. In consideration of the guarantee renewals, Mr. Murdoch and Mr.
Furst will receive a fee of $23,000 shared between them paid in ten equal
monthly installments. As additional consideration, they received fully vested,
two year warrants to purchase approximately 4.2 million common shares of the
Company at an exercise price of $0.065 per share. The fair value of these
warrants of $94,000 was determined in accordance with SFAS No. 123R and
beginning in July 2007 is being taken into income over the period of the
guarantee, which is ten months.
On September 25, 2007, Mr. Murdoch and Mr. Furst agreed to provide Tradition
Capital Bank additional personal guarantees totaling $500,000, which increased
the maximum the Company can draw to $1,050,000, until April 30, 2008 under the
same terms and conditions as listed above. As of March 31,
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
March 31, 2008 and 2007
2008 borrowings were at the maximum amount available. In consideration of the
guarantees, Mr. Murdoch and Mr. Furst will receive a fee of $15,000 shared
between them paid in seven equal monthly installments. As additional
consideration, they received fully vested, two year warrants to purchase
approximately 2.5 million common shares of the Company at an exercise price of
$0.10 per share. The fair value of these warrants of $89,000 was determined in
accordance with SFAS No. 123R and beginning in October 2007 will be taken into
income over the period of the guarantee, which is seven months. During the three
month period ended March 31, 2008, $66,000 (March 31, 2007 - $46,000) has been
recorded in interest and financing expense related to these warrants and $22,000
will be expensed in the second quarter of 2008.
As of April 30, 2008, Mr. Peter Murdoch and Mr. Robert Furst agreed to extend
their personal guarantees relating to the Tradition Capital Bank loan agreement
to December 31, 2008. In consideration of these guarantee renewals, Mr. Murdoch
and Mr. Furst will receive a fee of $35,000 shared between them in eight equal
monthly installments. As additional consideration they will receive fully
vested warrants for the purchase of approximately 5.3 million common shares of
the Company, to be shared equally, exercisable until April 30, 2010, at an
exercise price of $0.10 per share.
In August 2007, Mr. Murdoch agreed to provide a personal guarantee for a Letter
of Credit of $49,350 for a period of one year in favor of Palm Beach Public
Library that the Company was unable to obtain on its own in order to complete a
sale of the Company's self service library systems. In consideration of this
guarantee Mr. Murdoch will receive a fee of $2,000 paid in twelve equal monthly
installments. As additional consideration, he received fully vested, two year
warrants to purchase approximately 0.2 million common shares of the Company at
an exercise price of $0.10 per share. The fair value of these warrants of
$10,000 was determined in accordance with SFAS No. 123R "Share-Based Payment"
and beginning in August 2007 is being taken into income over the period of the
guarantee, which is twelve months. Interest and financing expense recorded was
$3,000 for the three-month period ended March 31, 2008 and $3,000 will be
expensed in the second quarter of 2008.
In December 2007, Mr. Murdoch and Mr. Furst agreed to lend the Company $141,000
($81,000 and $60,000, respectively) to secure a bid that the Company was unable
to obtain on its own to sell products to an airport facility. In consideration
of the loans, Mr. Murdoch and Mr. Furst received interest for the period of the
loan at the Bank of America's prime rate (7.25%) plus 1% per annum. During the
three month period ended March 31, 2008, $1,000 has been recorded in interest
and finance expense related to the loans. The loans were repaid in January 2008.
We will require positive cash flows from operations to meet our working capital
needs over the next twelve months. The Company continued to incur operating
losses through the first three months of 2008. This has limited the Company's
ability to secure additional bank financing. The Company collected a large
receivable balance the last week of the quarter ended March 31, 2008, which
caused our cash balance to increase to $1.2 million. The Company has instituted
certain plans to increase its revenue base as well as preserve its cash.
We anticipate revenue growth in new and existing markets. We are striving to
continue to improve our gross margins and control our selling expenses and our
general and administrative expenses. There can be no assurance, however, that
changes in our plans or other events affecting our operations will not result in
accelerated or unexpected cash requirements, or that we will be successful in
achieving positive cash flow from operations or obtaining adequate financing
through our credit facility. Our future cash requirements are expected to depend
on numerous factors, including, but not limited to: (i) the ability to
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
March 31, 2008 and 2007
generate positive cash flow from operations; (ii) the ability to raise
additional capital or obtain additional financing; and (iii) economic
conditions. In the event that sufficient positive cash flow from operations
is not generated, we will seek additional financing to satisfy current operating
cash flow deficiencies.
There can be no assurance, however, that additional financing will be available
on terms that are satisfactory to the Company, or that any such financing will
be sufficient to provide the full amount of funding necessary.
Related Party Transactions
- ----------------------------
Certain of Sentry's key shareholders and directors personally guaranteed bank
debt to the Company. Please refer to the Liquidity and Capital Resources
section for details.
In December 2007, Mr. Murdoch, Sentry's CEO and director, and Mr. Furst, a
Sentry director, agreed to lend the Company $141,000 ($81,000 and $60,000,
respectively) to secure a bid that the Company was unable to obtain on its own
to sell products to an airport facility. In consideration of the loans, Mr.
Murdoch and Mr. Furst received interest for the period of the loan at the Bank
of America's prime rate (7.25%) plus 1% per annum. During the three month
period ended March 31, 2008, $1,000 has been recorded in interest and finance
expense related to the loans. The loans were repaid in January 2008. Included
in accrued liabilities for 2007 for this transaction is $142,000.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of changes in the value of market risk sensitive
instruments caused by fluctuations in interest rates, foreign exchange rates and
commodity prices. Changes in these factors could cause fluctuations in the
results of our operations and cash flows. In the ordinary course of business, we
are primarily exposed to foreign currency and interest rate risks. We do not use
derivative financial instruments in connection with these commodity market
risks.
Item 4T. Controls and Procedures
We maintain disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) that are designed (i) to collect the information we are
required to disclose in the reports we file with the SEC; (ii) to record,
process, summarize and disclose this information within the time periods
specified in the rules of the SEC; and (iii) to ensure that information is
accumulated and communicated to our management, including our Chief Executive
Officer and Principal Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in the Company's internal control over financial reporting
that occurred during our most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
March 31, 2008 and 2007
PART II - OTHER INFORMATION
Item 6 - Exhibits
(a) Exhibits:
31.1 - Certification by the Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a).
31.2 - Certification by the Principal Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a).
32.1 - Certification by the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.***
32.2 - Certification by the Principal Financial Officer Pursuant to 18 U.S.C.
Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.***
*** In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit
shall not be deemed "filed" for the purposes of Section 18 of the
Securities and Exchange Act of 1934 or otherwise subject to the
liability of that section, nor shall it be deemed incorporated by
reference in any filing under the Securities Act of 1933 or the
Securities Exchange Act of 1934.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SENTRY TECHNOLOGY CORPORATION
-----------------------------
Date: May 14, 2008 By: /s/JOAN E. MILLER
------------ -------------------------
Joan E. Miller, Vice President
Finance and Treasurer
(Principal Financial and
Accounting Officer)