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 June 30, 2007
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
----------------------------------------------------------
SENTRY TECHNOLOGY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 96-11-3231714
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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 shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of August 14, 2007, there were 120,743,804 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
----------------------------------------------
INDEX
-----
Page No.
--------
PART I. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements
Consolidated Balance Sheets --
June 30, 2007 (Unaudited) and December 31, 2006 3
Consolidated Statements of Operations --
Three Months Ended June 30, 2007 and 2006
And Six Months Ended June 30, 2007 and 2006 (Unaudited) 4
Consolidated Statements of Cash Flows --
Six Months Ended June 30, 2007 and 2006 (Unaudited) 5
Notes to Condensed Consolidated Financial
Statements - June 30, 2007 6 - 12
Item 2. Management's Discussion and Analysis of Plan of Operation 13 - 15
Item 3. Controls and Procedures 16
PART II. OTHER INFORMATION
- ----------------------------
Item 6. Exhibits 16
Signature 17
2
PART I. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements (Unaudited)
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par Value Amounts)
JUNE 30, December 31,
2007 2006
------------ --------------
(UNAUDITED) (Audited)
ASSETS
------
Current Assets:
Cash and cash equivalents $ 266 $ 360
Short-term investments 94 259
Accounts receivable, less allowance for doubtful
accounts of $183 and $160, respectively 1,310 2,251
Inventory 3,384 3,005
Prepaid expenses and other assets 334 306
------------ --------------
Total current assets 5,388 6,181
PROPERTY AND EQUIPMENT, net 625 609
GOODWILL 1,564 1,564
OTHER ASSETS 314 480
------------ --------------
TOTAL ASSETS $ 7,891 $ 8,834
============ ==============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
-----------------------------------------------
Current Liabilities:
Bank indebtedness, demand loan and revolving line of credit $ 3,035 $ 3,030
Accounts payable 1,038 609
Accrued liabilities 1,005 1,078
Obligations under capital leases - current portion 2 3
Deferred income 246 185
------------ --------------
Total current liabilities 5,326 4,905
OBLIGATIONS UNDER CAPITAL LEASES - less current portion 8 8
DEFFERED TAX LIABILITY 99 91
CONVERTIBLE DEBENTURE 1,966 1,945
------------ --------------
Total liabilities 7,399 6,949
MINORITY INTEREST 1,243 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 190,000
(2006 - 160,000) shares; issued and outstanding 120,744
and 120,744 shares, respectively 121 121
Additional paid-in capital 49,050 49,037
Accumulated deficit (50,334) (48,712)
Accumulated other comprehensive income 412 202
------------ --------------
Total stockholders' (deficit) equity (751) 648
------------ --------------
TOTAL LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY $ 7,891 $ 8,834
============ ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ ------------------------------------
2007 2006 2007 2006
(Unaudited) (Unaudited)
REVENUES
Sales $ 1,991 $ 2,526 $ 4,320 $ 4,811
Service, installation and other revenues 437 406 776 829
----------------- ----------------- ----------------- -----------------
2,428 2,932 5,096 5,640
COST OF SALES AND EXPENSES:
Cost of sales 1,106 1,302 2,376 2,558
Customer service expenses 485 558 940 1,081
Selling, general and administrative expenses 1,395 1,324 2,592 2,677
Research and development 185 204 391 404
----------------- ----------------- ----------------- -----------------
3,171 3,388 6,299 6,720
----------------- ----------------- ----------------- -----------------
OPERATING LOSS (743) (456) (1,203) (1,080)
INTEREST AND FINANCING EXPENSE, net 193 86 406 168
----------------- ----------------- ----------------- -----------------
LOSS BEFORE INCOME TAXES
AND MINORITY INTEREST (936) (542) (1,609) (1,248)
INCOME TAX (RECOVERY) EXPENSE (20) 30 7 40
----------------- ----------------- ----------------- -----------------
LOSS BEFORE MINORITY INTEREST (916) (572) (1,616) (1,288)
MINORITY INTEREST 18 (26) (6) (40)
----------------- ----------------- ----------------- -----------------
NET LOSS $ (898) $ (598) $ (1,622) $ (1,328)
================= ================= ================= =================
LOSS PER SHARE
Basic and diluted $ (0.01) $ (0.00) $ (0.01) $ (0.01)
================= ================= ================= =================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic and diluted 120,744 120,729 120,744 120,689
================= ================= ================= =================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
June 30,
------------------------------
2007 2006
-------------- --------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,622) $ (1,328)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation 63 78
Amortization of intangibles and other assets 63 61
Deferred income taxes 7 2
Non-cash consideration 187 89
Minority interest in net income of consolidated subsidiary 6 88
Changes in operating assets and liabilities:
Accounts receivable 1,151 998
Inventory (379) (344)
Prepaid expenses and other assets (28) (225)
Accounts payable 429 104
Accrued liabilities (73) 412
Deferred income 61 (1)
-------------- --------------
Net cash used in operating activities (135) (66)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Changes in short-term investments 165 (15)
Purchase of property and equipment (79) (87)
Intangibles (49) (19)
-------------- --------------
Net cash provided by (used in) investing activities 37 (121)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on the demand loan and revolving line of credit 5 (19)
Repayment of obligations under capital leases (1) (1)
Proceeds from exercise of stock options --- 22
-------------- --------------
Net cash provided by financing activities 4 2
-------------- --------------
DECREASE IN CASH AND CASH EQUIVALENTS (94) (185)
CASH AND CASH EQUIVALENTS, at beginning of period 360 445
-------------- --------------
CASH AND CASH EQUIVALENTS, at end of period $ 266 $ 260
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 254 $ 145
============== ==============
Income taxes $ 10 $ 8
============== ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements
5
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 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
- -----------------------
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 $1.6 million for the six month period ended June 30, 2007
and as at June 30, 2007, the Company had an accumulated deficit of $50.3
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
- -----------------------------------------------
On May 2, 2007 the FASB issued FASB Interpretation FIN No. 48-1, "Definition of
Settlement in FASB Interpretation 48" ("FIN 48-1"). FIN 48-1 amends FIN 48,
"Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement
No. 109", to provide guidance on how an enterprise should determine whether a
tax position is effectively settled for the purpose of recognizing previously
unrecognized tax benefits. The guidance in FIN 48-1 shall be applied upon the
initial adoption of FIN 48. The Company is currently assessing the potential
impacts of implementing this standard.
6
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2007 and 2006
In May 2007, the FASB issued a FASB Staff Position on FIN 46(R)-7, "Application
of FASB Interpretation No. 46(R) to Investment Companies" ("FSP FIN 46 (R)-7").
FSP FIN 46(R)-7 addresses the application of FASB Interpretation No. 46 (revised
December 2003), "Consolidation of Variable Interest Entities", by an entity that
accounts for its investments in accordance with the specialized accounting
guidance in the AICPA Audit and Accounting Guide, "Investment Companies". The
Company has assessed the effect of adopting this guidance and has determined
that there will be no impact on the Company's consolidated financial statements.
In June 2007, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") No. 07-1, ''Clarification of the Scope of
the Audit and Accounting Guide Investment Companies and Accounting by Parent
Companies and Equity Method Investors for Investments in Investment Companies.''
SOP No. 07-1 clarifies when an entity may apply the provisions of the Audit and
Accounting Guide from Investment Companies (the Guide). Investment companies
that are within the scope of the Guide report investments at fair value;
consolidation or use of the equity method for investments is generally not
appropriate. SOP No. 07-1 also addresses the retention of specialized investment
company accounting by a parent company in consolidation or by an equity method
investor. SOP No. 07-1 is effective for fiscal years beginning on or after
December 15, 2007 with early adoption encouraged. The Company has assessed the
effect of adopting this guidance and has determined that there will be no impact
on the Company's consolidated financial statements.
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
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
- -------------------
Inventory consists of the following: JUNE 30, December 31,
2007 2006
--------------- --------------
(In thousands)
--------------- --------------
Raw materials $ 1,230 $ 938
Work-in-process 201 233
Finished goods 1,953 1,834
--------------- ---------------
$ 3,384 $ 3,005
=============== ===============
Reserves for excess and obsolete inventory totaled $1,227,000 and $1,285,000 as
of June 30, 2007 and December 31, 2006, respectively and have been included as a
component of the above amounts.
7
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2007 and 2006
NOTE 5 - Bank Indebtedness, Demand Loan, Revolving Line of Credit and Subsequent
- --------------------------------------------------------------------------------
Event
- -----
JUNE 30, December 31,
2007 2006
--------------- ---------------
(In thousands)
--------------- ---------------
Royal Bank of Canada - Bank indebtedness $ 85 $ 36
Royal Bank of Canada - Demand loan 2,400 2,519
Tradition Capital Bank - Revolving line of credit 550 475
--------------- ---------------
$ 3,035 $ 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
demand loan were reduced to Canadian $3.6 million (U.S. $3.4 million). However,
RBC increased the borrowing base formula by Canadian $1.0 million (U.S.
$939,000) 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 June 30, 2007), plus 2.75% per annum.
Borrowings under this demand loan are secured by substantially all of the
Company's assets. As of June 30, 2007, the Company had borrowings of $2.4
million, which exceeded the maximum available (subject to above limitations)
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 at June 30, 2007. The Company is presently in
negotiations with RBC to further amend the agreement.
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 $1.0
million (U.S. $939,000) 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 received a fee of $43,000, 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
was taken into income over the period of the guarantee, which was one year.
During the three and six month periods ended June 30, 2007, $20,000 and $50,000,
respectively, has been recorded in interest and financing expense. These
guarantees expired in June 2007 and were subsequently renewed in July 2007. In
consideration of these guarantee renewals, Mr. Murdoch and Mr. Furst will
receive fully vested, two year warrants to purchase approximately 7.4 million
shares of the Company's common stock, at an exercise price of $0.065, to be
shared between them. As additional compensation, Mr. Murdoch and Mr. Furst will
receive an annual cash fee, to be shared between them, equal to 5% of the
guarantee value (Canadian $1.0 million) payable until the loan guarantees expire
(June 2008 and December 2007 for Mr. Murdoch and Mr. Furst, respectively).
8
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2007 and 2006
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 June 30, 2007), plus 1% per annum. As of June 30, 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 received a fee of $14,000, 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 was
taken into income over the period of the guarantee, which is six months. During
the three and six month periods ended June 30, 2007, $37,000 and $83,000,
respectively, has been recorded in interest and financing expense. The credit
facility and related guarantees expired in June 2007 and were subsequently
renewed in July 2007 until December 31, 2007. In consideration of the guarantee
renewals, Mr. Murdoch and Mr. Furst will receive fully vested, two year warrants
to purchase approximately 4.2 million shares of the Company's common stock, at
an exercise price of $0.065, to be shared between them. As additional
compensation, Mr. Murdoch and Mr. Furst will receive an annual cash fee, to be
shared between them, equal to 5% of the guarantee value($550,000) payable until
the loan guarantees expire on December 31, 2007.
NOTE 6 - Accrued Liabilities
- ----------------------------
Accrued liabilities consist of the following: JUNE 30, December 31,
--------------- ---------------
2007 2006
--------------- ---------------
(In thousands)
Accrued salaries, employee benefits and payroll taxes $ 259 $ 297
Other accrued liabilities 746 781
--------------- ---------------
$ 1,005 $ 1,078
=============== ===============
NOTE 7 - Comprehensive Loss
- ---------------------------
Comprehensive loss is as follows: Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
--------------- --------------- --------------- ---------------
(in thousands)
Net loss: $ (898) $ (598) $ (1,622) $ (1,328)
Other comprehensive income (loss):
Foreign currency translation adjustments 198 51 210 49
--------------- --------------- --------------- ---------------
Comprehensive loss $ (700) $ (547) $ (1,412) $ (1,279)
--------------- =============== --------------- ===============
9
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2007 and 2006
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 in regard to Directors guarantees.
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 June 30, 2007. The
plan was renewed on May 18, 2007 (the "2007 Plan"), which is shareholder
approved, 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. The purchase of stock by Saburah Investments Inc.
constituted a change in control under the 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 June 30, 2007, under the 1997 plan, 1,550,500 common
shares were reserved for issuance in connection with the exercise of stock
options. Under the 2007 plan, 511,500 common shares were reserved for issuance
in connection with the exercise of stock options during the quarter ended June
30, 2007.
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.
There was no cash received from exercise of options during the three and six
month periods ended June 30, 2007.
10
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2007 and 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 Six Months Ended
June 30, June 30,
2007 2006 2007 2006
---------- ---------- ---------- ------------
Risk-free interest rate 4.82% 4.75% 4.82% 4.46%
Expected dividend yield 0% 0% 0% 0%
Expected lives 2-5 YEARS 2 years 2-5 YEARS 2 - 3 years
Expected volatility 80% 87% 80% 100%
The following table represents the Company's stock options granted, forfeited or
expired and exercised during the six months ended June 30, 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 511,500 0.06
Exercised --- ---
Forfeited or expired (595,000) 0.29
----------- ---------
OUTSTANDING AT JUNE 30, 2007 2,062,000 $ 0.10 7.9 YEARS 0
=========== ========= =========== ==========
EXERCISABLE AT JUNE 30, 2007 1,032,000 $ 0.11 7.3 YEARS 0
=========== ========= =========== ==========
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 $14,000 for the three and six month periods ended June 30, 2007 and
was $6,000 and $18,000 for the three and six month periods ended June 30, 2006,
respectively.
As of June 30, 2007, there was $64,000 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 3.3
years.
There were 511,500 options issued during the six month period ended June 30,
2007 with a weighted average estimated fair value of $0.06. There were 650,000
options issued during the six month period ended June 30, 2006 with a weighted
average estimated fair value of $0.10.
At June 30, 2007, the 1997 option plan expired; there were no common shares
available for future grant under this plan. Under the 2007 option plan there
were 4,488,500 options available for grant as of June 30, 2007.
11
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2007 and 2006
b) Warrants
--------
As of June 30, 2007, Sentry has outstanding warrants for 13,363,680 (June 30,
2006 - 8,600,000) common shares issued in connection with various financing
arrangements. The warrants have exercise prices ranging from $0.05 to $0.20
(June 30, 2006 - $0.10 to $0.20) and expire from April 28, 2008 through January
22, 2009.
12
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
June 30, 2007 and 2006
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-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.
Results of Operations:
- ----------------------
Consolidated revenues were 17% lower in the quarter ended June 30, 2007 as
compared to the quarter ended June 30, 2006. For the six month period ended
June 30, 2007 consolidated revenues were 10% lower than in the same period of
last year. Our backlog of orders, which we expect to deliver within the next
twelve months, was $3.3 million at June 30, 2007, an increase of 65% as compared
to $2.0 million at June 30, 2006, and a 136% increase as compared to $1.4
million at December 31, 2006. Total revenues for the periods presented are
broken out as follows:
Q-2 Q-2 % 6 Mos. 6 Mos. %
2007 2006 Change 2007 2006 Change
-------- -------- ------- -------- -------- -------
(in thousands) (in thousands)
EAS $ 1,247 $ 1,865 (33) $ 2,900 $ 3,376 (14)
CCTV 53 168 (68) 149 375 (60)
SentryVision 691 493 40 1,271 1,060 20
-------- -------- ------- -------- -------- -------
Total sales 1,991 2,526 (21) 4,320 4,811 (10)
Service, installation and other 437 406 8 776 829 (6)
-------- -------- ------- -------- -------- -------
Total revenues $ 2,428 $ 2,932 (17) $ 5,096 $ 5,640 (10)
======== ======== ======= ======== ======== =======
Sales in the second quarter of 2007 continued to be soft. EAS and CCTV revenues
decreased due to a weak sector performance. There was an increase in
international sales of our SentryVision SmartTrack systems, which was partially
offset by lower domestic sales. Installation revenues were lower in the six
month period of 2007 as compared to 2006 due to related lower sales revenue. The
increase in the three month period compared to the same period last year was
principally the result of higher SentryVision (R) sales. However, the increase
in the order backlog is illustrative of a positive trend in new business that is
expected to continue throughout 2007.
13
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
June 30, 2007 and 2006
Cost of sales were 56% and 55% of total sales in the three and six month periods
ended June 30, 2007 compared to 52% and 53% in the three and six month periods
ended June, 30, 2006. We continue to have slightly lower margins due to an
increase in the percentage of total sales to foreign dealers.
The 13% decrease in customer service expenses in the second quarter and first
six months of 2007 as compared to the second quarter and first six months of
2006 is primarily attributable to a decrease in the number of customer service
employees and increase use of outside service contractors in order to better
manage total customer service costs during fluctuations in activity levels
between periods.
Selling, general and administrative expenses were 5% higher and 3% lower in the
three and six month periods ended June 30, 2007 when compared to the same
periods of the previous year. An increase in the three month period compared to
the same period last year was principally the result of foreign exchange losses
of $292,000 which were partially offset by lower headcount, travel and
promotional costs. A decrease in the six month period compared to the same
period last year was attributable to lower headcount, travel and promotional
costs which was partially offset by foreign exchange losses of $337,000.
The decrease in research and development costs in the second quarter and first
six months of 2007 when compared to the second quarter and first six months of
2006 is primarily a result of a reduced headcount.
Total interest and financing costs increased in the three and six month periods
ended June 30, 2007 primarily as 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 outstanding debt.
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.
As a result of the foregoing, Sentry had losses of $898,000 and 1,622,000 in the
quarter and six months ended June 30, 2007 as compared to losses of $598,000 and
$1,328,000 in the quarter and six months ended June 30, 2006.
Liquidity and Capital Resources as of June 30, 2007
At June 30, 2007, we had cash and short-term investments of $360,000, working
capital of $62,000 and total assets of $7,891,000. Cash used in operating
activities was $135,000 for the six month period ended June 30, 2007. Cash was
principally used to finance increases in inventory levels purchased in
anticipation of higher sales levels. Cash was generated from reductions in
accounts receivable as well as an increase in accounts payable.
Cash provided by investing activities was $37,000 during the first six months of
2007 due to use of short term investments, partially offset by 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 provided by financing activities was $4,000 during the first six months of
2007 primarily due to increased borrowings under our credit facilities.
Borrowing availability under the credit facilities has principally been based
upon the combined levels of receivables and inventory, which was a net decline
in
14
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
June 30, 2007 and 2006
the first six 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. $3.4 million). However,
RBC increased the borrowing base formula by Canadian $1.0 million (U.S.
$939,000) 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 June 30, 2007), plus 2.75% per annum.
Borrowings under this demand loan are secured by substantially all of the
Company's assets. As of June 30, 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 at June
30, 2007. The Company is presently in negotiations with RBC to further amend the
agreement.
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 six months of 2007. This has
substantially reduced the Company's available cash reserves and limited
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.
Recently the Company completed a successful market trial of its OperationalVideo
system that uses our patented SmartTrack traveling system to manage safety and
security as well as retail business operations such as sign placement, product
merchandising and employee procedure compliance over the internet. Management
believes that OperationalVideo will contribute a significant new revenue stream
beginning in the third quarter of 2007.
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.
15
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
June 30, 2007 and 2006
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.
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.
16
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
June 30, 2007 and 2006
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: August 14, 2007 By: /s/ JOAN E. MILLER
--------------- -------------------------------------------
Joan E. Miller, Vice President - Finance
and Treasurer
(Principal Financial and Accounting Officer)
17