-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TgfXcxoyLrCHOVNSqFL15ph+WxyrW4js34hdk9QfryDVuen0KaiD59KGYRDlWpEt FyO2E4fS/NJSFCBZ10JU5g== 0001140361-07-009988.txt : 20070515 0001140361-07-009988.hdr.sgml : 20070515 20070515153949 ACCESSION NUMBER: 0001140361-07-009988 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070331 FILED AS OF DATE: 20070515 DATE AS OF CHANGE: 20070515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SENTRY TECHNOLOGY CORP CENTRAL INDEX KEY: 0001030708 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 113349733 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-12727 FILM NUMBER: 07852797 BUSINESS ADDRESS: STREET 1: 1881 LAKELAND AVENUE CITY: RONKONKOMA STATE: NY ZIP: 11779 BUSINESS PHONE: 6317392000 MAIL ADDRESS: STREET 1: 1881 LAKELAND AVENUE CITY: RONKONKOMA STATE: NY ZIP: 11779 10QSB 1 form10qsb.txt SENTRY TECHNOLOGY CORP 10-QSB 3-31-2007 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 ---------- ---------- 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 May 15, 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 (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 - -------------------------- Item 6. Exhibits 15 Signature 15
2
PART I. FINANCIAL INFORMATION - ------------------------------- Item 1. Financial Statements (Unaudited) SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Par Value Amounts) MARCH 31, December 31, 2007 2006 ------------ -------------- (UNAUDITED) (Audited) ASSETS ------ 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 ------------ -------------- Total current assets 5,913 6,181 PROPERTY AND EQUIPMENT, net 598 609 GOODWILL 1,564 1,564 OTHER ASSETS 374 480 ------------ -------------- TOTAL ASSETS $ 8,449 $ 8,834 ============ ============== 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 ------------ -------------- 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 ------------ -------------- 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 ------------ -------------- Total stockholders'(deficit) equity (58) 648 ------------ -------------- 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, ------------------------------ 2007 2006 -------------- -------------- (Unaudited) REVENUES: Sales $ 2,329 $ 2,285 Service, installation and other revenues 339 423 -------------- -------------- 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 -------------- -------------- 3,128 3,332 -------------- -------------- OPERATING LOSS (460) (624) INTEREST AND FINANCING EXPENSE, net 213 82 -------------- -------------- LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (673) (706) INCOME TAX EXPENSE 27 10 -------------- -------------- LOSS BEFORE MINORITY INTEREST (700) (716) MINORITY INTEREST 24 14 -------------- -------------- 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 -------------- -------------- (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) -------------- -------------- Net cash (used in) provided by operating activities (8) 334 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Changes in short-term investments (3) 2 Purchase of property and equipment (21) (11) Intangibles (4) --- -------------- -------------- Net cash used in investing activities (28) (9) -------------- -------------- 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 -------------- -------------- Net cash used in financing activities (48) (527) -------------- -------------- DECREASE IN CASH AND CASH EQUIVALENTS (84) (202) CASH AND CASH EQUIVALENTS, at beginning of period 360 445 -------------- -------------- 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 - --------------------------- 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 - ----------------------------------------------- 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 6 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 - -------------------
Inventory consists of the following: MARCH 31, December 31, -------------------------------- 2007 2006 --------------- --------------- (In thousands) Raw materials $ 1,107 $ 938 Work-in-process 205 233 Finished goods 2,010 1,834 --------------- --------------- $ 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 - -----------------------------------------------------------------
MARCH 31, December 31, -------------------------------- 2007 2006 --------------- --------------- (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 --------------- --------------- $ 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 --------------- --------------- (In thousands) Accrued salaries, employee benefits and payroll taxes $ 325 $ 297 Other accrued liabilities 823 781 --------------- --------------- $ 1,148 $ 1,078 --------------- ---------------
NOTE 7 - Comprehensive Loss - ---------------------------
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 - ---------------------------------- 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 ------------- ------------- 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 ----------- --------- 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. - ------------------------------------------------------------------- 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 13 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. 14 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 EX-31.1 2 ex31_1.txt EXHIBIT 31.1 SECTION 302 CERTIFICATION: EXHIBIT 31.1 CERTIFICATION PURSUANT TO RULE 13(A) OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, PETER L. MURDOCH, CERTIFY THAT: 1. I have reviewed this Quarterly Report on Form 10-QSB of Sentry Technology Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures [as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)], and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)] for the Registrant and we have: A. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure the material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; B. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals; C. Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and D. Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the Audit Committee of Registrant's Board of Directors (or persons performing the equivalent function): A. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and B. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. DATED: May 15, 2007 BY: /S/ PETER L. MURDOCH ----------------------------------------- NAME: Peter L. Murdoch TITLE: President and Chief Executive Officer EX-31.2 3 ex31_2.txt EXHIBIT 31.2 SECTION 302 CERTIFICATION: EXHIBIT 31.2 CERTIFICATION PURSUANT TO RULE 13(A) OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 202 I, JOAN E. MILLER, CERTIFY THAT: 1. I have reviewed this Quarterly Report on Form 10-QSB of Sentry Technology Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures [as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)], and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)] for the Registrant and we have: A. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure the material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; B. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals; C. Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and D. Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): A. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and B. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Dated: May 15, 2007 By: /s/ Joan E. Miller ------------------------------------- Name: Joan E. Miller Title: Vice President - Finance and Treasurer (Principal Financial and Accounting Officer) EX-32.1 4 ex32_1.txt EXHIBIT 32.1 SECTION 906 CERTIFICATION: EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Certification of CEO In connection with the Quarterly Report of Sentry Technology Corporation (the "Company") on Form 10-QSB for the period ended March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the Report"), I, Peter L. Murdoch, Chief Executive Officer of the Company, certify, pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ PETER L. MURDOCH --------------------------------- Peter L. Murdoch President and Chief Executive Officer May 15, 2007 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. This certification accompanies this Report on Form 10-QSB pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference. EX-32.2 5 ex32_2.txt EXHIBIT 32.2 SECTION 906 CERTIFICATION: EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Certification of Principal Financial Officer In connection with the Quarterly Report of Sentry Technology Corporation (the "Company") on Form 10-QSB for the period ended March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the Report"), I, Joan E. Miller, Principal Financial Officer of the Company, certify, pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ JOAN E. MILLER ------------------------------------- Joan E. Miller Vice President -Finance and Treasurer (Principal Financial and Accounting Officer) May 15, 2007 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. This certification accompanies this Report on Form 10-QSB pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference. -----END PRIVACY-ENHANCED MESSAGE-----