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 September 30, 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
- ------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
631-739-2000
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(Registrant's telephone number, including area code)
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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 November 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. Condensed Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets --
September 30, 2008, and December 31, 2007 3
Consolidated Statements of Operations and Comprehensive Loss --
Three Months Ended September 30, 2008, and 2007
and Nine Months Ended September 30, 2008, and 2007 4
Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 2008, and 2007 5
Notes to Condensed Consolidated Financial
Statements - September 30, 2008, and 2007 6 - 14
Item 2. Management's Discussion and Analysis of Plan of Operation 14 - 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4T. Controls and Procedures 20 - 21
PART II. OTHER INFORMATION
- ----------------------------
Item 6. Exhibits 21 - 22
Signature 22
PART I. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par Value Amounts)
(Unaudited)
SEPTEMBER 30, December 31,
2008 2007
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ASSETS
- -------------------------------------------------
Current Assets:
Cash and cash equivalents $ 215 $ 256
Short-term investments 289 202
Accounts receivable, less allowance for doubtful
accounts of $175 in 2008 and $209 in 2007, respectively 1,784 3,014
Inventory, net 2,997 3,299
Prepaid expenses and other assets 582 858
--------- ---------
Total current assets 5,867 7,629
PROPERTY AND EQUIPMENT, net 525 634
OTHER ASSETS 244 269
--------- ---------
TOTAL ASSETS $ 6,636 $ 8,532
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- ------------------------------------------------
Current Liabilities:
Bank indebtedness, demand loan and revolving line of credit $ 3,986 $ 4,551
Accounts payable 780 1,223
Accrued liabilities 1,299 1,539
Obligations under capital leases - current portion 2 2
Deferred income 240 145
Convertible debenture 2,000 1,986
--------- ---------
Total current liabilities 8,307 9,446
OBLIGATIONS UNDER CAPITAL LEASES - less current portion 5 7
DEFFERED TAX LIABILITY 109 117
--------- ---------
Total liabilities 8,421 9,570
MINORITY INTEREST 1,213 1,200
STOCKHOLDERS' DEFICIT
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 49,894 49,420
Accumulated deficit (53,473) (52,390)
Accumulated other comprehensive income 460 611
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Total stockholders' deficit (2,998) (2,238)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 6,636 $ 8,532
========= =========
The accompanying notes are an integral part of these 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 Nine Months Ended
September 30, September 30,
------------------------- ------------------------
2008 2007 2008 2007
(Unaudited) (Unaudited)
REVENUES:
Sales $ 3,101 $ 3,222 $ 8,215 $ 7,542
Service, installation and other revenues 472 839 1,429 1,615
--------- --------- --------- ---------
3,573 4,061 9,644 9,157
COST OF SALES AND EXPENSES:
Cost of sales 1,818 1,799 4,721 4,175
Customer service expenses 522 692 1,627 1,632
Selling, general and administrative expenses 967 1,403 3,041 3,995
Research and development 142 165 435 556
--------- --------- --------- ---------
3,449 4,059 9,824 10,358
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 124 2 (180) (1,201)
INTEREST EXPENSE, net 139 132 415 384
NON-CASH AMORTIZATION COSTS RELATED TO FINANCING 172 89 460 243
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES
AND MINORITY INTEREST (187) (219) (1,055) (1,828)
INCOME TAX EXPENSE (RECOVERY) 9 (7) 15 ---
--------- --------- --------- ---------
LOSS BEFORE MINORITY INTEREST (196) (212) (1,070) (1,828)
MINORITY INTEREST EXPENSE (INCOME) 8 (44) 13 (38)
--------- --------- --------- ---------
NET LOSS (204) (168) (1,083) (1,790)
--------- --------- --------- ---------
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments (90) 165 (151) 375
--------- --------- --------- ---------
COMPREHENSIVE LOSS $ (294) $ (3) $(1,234) $(1,415)
========= ========= ========= =========
LOSS PER SHARE
Basic and diluted $ (0.00) $ (0.00) $ (0.01) $ (0.01)
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic and diluted 120,744 120,744 120,744 120,744
========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
September 30,
-----------------------------
2008 2007
---- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,083) $(1,790)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation 88 94
Amortization of other assets 53 93
Non-cash consideration
Stock-based compensation 17 20
Warrant amortization 446 213
Amortization of convertible debenture 14 30
Minority interest expense (income) of consolidated subsidiary 13 (38)
Changes in operating assets and liabilities:
Accounts receivable 1,092 (74)
Inventory 276 (31)
Prepaid expenses and other assets 274 (321)
Accounts payable (433) 644
Accrued liabilities (224) 355
Deferred income 98 (7)
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Net cash provided by (used in) operating activities 631 (812)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Changes in short-term investments (104) 104
Purchase of property and equipment (20) (26)
Changes in other assets (29) 88
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Net cash (used in) provided by investing activities (153) 166
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing (repayment) on the demand loan
and revolving line of credit (361) 354
Repayment of obligations under capital leases (2) (2)
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Net cash (used in) provided by financing activities (363) 352
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EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (156) 295
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (41) 1
CASH AND CASH EQUIVALENTS, beginning of period 256 360
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 215 $ 361
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 476 $ 310
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Income taxes $ --- $ 87
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Non-cash financing activity:
Issuance of warrants relating to bank guarantees $ 457 $ 357
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The accompanying notes are an integral part of these condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 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 September 30, 2008, and for the three
and nine-month periods ended September 30, 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 consolidated 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
September 30, 2008, and results of operations and cash flows for the three and
nine-month periods ended September 30, 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 $1.1 million for the nine-month period ended September 30, 2008
(September 30, 2007 - $1.8 million), and as of September 30, 2008, the Company
had an accumulated deficit of approximately $53.5 million (December 31, 2007 -
$52.4 million). The Company's continuation as a going concern is uncertain. The
Company entered into a Forbearance Agreement on May 29, 2008, with its primary
lenders who have agreed to forbear from the exercise of their rights and
remedies under the security in respect of the indebtedness until October 31,
2008 or earlier in the event of the occurrence of a default in the agreement. As
of October 31, 2008, the Forbearance Agreement with RBC expired. On November 12,
2008, the Company and RBC extended the Forbearance Agreement to May 15, 2009
with revised terms and conditions (see Notes 5 and 11). The Company's
convertible debenture holders and Tradition Capital Bank 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.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2008, and 2007
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.
NOTE 3 -- Recent Accounting Pronouncements
- -----------------------------------------------
In April 2008, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position ("FSP") Statement of Financial Accounting Standards ("SFAS") No.
142-3, "Determination of the Useful Life of Intangible Assets" ("FSP SFAS
142-3"). FSP SFAS 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). The intent of this FSP is to improve the consistency
between the useful life of a recognized intangible asset under SFAS 142 and the
period of expected cash flows used to measure the fair value of the asset under
FASB Statement No. 141 (revised 2007), "Business Combinations," and other U.S.
generally accepted accounting principles ("GAAP"). FSP SFAS 142-3 is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. The requirement for
determining useful lives must be applied prospectively to intangible assets
acquired after the effective date and the disclosure requirements must be
applied prospectively to all intangible assets recognized as of, and subsequent
to, the effective date. Early adoption is prohibited. The Company is currently
reviewing the effect, if any; the proposed guidance will have on its
consolidated financial statements.
In May 2008, FASB issued FSP Accounting Principles Board ("APB") 14-1,
"Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1
clarifies that convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) are not addressed by paragraph 12
of APB Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants." Additionally, FSP APB 14-1 specifies that issuers of
such instruments should separately account for the liability and equity
components in a manner that will reflect the entity's nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. FSP APB
14-1 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. Early
adoption is not permitted. The Company is currently reviewing the effect, if
any; the proposed guidance will have on its consolidated financial statements.
In May 2008, FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles ("GAAP")
in the United States (the GAAP hierarchy). SFAS 162 is effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles." The Company is currently reviewing
the effect, if any; the proposed guidance will have on its consolidated
financial statements.
In June 2008, FASB issued FSP EITF Issue 03-6-1, "Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities" ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether instruments
granted in share-based payment transactions are participating securities prior
to vesting and, therefore, need to be included in the earnings allocation in
computing earnings per share under the two-class method described in paragraphs
60 and 61 of SFAS No. 128, "Earnings per
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2008, and 2007
Share." FSP EITF 03-6-1 is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those years.
The Company is currently reviewing the effect, if any, the proposed guidance
will have on its financial statements.
In September 2008, FASB issued FSP No. 133-1 and FIN 45-4, "Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161" ("FSP SFAS 133-1 and FIN 45-4"). FSP 133-1 and FIN 45-4
to require disclosures by sellers of credit derivatives, including credit
derivatives embedded in a hybrid instrument. FSP SFAS 133-1 and FIN 45-4 also
amend FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," to require an additional disclosure about the current status of the
payment/performance risk of a guarantee. Further, FSP SFAS 133-1 and FIN 45-4
clarifies the Board's intent about the effective date of FASB Statement No. 161,
"Disclosures about Derivative Instruments and Hedging Activities." FSP SFAS
133-1 and FIN 45-4 is effective for reporting periods (annual or interim) ending
after November 15, 2008. The adoption of FSP SFAS 133-1 and FIN 45-4 will have
no impact on the Company's consolidated financial statements.
In October 2008, FASB issued FSP SFAS No. 157-3, "Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active" ("FSP SFAS
157-3"), which clarifies the application of SFAS No. 157, "Fair Value
Measurements," in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. FSP FAS 157-3 was
effective upon issuance, including prior periods for which financial statements
had not been issued. The Company is currently reviewing the effect, if any, the
proposed guidance will have on its consolidated financial statements.
NOTE 4 - Inventory, Net
- -----------------------
Inventory consists of the following: SEPTEMBER 30, December 31,
------------- ------------
2008 2007
---- ----
(UNAUDITED) (audited)
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(In thousands)
Raw materials $ 1,133 $ 1,288
Work-in-process 196 193
Finished goods 1,668 1,818
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Total, net $ 2,997 $ 3,299
========= =========
Reserves for excess and obsolete inventory totaled $1,335,000 and $1,350,000 as
of September 30, 2008, and December 31, 2007, respectively, and have been
included as a component of the above amounts.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2008, and 2007
NOTE 5 - Bank Indebtedness, Demand Loan and Revolving Line of Credit
- --------------------------------------------------------------------
SEPTEMBER 30, December 31,
============= ============
2008 2007
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(UNAUDITED) (audited)
(In thousands)
Royal Bank of Canada ("RBC")-Bank indebtedness $ 11 $ 13
RBC - Demand loan 2,925 3,488
Tradition Capital Bank-Revolving line of credit 1,050 1,050
------- -------
$ 3,986 $ 4,551
======= =======
a) Royal Bank of Canada
---------------------
The maximum borrowing under the demand loan facility was Canadian $3.6 million
(U.S. $3.4 million). RBC increased the borrowing base formula by Canadian $1.0
million (U.S. $944,000) in exchange for additional security provided by two of
the Company's directors. 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
(4.75% at September 30, 2008), plus 2.75% per annum. Borrowings under this
facility are secured by substantially all of the Company's assets. As of
September 30, 2008, the Company exceeded its facilities under the lending
formula by approximately $0.7 million (subject to the above limitations) under
the demand loan. RBC agreed to forbear from the exercise of its rights and
remedies under the security in respect of the indebtedness until October 31,
2008 or earlier in the event of the occurrence of default in accordance with the
Forbearance Agreement, which was finalized on May 29, 2008. In accordance with
the Forbearance Agreement the maximum borrowings were reduced to Canadian
$3,175,000 (U.S. $3,000,000) and the interest rate was increased from RBC's
prime rate plus 2.75% per annum to RBC's prime rate plus 3.25% per annum.
As of October 31, 2008, the Forbearance Agreement with RBC expired. On
November 12, 2008, the Company and RBC extended the Forbearance Agreement to May
15, 2009 with revised terms and conditions.
In consideration for the guarantees provided by Mr. Murdoch and Mr. Furst to
RBC, the Company paid 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 received 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 was taken into income
over the period of the guarantee, which was ten months. These guarantees expired
in April 2008 and were subsequently renewed in May 2008 until December 31, 2008.
In consideration of these guarantee renewals, Mr. Murdoch and Mr. Furst received
a fee of $33,000, shared between them, paid in eight equal monthly installments.
As additional consideration, they received fully-vested, two-year warrants to
purchase approximately 5 million
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2008, and 2007
common shares of the Company at an exercise price of $0.10 per share. The fair
value of these warrants of $150,000 was determined in accordance with SFAS No.
123R and beginning in May 2008 is being taken into income over the period of the
guarantee, which is eight months. Interest and financing expense recorded was
$56,000 for the three-month period ended September 30, 2008, $159,000 for the
nine-months ended September 30, 2008. During the three and nine-month periods
ended September 30, 2007, $50,000 and $100,000, respectively, has been recorded
in interest and financing expense.
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. 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
received 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 was taken into income over the period of the guarantee, which was 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. In consideration of the guarantees,
Mr. Murdoch and Mr. Furst received 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 was taken into income over the period of the
guarantee, which was seven months. On April 30, 2008 the above loan facility
expired and was renewed until December 31, 2008. Interest is payable at the
reference rate (Wall Street Journal prime, with an interest rate floor of 5.5%,
currently 5.0%), plus 1.0% per annum. At September 30, 2008, borrowings were at
the maximum amount available. In consideration of these guarantee renewals, Mr.
Murdoch and Mr. Furst will receive a fee of $35,000, shared between them, paid
in eight equal monthly installments. As additional consideration, they received
fully-vested, two-year warrants to purchase approximately 5.3 million common
shares of the Company at an exercise price of $0.10 per share. The fair value of
these warrants of $157,000 was determined in accordance with SFAS No. 123R and
beginning in May 2008 is being taken into income over the period of the
guarantee, which is eight months. Interest and financing expense recorded was
$59,000 for the three-month period ended September 30, 2008, $187,000 for the
nine-months ended September 30, 2008. During the three and nine-month periods
ended September 30, 2007, $28,000 and $111,000, respectively, has been recorded
in interest and financing expense.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2008, and 2007
NOTE 6 -- Accrued Liabilities
- -----------------------------
SEPTEMBER 30, December 31,
------------- ------------
2008 2007
------------- ------------
(UNAUDITED) (audited)
--------- -------
(In thousands)
Accrued salaries, employee benefits and payroll taxes $ 271 $ 280
Customer deposit payables 325 305
Other accrued liabilities 703 954
---------- ----------
$ 1,299 $ 1,539
========== ==========
NOTE 7 - Convertible Debenture
- ------------------------------
On April 30, 2004, Sentry entered into a $2,000,000 secured convertible
debenture with Brookfield Technology Fund ("Brookfield"), an alternative
investment fund established by Brookfield Asset Management (formerly known as
Brascan Technology Fund and Brascan Asset Management, respectively), to invest
in early stage, technology-based companies with high growth potential.
Key terms of the transaction are as follows:
- - Four-year term.
- - Interest rate of 8% per annum.
- - Redeemable at Sentry's option after 18 months.
- - Conversion price equal to the market price, at time of conversion, less a
discount of 30% with a maximum conversion price of $0.12 per share.
- - Conversion is at the option of Brookfield when market share price is equal
to or greater than $0.17 per share or with the approval of Sentry's Board
of Directors when the market share price is less than $0.17 per share.
- - Sentry will provide most favored pricing to all Brookfield affiliates and
expects to be a supplier of security and identification products to the
Brookfield affiliates.
- - Brookfield was issued warrants for 5,000,000 common shares of Sentry,
priced at $0.15 per share, exercisable anytime up to April 30, 2008.
- - Brookfield is entitled to one seat on Sentry's Board of Directors or will
participate as an observer.
The convertible debenture is secured by a general security interest over all the
assets and properties of Sentry. The amount is subordinate to the existing
credit facilities.
On April 11, 2008, Brookfield extended its maturity of the debenture to December
31, 2008. The 5 million warrants that were originally issued expired. In
consideration of this renewal, Brookfield received fully- vested, two-year
warrants to purchase 5 million common shares of the Company at an exercise price
of $0.10 per share. The fair value of these warrants of $150,000 was determined
in accordance with SFAS No. 123R and beginning in May 2008 is being taken into
income over the period of the guarantee, which is eight months.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2008, and 2007
NOTE 8 -- 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 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 received 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 was taken into income over the period of the
guarantee, which was twelve months. This guarantee expired in August 2008 and
was subsequently renewed in August 2008 until August 2009. In consideration of
this guarantee renewal, Mr. Murdoch will receive a fee of $2,000 paid over the
next year. Interest and financing expense recorded was $1,000 for the
three-month period and $6,000 for the nine-month period ended September 30,
2008, respectively.
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 nine-month period
ended September 30, 2008, $1,000 has been recorded in interest and finance
expense related to the loans. The loans were repaid in January 2008.
NOTE 9 -- 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 September 30, 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 and
nine-month periods ended September 30, 2008 and the three and nine-month periods
ended September 30, 2007.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2008, and 2007
The assumptions used for the specified reporting periods and resulting estimates
of weighted average fair value per share of options granted during those periods
were as follows:
The assumptions used for the specified reporting periods and resulting estimates
of weighted average fair value per share of options granted during those periods
were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
---- ---- ---- ----
Risk-free interest rate 2.5% --- 2.5% 4.82%
Expected dividend yield 0% --- 0% 0%
Expected lives 2 YEARS --- 2 YEARS 2-5 years
Expected volatility 77% --- 77% 80%
The following table represents the Company's stock options granted, forfeited,
or expired and exercised during the nine-months ended September 30, 2008:
Weighted
Number of Weighted Average Aggregate
Shares Average Remaining Intrinsic
Subject to Exercise Contractual Value
Issuance Price Term ($000)
----------------------------------------------------
Outstanding as of January 1, 2008 2,057,000 $ 0.10
Granted 225,000 0.06
Exercised --- ---
Forfeited (129,000) 0.16
Expired (3,000) 2.37
---------- -------
OUTSTANDING AS OF SEPTEMBER 30, 2008 2,150,000 $ 0.09 7.0 YEARS ---
========== ====== ========= =======
EXERCISABLE AS OF SEPTEMBER 30, 2008 1,606,000 $ 0.09 7.0 YEARS ---
========== ====== ========= =======
The aggregate intrinsic value of options has been shown as $0 because the
exercise price of 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
$9,000 and $17,000 for the three and nine-month periods ended September 30,
2008, respectively, and $6,000 and $20,000 for the three and nine-month periods
ended September 30, 2007, respectively.
As of September 30, 2008, there was $36,000 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 2.2
years.
There were 225,000 options issued during the nine-month period ended September
30, 2008 with a weighted average estimated fair value of $0.03 per share. There
were 511,500 options issued during the nine-month period ended September 30,
2007, with a weighted average estimated fair value of $0.04 per share.
At September 30, 2008, options for 4,283,500 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
1997 Plan.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2008, and 2007
b) Warrants
--------
As of September 30, 2008, Sentry has outstanding warrants for 35,093,123
(September 30, 2007 - 27,718,123) common shares issued in connection with
various financing arrangements. The warrants have exercise prices ranging from
$0.05 to $0.17 per share (September 30, 2007 - $0.05 to $0.17 per share) and
expire from December 15, 2008, through May 1, 2010.
NOTE 10 - Fair Value Measurements
- --------------------------------------
Effective January 1, 2008, the Company adopted "Fair Value Measurement," ("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, short-term investments (Level 1), accounts
receivable, bank indebtedness, accounts payable, accrued liabilities,
obligations under capital leases, and convertible debenture (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 11 - Subsequent Event
- ------------------------------
As of October 31, 2008, the Forbearance Agreement with RBC expired. On November
12, 2008, the Company and RBC extended the Forbearance Agreement to May 15, 2009
with revised terms and conditions.
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
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
September 30, 2008, and 2007
"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 12% lower in the quarter ended September 30, 2008 as
compared to the quarter ended September 30, 2007. For the nine-month period
ended September 30, 2008 consolidated revenues were 5% higher than in the same
period of last year. Our backlog of orders, which we expect to deliver within
the next twelve months, was $3.4 million at September 30, 2008, a decrease of
24% as compared to $4.5 million at September 30, 2007, and a 21% increase as
compared to $2.8 million at December 31, 2007. Total revenues for the periods
presented are broken out as follows:
Q-3 Q-3 % 9 Mos. 9 Mos. %
2008 2007 Change 2008 2007 Change
---- ---- ------ ---- ---- ------
(in thousands) (in thousands)
Electronic Article Surveillance (EAS) $ 1,606 $1,726 (7) $ 3,769 $ 4,626 (19)
Closed Circuit Television (CCTV) 251 156 61 389 305 28
SentryVision 1,244 1,341 (7) 4,057 2,611 55
-------- ------- ----- -------- -------- -----
Total sales 3,101 3,223 (4) 8,215 7,542 9
Service, maintenance and installation 472 838 (44) 1,429 1,615 (12)
-------- ------- ----- -------- -------- -----
Total revenues $ 3,573 $4,061 (12) $ 9,644 $ 9,157 5
======== ======= ===== ======== ======== =====
Sales in the third quarter of 2008 were 4% lower than the same period in 2007.
For the three and nine-month periods ended September 30, 2008 domestic sales
were lower for EAS sales mainly due to weak sales volume at our 51% owned
labeling plant. International EAS sales were slightly higher in the three-month
period and slightly lower in the nine-month period. In the three-month period
ended September 30, 2008 we had higher domestic QuickCheck self-service library
sales offset by lower QuickCheck sales in the nine-month period ended September
30, 2008 compared to 2007. CCTV produced higher sales in both the three-month
and nine-month periods. SentryVision international sales were up in both the
three-month and nine-month periods primarily due to a $503,000 sale in the
three-month period and total sales of $1,403,000 in the nine-month period to a
dealer serving the Mexico City Metro. Domestic SentryVision sales are down in
both the three and nine-month periods due to the previous year having a
significant sale to Steve & Barry's of $0.7 million which was not recurring for
this year. Service, maintenance and installation revenues were lower in both
the three and nine-month periods due to lower domestic related sales revenue
including the non-recurring $0.4 million installation revenue we received from
Steve & Barry's in the prior year.
Cost of sales were 59% and 57% of total sales in the three and nine-month
periods ended September 30, 2008 as compared to 56% and 55% in the three and
nine-month periods ended September 30, 2007. This
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
September 30, 2008, and 2007
increase in the cost of sales percentage is mainly due to lower sales at our 51%
owned labeling plant as well as an increase in the percentage of total sales to
foreign dealers.
The 25% decrease in customer service expenses in the third quarter of 2008 as
compared to the third quarter of 2007 is primarily due to lower subcontractor
labor costs due to lower domestic revenues of installed products. The first
nine-month period of 2008 compared to the first nine-month period of 2007
remained approximately the same. 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 31% and 24% lower in the three
and nine-month periods ended September 30, 2008, respectively, when compared to
the same periods of the previous year. This decrease is principally the result
of foreign exchange gains of $141,000 in the three-month period and $217,000 in
the nine-month period ended September 30, 2008 compared to a loss of $255,000 in
the three-month period and a loss of $592,000 in the nine-month period ended
September 30, 2007 as well as lower sales salaries, warranty expenses and
freight expenses, offset slightly by higher 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 14% in the third quarter and
22% in the first nine-months of 2008 compared to the third quarter and first
nine-months of 2007 is primarily a result of lower salary expenses. The Company
continues to develop both hardware and software products for its core library
and traveling camera system markets.
Net interest expense increased in the three and nine-month periods ended
September 30, 2008 compared to the same periods in 2007 as a result of higher
average outstanding debt.
Non-cash amortization of costs related to financing increased in the three and
nine-month periods ended September 30, 2008 compared to the same periods in
2007. This is primarily a result of financing costs related to the non-cash
amortization of warrants issued as a result of the loan guarantees provided by
the Company's directors as well as amortization costs on the convertible
debenture.
The income tax expense (recovery) in all periods presented principally results
from the taxable income of one of our Canadian subsidiaries, which cannot be
offset by Sentry's net operating loss carryforwards.
As a result of the foregoing, Sentry had losses of $204,000 and $1,083,000 in
the three-months and nine-months ended September 30, 2008, respectively, as
compared to losses of $168,000 and $1,790,000 in the three-months and
nine-months ended September 30, 2007.
Liquidity and Capital Resources as of September 30, 2008
At September 30, 2008, we had cash and short-term investments of $504,000 and
total assets of $6,636,000. Our working capital was negative $2,440,000. Even
through we had a loss of $1,083,000 million in the first nine-months of 2008, we
generated net cash from operating activities of $631,000. This was primarily a
result of the collection of accounts receivable balances as well as receiving
advanced payments of $325,000 from most foreign customers and some domestic
customers. The
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
September 30, 2008, and 2007
Company's liquidity has primarily been supported by the guarantees of two
directors, Mr. Murdoch and Mr. Furst to the Company's principal lenders.
Cash used by investing activities was $153,000 during the first nine-months of
2008 mainly due to changes in short-term investments.
Cash used by financing activities was $363,000 during the first nine months of
2008 primarily due to reduced borrowings available under our RBC credit
facilities as of September 30, 2008. Borrowing availability under the credit
facilities has been based upon the combined levels of receivables and inventory,
which were lower in the first nine 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 $0.7 million
as of September 30, 2008. The Company entered into a Forbearance Agreement with
RBC in May 2008, extending the RBC bank credit to October 31, 2008. As of
October 31, 2008, the Forbearance Agreement with RBC expired. On November 12,
2008, the Company and RBC extended the Forbearance Agreement to May 15, 2009
with revised terms and conditions.
The maximum borrowing under the demand loan facility was Canadian $3.6 million
(U.S. $3.4 million). RBC increased the borrowing base formula by Canadian $1.0
million (U.S. $944,000) in exchange for additional security provided by two of
the Company's directors. 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
(4.75% at September 30, 2008), plus 2.75% per annum. Borrowings under this
facility are secured by substantially all of the Company's assets. As of
September 30, 2008, the Company exceeded its facilities under the lending
formula by approximately $0.7 million (subject to the above limitations) under
the demand loan. RBC agreed to forbear from the exercise of its rights and
remedies under the security in respect of the indebtedness until October 31,
2008 or earlier in the event of the occurrence of default in accordance with the
Forbearance Agreement, which was finalized on May 29, 2008. In accordance with
the Forbearance Agreement the maximum borrowings were reduced to Canadian
$3,175,000 (U.S. $3,000,000) and the interest rate was increased from RBC's
prime rate plus 2.75% per annum to RBC's prime rate plus 3.25% per annum.
As of October 31, 2008, the Forbearance Agreement with RBC expired. On November
12, 2008, the Company and RBC extended the Forbearance Agreement to May 15, 2009
with revised terms and conditions.
In consideration for the guarantees provided by Mr. Murdoch and Mr. Furst to
RBC, the Company paid 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 received 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 was taken into income
over the period of the guarantee, which was
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
September 30, 2008, and 2007
ten months. These guarantees expired in April 2008 and were subsequently renewed
in May 2008 until December 31, 2008. In consideration of these guarantee
renewals, Mr. Murdoch and Mr. Furst received a fee of $33,000, shared between
them, paid in eight equal monthly installments. As additional consideration,
they received fully-vested, two-year warrants to purchase approximately 5
million common shares of the Company at an exercise price of $0.10 per share.
The fair value of these warrants of $150,000 was determined in accordance with
SFAS No. 123R and beginning in May 2008 is being taken into income over the
period of the guarantee, which is eight months. Interest and financing expense
recorded was $56,000 for the three-month period ended September 30, 2008,
$159,000 for the nine-months ended September 30, 2008. During the three and
nine-month periods ended September 30, 2007, $50,000 and $100,000, respectively,
has been recorded in interest and financing expense.
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. 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
received 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 was taken into income over the period of the guarantee, which was 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. In consideration of the guarantees,
Mr. Murdoch and Mr. Furst received 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 was taken into income over the period of the
guarantee, which was seven months. On April 30, 2008 the above loan facility
expired and was renewed until December 31, 2008. Interest is payable at the
reference rate (Wall Street Journal prime, with an interest rate floor of 5.5%,
currently 5.0%), plus 1.0% per annum. At September 30, 2008, borrowings were at
the maximum amount available. In consideration of these guarantee renewals, Mr.
Murdoch and Mr. Furst will receive a fee of $35,000, shared between them, paid
in eight equal monthly installments. As additional consideration, they received
fully-vested, two-year warrants to purchase approximately 5.3 million common
shares of the Company at an exercise price of $0.10 per share. The fair value of
these warrants of $157,000 was determined in accordance with SFAS No. 123R and
beginning in May 2008 is being taken into income over the period of the
guarantee, which is eight months. Interest and financing expense recorded was
$59,000 for the three-month period ended September 30, 2008, $187,000 for the
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
September 30, 2008, and 2007
nine-months ended September 30, 2008. During the three and nine-month periods
ended September 30, 2007, $28,000 and $111,000, respectively, has been recorded
in interest and financing expense.
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 received 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 was taken into income over the period of the
guarantee, which was twelve months. This guarantee expired in August 2008 and
was subsequently renewed in August 2008 until August 2009. In consideration of
this guarantee renewal, Mr. Murdoch will receive a fee of $2,000 paid over the
next year. Interest and financing expense recorded was $1,000 for the
three-month period and $6,000 for the nine-month period ended September 30,
2008, respectively.
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 nine-month period
ended September 30, 2008, $1,000 has been recorded in interest and finance
expense related to the loans. The loans were repaid in January 2008.
On April 11, 2008, Brookfield extended its maturity of the debenture to December
31, 2008. The 5 million warrants that were originally issued expired. In
consideration of this renewal, Brookfield received fully- vested, two-year
warrants to purchase 5 million common shares of the Company at an exercise price
of $0.10 per share. The fair value of these warrants of $150,000 was determined
in accordance with SFAS No. 123R and beginning in May 2008 is being taken into
income over the period of the guarantee, which is eight months.
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 nine months of 2008. This has limited the Company's
ability to secure additional bank financing. With the uncertainty of continued
financing the Company has continued to institute plans to increase its revenue
base as well as preserve its cash and to reduce operating expenses.
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 any of our existing credit facilities. Our future cash requirements are
expected to depend on numerous factors, including, but not limited to: (i) the
ability to 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.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
September 30, 2008, and 2007
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 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 received 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 was taken into income over the period of the
guarantee, which was twelve months. This guarantee expired in August 2008 and
was subsequently renewed in August 2008 until August 2009. In consideration of
this guarantee renewal, Mr. Murdoch will receive a fee of $2,000 paid over the
next year. Interest and financing expense recorded was $1,000 for the
three-month period and $6,000 for the nine-month period ended September 30,
2008, respectively.
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 nine-month period
ended September 30, 2008, $1,000 has been recorded in interest and finance
expense related to the loans. The loans were repaid in January 2008.
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
(a) Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and our Principal Financial Officer evaluated, with
the participation of our management, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this Quarterly
Report on Form 10-Q. As of September 30, 2008, our Chief Executive Officer and
our Principal Financial Officer concluded that our disclosure controls and
procedures, as defined in Securities Exchange Act Rule 13a-15(e), were
effective.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
September 30, 2008, and 2007
Our disclosure controls and procedures have been formulated to ensure (i) that
information that we are required to disclose in reports that we file or submit
under the Securities Exchange Act of 1934 were recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms and (ii) that the information required to be
disclosed by us is accumulated and communicated to our management, including our
Chief Executive Officer and Principal Financial Officer, as appropriate, to
allow timely decisions regarding required disclosures.
(b) Changes in Internal Controls over Financial Reporting
There was no change in our internal controls over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
third quarter of 2008 covered by this Quarterly Report on Form 10-Q that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
PART II - OTHER INFORMATION
Item 6 - Exhibits
(a) Exhibits:
10.1 - Forbearance Agreement Extension, dated November 12, 2008,
by and among Royal Bank of Canada, Sentry Technology Canada
Inc., Sentry Technology Corporation and Custom Security
Industries Inc.
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.
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
SIGNATURE
September 30, 2008, and 2007
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: November 14, 2008 By: /s/JOAN E. MILLER
----------------- ----------------------------------------
Joan E. Miller, Vice President - Finance
and Treasurer
(Principal Financial and Accounting Officer)