FORM 10-QSB
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, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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)
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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
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
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As of May 15, 2007, there were 120,743,804 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one)
Yes No X
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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 (Unaudited)
Consolidated Balance Sheets --
March 31, 2007 and December 31, 2006 3
Consolidated Statements of Operations --
Three Months Ended March 31, 2007 and 2006 4
Consolidated Statements of Cash Flows --
Three Months Ended March 31, 2007 and 2006 5
Notes to Condensed Consolidated Financial
Statements - March 31, 2007 6 - 11
Item 2. Management's Discussion and Analysis of Plan of Operation 11 - 14
Item 3. Controls and Procedures 14
PART II. OTHER INFORMATION
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Item 6. Exhibits 15
Signature 15
2
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par Value Amounts)
MARCH 31, December 31,
2007 2006
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(UNAUDITED) (Audited)
ASSETS
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Current Assets:
Cash and cash equivalents $ 276 $ 360
Short-term investments 262 259
Accounts receivable, less allowance for doubtful
accounts of $171 and $160, respectively 1,714 2,251
Inventory 3,322 3,005
Prepaid expenses and other assets 339 306
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Total current assets 5,913 6,181
PROPERTY AND EQUIPMENT, net 598 609
GOODWILL 1,564 1,564
OTHER ASSETS 374 480
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TOTAL ASSETS $ 8,449 $ 8,834
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Bank indebtedness, demand loan and revolving line of credit $ 2,983 $ 3,030
Accounts payable 864 609
Accrued liabilities 1,148 1,078
Obligations under capital leases - current portion 2 3
Deferred income 182 185
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Total current liabilities 5,179 4,905
OBLIGATIONS UNDER CAPITAL LEASES - less current portion 8 8
DEFFERED TAX LIABILITY 91 91
CONVERTIBLE DEBENTURE 1,955 1,945
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Total liabilities 7,233 6,949
MINORITY INTEREST 1,274 1,237
STOCKHOLDERS' (DEFICIT) EQUITY
Preferred stock, $0.001 par value; authorized 10,000
(2006 - 10,000) shares; none issued and outstanding
Common stock, $0.001 par value; authorized 160,000
(2006 - 160,000) shares; issued and outstanding 120,744
and 120,744 shares, respectively 121 121
Additional paid-in capital 49,043 49,037
Accumulated deficit (49,436) (48,712)
Accumulated other comprehensive income 214 202
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Total stockholders'(deficit) equity (58) 648
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TOTAL LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY $ 8,449 $ 8,834
============ ==============
The accompanying notes are an integral part of these consolidated financial
statements.
3
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Par Share Amounts)
Three Months Ended
March 31,
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2007 2006
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(Unaudited)
REVENUES:
Sales $ 2,329 $ 2,285
Service, installation and other revenues 339 423
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2,668 2,708
COST OF SALES AND EXPENSES:
Cost of sales 1,270 1,256
Customer service expenses 455 523
Selling, general and administrative expenses 1,197 1,353
Research and development 206 200
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3,128 3,332
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OPERATING LOSS (460) (624)
INTEREST AND FINANCING EXPENSE, net 213 82
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LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (673) (706)
INCOME TAX EXPENSE 27 10
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LOSS BEFORE MINORITY INTEREST (700) (716)
MINORITY INTEREST 24 14
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NET LOSS $ (724) $ (730)
============== ==============
LOSS PER SHARE
Basic and diluted $ (0.01) $ (0.01)
============== ==============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING
Basic and diluted 120,744 120,648
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
4
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months Ended
March 31,
------------------------------
2007 2006
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(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (724) $ (730)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation 32 38
Amortization of intangibles and other assets 31 31
Non-cash consideration 95 19
Minority interest in net income of consolidated subsidiary 37 8
Changes in operating assets and liabilities:
Accounts receivable 549 608
Inventory (317) (200)
Prepaid expenses and other assets (33) (134)
Accounts payable 255 48
Accrued liabilities 70 652
Deferred income (3) (6)
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Net cash (used in) provided by operating activities (8) 334
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CASH FLOWS FROM INVESTING ACTIVITIES:
Changes in short-term investments (3) 2
Purchase of property and equipment (21) (11)
Intangibles (4) ---
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Net cash used in investing activities (28) (9)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on the demand loan and revolving line of credit (47) (532)
Repayment of obligations under capital leases (1) (1)
Proceeds from exercise of stock options --- 6
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Net cash used in financing activities (48) (527)
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DECREASE IN CASH AND CASH EQUIVALENTS (84) (202)
CASH AND CASH EQUIVALENTS, at beginning of period 360 445
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CASH AND CASH EQUIVALENTS, at end of period $ 276 $ 243
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements
5
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2007 and 2006
NOTE 1 -- Basis of Presentation
- ------------------------------------
The unaudited 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 in
consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and the requirement of item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Interim results are not
necessarily indicative of the results that may be expected for a full year.
These unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 2006, as filed with the Securities and Exchange Commission ("SEC").
Certain prior period amounts have been reclassified to conform to current period
presentation.
NOTE 2 -- Going Concern
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The accompanying unaudited 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, reduced levels of revenues and
decreased financial position as a result of not meeting its business plan. The
Company had losses of $.7 million for the three month period ended March 31,
2007 and as at March 31, 2007, the Company had an accumulated deficit of $49.4
million. The Company's continuation as a going concern is uncertain.
Management's plan is to continue raising additional funds through future equity
or debt financing 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 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
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In February 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 159, "The Fair Value of
Option for Financial Assets and Liabilities" ("SFAS No. 159"), which permits
entities to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. An entity
would report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. The
objective is to improve financial reporting by providing entities with the
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SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2007 and 2006
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. The decision about whether to elect the fair value option
is applied instrument by instrument, with a few exceptions; the decision is
irrevocable; and it is applied only to entire instruments and not to portions of
instruments. The statement requires disclosures that facilitate comparisons (a)
between entities that choose different measurement attributes for similar assets
and liabilities and (b) between assets and liabilities in the financial
statements of an entity that selects different measurement attributes for
similar assets and liabilities. SFAS No. 159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007. Early
adoption is permitted as of the beginning of a fiscal year that begins on or
before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS No. 157, "Fair Value Measurement". Upon implementation, an
entity shall report the effect of the first remeasurement to fair value as a
cumulative-effect adjustment to the opening balance of retained earnings. Since
the provisions of SFAS No. 159 are applied prospectively, any potential impact
will depend on the instruments selected for fair value measurement at the time
of implementation. The Company is currently assessing the potential impacts of
implementing this standard.
NOTE 4 -- Inventory
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Inventory consists of the following: MARCH 31, December 31,
--------------------------------
2007 2006
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(In thousands)
Raw materials $ 1,107 $ 938
Work-in-process 205 233
Finished goods 2,010 1,834
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$ 3,322 $ 3,005
=============== ===============
Reserves for excess and obsolete inventory totaled $1,301,000 and $1,285,000 as
of March 31, 2007 and December 31, 2006, respectively and have been included as
a component of the above amounts.
NOTE 5 - Bank Indebtedness, Demand Loan, Revolving Line of Credit
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MARCH 31, December 31,
--------------------------------
2007 2006
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(In thousands)
Royal Bank of Canada - Bank indebtedness $ 19 $ 36
Royal Bank of Canada - Demand loan 2,414 2,519
Tradition Capital Bank - Revolving line of credit 550 475
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$ 2,983 $ 3,030
=============== ===============
a) Royal Bank of Canada
-----------------------
In November 2006, the Company and certain of its subsidiaries amended its
secured credit facility with Royal Bank of Canada ("RBC") by converting the
facility to a demand loan, increasing the interest rate and eliminating
financial covenants. In addition, during 2006, the maximum borrowings under the
7
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2007 and 2006
demand loan were reduced to Canadian $3.6 million (U.S. $3.1 million). However,
RBC increased the borrowing base formula by Canadian $1.0 million (U.S.
$866,000) in exchange for additional security provided by two of the Company's
directors in the second quarter of 2006. Borrowings under the demand loan 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 (6.0% at March 31, 2007), plus 2.75% per annum.
Borrowings under this demand loan are secured by substantially all of the
Company's assets. As of March 31, 2007, the Company had borrowings of $2.4
million, which exceeded the maximum available under the demand loan, and
accordingly, the Company was in violation of the terms of the agreement. RBC has
been made aware of the violation and has agreed to waive the violation until
April 30, 2007, at which time the Company repaid the excess. As a result of the
Company exceeding its availability, its interest rate was increased to RBC's
prime rate plus 5% per annum for the entire balance of the loan during the
violation period.
At the end of the second quarter of 2006, Mr. Murdoch, Sentry's Chief Executive
Officer and Director, and Mr. Furst, a Sentry Director, agreed to provide a
personal guarantee to RBC, the Company's lender, in the amount of Canadian $1
million (U.S. $866,000) in exchange for RBC providing increased availability
under its credit facility to the Company by the same amount. In consideration
of these guarantees, Mr. Murdoch and Mr. Furst will receive a fee of $43,000, to
be shared between them, paid in 12 equal monthly installments. As additional
consideration, they received fully vested, two year warrants to purchase
approximately 2.9 million common shares of the Company 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 "Share-Based Payment" and beginning in June 2006
is being taken into income over the period of the guarantee, which is one year.
During the three months ended March 31, 2007, $30,000 has been recorded in
interest and financing expense and the remaining $20,000 will be expensed in the
second quarter.
b) Tradition Capital Bank
------------------------
In December 2006, the Company entered into a secured revolving credit agreement
with Tradition Capital ("TC") Bank. From December 15, 2006 through the
expiration of the facility on June 15, 2007, the Company may draw up to a
maximum of $550,000 under the facility. Interest is payable at TC Bank's prime
rate (8.25% at March 31, 2007), plus 1% per annum. As of March 31, 2007,
borrowings were at the maximum amount available. Borrowings under this facility
are secured by substantially all of the Company's assets in a second position to
RBC. In addition, the facility is fully secured by the personal guarantees of
Mr. Murdoch and Mr. Furst. In consideration of these guarantees, Mr. Murdoch
and Mr. Furst will receive a fee of $14,000, to be shared between them, paid in
6 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 "Share-Based Payment" and beginning
in December 2006 is being taken into income over the period of the guarantee,
which is six months. During the three month period ended March 31, 2007,
$46,000 has been recorded in interest and financing expense and the remaining
$37,000 will be expensed in the second quarter.
8
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2007 and 2006
NOTE 6 - Accrued Liabilities
- ----------------------------
Accrued liabilities consist of the following: MARCH 31, December 31,
--------------------------------
2007 2006
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(In thousands)
Accrued salaries, employee benefits and payroll taxes $ 325 $ 297
Other accrued liabilities 823 781
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$ 1,148 $ 1,078
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NOTE 7 - Comprehensive Loss
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Comprehensive loss is as follows: Three Months Ended
March 31,
--------------------------------
2007 2006
--------------- ---------------
(In thousands)
Net loss: $ (724) $ (730)
Other comprehensive loss:
Foreign currency translation adjustments (12) (2)
--------------- ---------------
Comprehensive loss $ (736) $ (732)
=============== ===============
NOTE 8 - Related Party Transactions
- ----------------------------------------
Related parties include directors and officers and companies controlled by the
directors and officers of the Company.
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.
See Note 5 for Related Party Transactions.
NOTE 9 -- Stock Based Compensation
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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 the Company is in the
process of putting a new plan in place. As such, there were no remaining shares
available for grant under this plan at March 31, 2007. 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. The Saburah
investment constituted a change in control under the
9
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2007 and 2006
1997 Plan, resulting in the immediate vesting of all shares issued prior to May
1, 2004. All outstanding stock options are issued at not less than the fair
value of the related common stock at the date of grant. At March 31, 2007,
1,617,000 common shares were reserved for issuance in connection with the
exercise of stock options.
Effective January 1, 2006, the Company's Plan is accounted for in accordance
with the recognition and measurement provisions of SFAS No. 123R, which replaces
SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. SFAS 123R requires compensation
costs related to share-based payment transactions, including employee stock
options, to be recognized in the financial statements. In addition, the Company
adheres to the guidance set forth within SEC Staff Accounting Bulletin No. 107
("SAB 107"), which provides the staff's views regarding the interaction between
SFAS No. 123R and certain SEC rules and regulations and provides interpretations
with respect to the valuation of share-based payments for public companies.
Cash received from exercise of options during the periods were none in the three
month period ended March 31, 2007 and $6,000 in the three months ended March 31,
2006.
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
March 31,
----------------------------
2007 2006
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Risk-free interest rate 4.46% 4.375%
Expected dividend yield 0% 0%
Expected lives 2 - 3 YEARS 3 years
Expected volatility 100% 104%
The following table represents the Company's stock options granted, forfeited or
expired and exercised during the three months ended March 31, 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 2,145,500 $ 0.16
Granted --- ---
Exercised --- ---
Forfeited or expired (528,500) 0.24
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Outstanding at March 31, 2007 1,617,000 $ 0.13 7.4 years 0
=========== ========= =========== ==========
EXERCISABLE AT MARCH 31, 2007 817,000 $ 0.17 6.5 YEARS 0
=========== ========= =========== ==========
10
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2007 and 2006
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
$7,000 and $6,000 for the three month period ended March 31, 2007 and 2006,
respectively.
As of March 31, 2007, there was $54,000 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 3.4
years.
There were no stock options issued during the three month period ended March 31,
2007. A total of 300,000 options were granted in the same period last year.
The weighted average estimated fair value of stock options granted in the three
month period ended March 31, 2006 was $0.07.
At March 31, 2007, since the option plan has expired, there are no common shares
available for future grants until the new plan is put into place.
b) Warrants
--------
As of March 31, 2007, Sentry has outstanding warrants for 13,788,680 (2006 -
5,725,000) common shares issued in connection with various financing
arrangements. The warrants have exercise prices ranging from $0.05 to $0.20
(2006 - $0.15 to $0.20) and expire from April 29, 2007 through January 21, 2009.
Item 2. Management's Discussion and Analysis of Plan of Operation.
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Certain Factors That May Affect Future Results
- ----------------------------------------------
Information contained or incorporated by reference in this periodic report on
Form 10-QSB 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.
11
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
March 31, 2007 and 2006
Results of Operations:
- ------------------------
Consolidated revenues were 1% lower in the quarter ended March 31, 2007 as
compared to the quarter ended March 31, 2006. Our backlog of orders, which we
expect to deliver within the next twelve months, was $1.7 million at March 31,
2007. While this is a 19% decrease as compared to $2.1 million at March 31,
2006, this is a 21% increase as compared to $1.4 million at December 31, 2006.
Total revenues for the periods presented are broken out as follows:
Q-1 Q-1% Change
2007 2006 Incr (Decr)
--------------- --------------- --------------
(in thousands)
Electronic Article Surveillance (EAS) $ 1,653 $ 1,511 9%
Closed Circuit Television (CCTV) 96 207 (54%)
SentryVision(R) 580 567 2%
--------------- --------------- --------------
Total sales 2,329 2,285 2%
Service, maintenance and installation 339 423 (20%)
--------------- --------------- --------------
Total revenues $ 2,668 $ 2,708 (1%)
=============== =============== ==============
Sales in the first quarter of 2007 were slightly higher than the same period in
2006. We had growth in EAS sales in the North American library sector
principally due to higher sales of our QuickCheck patron self check
book-borrowing systems. CCTV revenues decreased due to a weak sector
performance. There was an increase in international sales of our SentryVision(R)
SmartTrack systems, which was partially offset by lower domestic sales.
Installation revenues were lower in 2007 as compared to 2006 due to increased
sales of our EAS library business, where installation revenue is lower than our
CCTV and SentryVision(R) sales.
Cost of sales remained constant at 55% in both the three month period ended
March 31, 2007 and 2006.
The 13% decrease in customer service expenses in the first quarter of 2007 as
compared to the first quarter of 2006 is primarily attributable to a decrease in
the number of customer service employees and lower outside service contractor
costs as a result of lower installation revenues.
Selling, general and administrative expenses were 12% lower in the three month
period ended March 31, 2007 when compared to the same period of the previous
year. The decreases in expenses in 2007 are principally a result of
administrative cost reductions including reduced headcount, accounting fees and
sales promotion costs. These were partially offset by a higher foreign exchange
loss.
The 3% increase in research and development costs in the first quarter of 2007
when compared to the first quarter of 2006 is primarily a result of increased
use of engineering consulting firms and prototype costs for new products. These
were partially offset by a reduced headcount.
Total interest and financing costs increased 160% in the first quarter of 2007
compared to the first quarter of 2006. The increase is primarily a result of
financing costs (including the non-cash amortization of warrants issued) related
to the loan guarantees provided by the Company's directors as well as increased
interest expenses on a higher average debt outstanding.
12
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
March 31, 2007 and 2006
The income tax expense in all the 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. A 170% increase from the same period
last year is primarily the result of higher taxable income earned by the
Company's subsidiary.
As a result of the foregoing, Sentry had losses of $724,000 in the quarter ended
March 31, 2007 as compared to a net loss of $730,000 in the quarter ended March
31, 2006.
Liquidity and Capital Resources as of March 31, 2007
At March 31, 2007, we had cash and short-term investments of $538,000, working
capital of $734,000 and total assets of $8,449,000. Cash used in operating
activities was $8,000 for the three month period ended March 31, 2007. Cash was
principally used to finance increases in inventory levels purchased in
anticipation of higher sales activity levels. This was partially offset by cash
generated from reductions in accounts receivable resulting from improved
collection efforts as well as an increase in accounts payable and accrued
liabilities.
Cash used in investing activities was $28,000 during the first three months of
2007 principally for the purchase of manufacturing equipment at our 51% owned
labeling plant. There are no significant projected capital expenditure
requirements anticipated through the remainder of the year, however, the level
of spending will be dependent upon various factors, including growth of the
business and general economic conditions.
Cash used in financing activities was $48,000 during the first quarter of 2007
primarily due to payments made under our credit facilities. Borrowing
availability under the credit facilities has principally been based upon the
combined levels of receivables and inventory, which declined in the first three
months of 2007. The extra availability under the credit facility was
principally related to the loan guarantees provided by our directors and the
overdraft allowed by RBC.
In November 2006, the Company and certain of its subsidiaries amended its
secured credit facility with Royal Bank of Canada ("RBC") by converting the
facility to a demand loan, increasing the interest rate and eliminating
financial covenants. In addition, during 2006, the maximum borrowings under the
demand loan were reduced to Canadian $3.6 million (U.S. $3.1 million). However,
RBC increased the borrowing base formula by Canadian $1.0 million (U.S.
$866,000) in exchange for additional security provided by two of the Company's
directors in the second quarter of 2006. Borrowings under the demand loan 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 (6.0% at March 31, 2007), plus 2.75% per annum.
Borrowings under this demand loan are secured by substantially all of the
Company's assets. As of March 31, 2007, the Company had borrowings of $2.4
million, which exceeded the maximum available under the demand loan, and
accordingly, the Company was in violation of the terms of the agreement. RBC has
been made aware of the violation and has agreed to waive the violation until
April 30, 2007, at which time the Company repaid the excess. As a result of the
Company exceeding its availability, its interest rate was increased to RBC's
prime rate plus 5% per annum for the entire balance of the loan during the
violation period.
We will require positive cash flows from operations to meet our working capital
needs over the next twelve months. Sentry's revenues declined and we continued
to incur operating losses through the first three months of 2007. This has
substantially reduced the Company's available cash reserves and limited
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SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
March 31, 2007 and 2006
our ability to secure additional bank financing. A majority of the Company's
cash is held at the 51% owned subsidiary. The Company has instituted certain
plans to increase its revenue base as well as preserve its cash. While we
believe that we have developed solid sales leads with some of the world's
largest retailers, we continued to see delays in receipt of current orders,
which caused us to continue to operate in a cash flow deficit for the first
three months of the year.
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 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
- ----------------------------
Details of related party transactions are included in Note 8 of this Form
10-QSB.
Item 3. Controls and Procedures
As of the end of the period covered by this report, Sentry Technology
Corporation carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Principal Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15 of the Securities and Exchange Act of 1934. Based upon
that evaluation, the Chief Executive Officer and Principal Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information related to the Company that is
required to be included in Sentry Technology Corporation's periodic SEC filings.
There has been no change in the Company's internal control over financial
reporting during the period covered by this report that has materially affected,
or is reasonable likely to materially affect, the Company's internal control
over financial reporting.
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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 15, 2007 By: /s/ JOAN E. MILLER
------------ --------------------------------------------
Joan E. Miller, Vice President - Finance
and Treasurer
(Principal Financial and Accounting Officer)
15