10QSB 1 q123105.txt 10-QSB 12-31-06 ALANCO TECHNOLOGIES, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ---- EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2005 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT ---- For the transition period from to --------- --------- Commission file number 0-9347 ALANCO TECHNOLOGIES, INC. (Exact name of small business issuer as specified in its charter) Arizona (State or other jurisdiction of incorporation or organization) 86-0220694 (I.R.S. Employer Identification No.) 15575 N. 83rd Way, Suite 3, Scottsdale, Arizona 85260 (Address of principal executive offices) (Zip Code) (480) 607-1010 (Issuer's telephone number) ---------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of February 8, 2006 there were 30,395,200 shares, net of treasury shares, of common stock outstanding. Transitional Small Business Disclosure Format (Check one): Yes No X --- --- Forward-Looking Statements: Some of the statements in this Form 10-QSB Quarterly Report, as well as statements by the Company in periodic press releases, oral statements made by the Company's officials to analysts and shareholders in the course of presentations about the Company, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Words or phrases denoting the anticipated results of future events such as "anticipate," "believe," "estimate," "will likely," "are expected to," "will continue," "project," "trends" and similar expressions that denote uncertainty are intended to identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among other things, (i) general economic and business conditions; (ii) changes in industries in which the Company does business; (iii) the loss of market share and increased competition in certain markets; (iv) governmental regulation including environmental laws; and (v) other factors over which the company has little or no control. 1 ALANCO TECHNOLOGIES, INC.
INDEX Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets December 31, 2005 (Unaudited) and June 30, 2005...............................3 Condensed Consolidated Statements of Operations (Unaudited)for the three months ended December 31, 2005 and 2004......................4 Condensed Consolidated Statements of Operations (Unaudited for the six months ended December 31, 2005 and 2004......................5 Condensed Consolidated Statements of Changes in Equity (Unaudited)for the six months ended December 31, 2005 and 2004......................6 Condensed Consolidated Statements of Cash Flows (Unaudited)for the six months ended December 31, 2005 and 2004.....................7 Notes to Condensed Consolidated Financial Statements (Unaudited)...............................................9 Note A - Basis of Presentation and Recent Accounting Pronouncements Note B - Inventories Note C - Contracts in Process Note D - Deferred Revenue Note E - Loss per Share Note F - Equity Note G - Industry Segment Data Note H - Related Party Transactions Note I - Line of Credit Note J - Litigation Note K - Subsequent Events Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................14 Item 3. Controls and Procedures..................................19 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................19 Item 2. Unregistered Sale of Equity Securities and Use of Proceeds..............................................19 Item 4. Submission of Matters to a Vote of Security Holders......19 Item 6. Exhibits ................................................20
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ALANCO TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2005 AND JUNE 30, 2005 Dec 31, 2005 June 30, 2005 ------------ ------------- ASSETS (unaudited) CURRENT ASSETS Cash and cash equivalents $ 129,900 $ 737,300 Accounts receivable, net 769,400 1,091,400 Notes receivable, current 29,600 80,000 Inventories, net 2,267,300 1,902,600 Prepaid expenses and other current assets 495,900 378,200 ------------ ------------ Total current assets 3,692,100 4,189,500 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT, NET 231,400 273,500 ------------ ------------ OTHER ASSETS Goodwill , net 5,356,300 5,356,300 Other intangible assets 450,000 560,700 Long-term notes receivable, net 5,000 8,000 Net assets held for sale 65,200 100,200 Other assets 50,200 55,700 ------------ ------------ Total other assets 5,926,700 6,080,900 ------------ ------------ TOTAL ASSETS $ 9,850,200 $ 10,543,900 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 1,260,100 $ 1,279,600 Billings in excess of cost and est earnings on uncompleted contracts 3,000 4,200 Deferred revenue, current 94,700 60,100 ------------ ------------ Total Current Liabilities 1,357,800 1,343,900 LONG TERM LIABILITIES Notes payable, long term 1,314,100 1,143,600 ------------ ------------ TOTAL LIABILITIES 2,671,900 2,487,500 ------------ ------------ Preferred Stock - Series B, 71,400 and 68,000 shares issued and outstanding, respectively 701,500 667,300 ------------ ------------ SHAREHOLDERS' EQUITY Preferred Stock - Series A Convertible, 2,947,100 and 2,781,200 shares issued and outstanding, respectively 3,661,500 3,412,700 Common Stock- 28,895,200 and 26,680,200 shares outstanding, net of 500,000 shares of Treasury Stock 72,942,600 71,714,600 Treasury Stock, at cost (375,100) (375,100) Accumulated deficit (69,752,200) (67,363,100) ------------ ------------ Total shareholders' equity 6,476,800 7,389,100 ------------ ------------ TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 9,850,200 $ 10,543,900 ============ ============
See accompanying notes to the consolidated financial statements 3
ALANCO TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, (Unaudited) 2005 2004 ------------ ------------ NET SALES $ 1,624,900 $ 2,085,500 Cost of goods sold 1,113,800 1,402,400 ------------ ------------ GROSS PROFIT 511,100 683,100 Selling, general and administrative expense 1,539,400 1,548,900 ------------ ------------ OPERATING LOSS (1,028,300) (865,800) OTHER INCOME & EXPENSES Interest expense, net (21,700) (11,200) Other income, net 8,200 5,800 ------------ ------------ LOSS FROM OPERATIONS (1,041,800) (871,200) Preferred stock dividends - paid in kind (17,300) (15,000) ------------ ------------ NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (1,059,100) $ (886,200) ============ ============ NET LOSS PER SHARE - BASIC AND DILUTED - Net loss attributable to common shareholders $ (0.04) $ (0.03) ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 28,269,300 25,416,700 ============ ============
See accompanying notes to the consolidated financial statements 4
ALANCO TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, (Unaudited) 2005 2004 ------------ ------------ NET SALES $ 3,226,500 $ 3,822,700 Cost of goods sold 2,170,500 2,518,200 ------------ ------------ GROSS PROFIT 1,056,000 1,304,500 Selling, general and administrative expense 3,136,600 3,067,600 ------------ ------------ OPERATING LOSS (2,080,600) (1,763,100) OTHER INCOME & EXPENSES Interest expense, net (42,200) (27,600) Other income, net 16,800 10,800 ------------ ------------ LOSS FROM OPERATIONS (2,106,000) (1,779,900) Preferred stock dividends - paid in kind (283,100) (251,700) ------------ ------------ NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (2,389,100) $ (2,031,600) ============ ============ NET LOSS PER SHARE - BASIC AND DILUTED - Net loss attributable to common shareholders $ (0.09) $ (0.08) ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 27,486,000 24,887,000 ============ ============
See accompanying notes to the consolidated financial statements 5
ALANCO TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED DECEMBER 31, 2005 (unaudited) SERIES A COMMON STOCK PREFERRED STOCK TREASURY STOCK ACCUMULATED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL ---------------------- --------------------- ----------------- ------------ ----------- Balances, June 30, 2005 27,180,200 $71,714,600 2,781,200 $3,412,700 500,000 $(375,100) $(67,363,100) $ 7,389,100 Exercise of options 140,000 53,600 - - - - - 53,600 Exercise of warrants 1,850,000 1,135,000 - - - - - 1,135,000 Shares issued for prepaid services 225,000 135,100 - - - - - 135,100 Quarterly stock valuation - (80,700) - - - - - (80,700) Preferred dividends, paid in kind - - 165,900 248,800 - - - 248,800 Nasdaq Fees - (15,000) - - - - - (15,000) Net loss - - - - - - (2,389,100) (2,389,100) ---------- ----------- --------- ---------- ------- --------- ------------ ----------- Balances, December 31, 2005 29,395,200 $72,942,600 2,947,100 $3,661,500 500,000 $(375,100) $(69,752,200) $ 6,476,800 ========== =========== ========= ========== ======= ========= ============ =========== See accompanying notes to the consolidated financial statements
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ALANCO TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31,(Unaudited) 2005 2004 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Loss from operations $ (2,106,000) $(1,779,900) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 219,500 168,100 Stock issued for services - 59,900 Income from assets held for sale (15,400) (10,800) Changes in: Accounts receivable, net 322,000 (334,400) Inventories, net (364,700) 21,900 Costs in excess of billings and estimated earnings on uncompleted contracts - (55,500) Prepaid expenses and other current assets (63,400) (75,300) Other assets 5,500 5,300 Accounts payable and accrued expenses (19,500) 269,400 Deferred revenue 34,600 123,100 Billings and estimated earnings in excess of costs on uncompleted contracts (1,200) (25,800) ------------ ------------ Net cash used in operating activities (1,988,600) (1,634,000) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Net cash from assets held for sale 50,400 40,500 Collection of notes receivable, net 53,400 55,000 Purchase of property, plant and equipment (66,700) (75,500) Patent renewal and other - (1,800) ------------ ------------ Net cash provided by investing activities 37,100 18,200 ------------ ------------
See accompanying notes to the consolidated financial statements 7
ALANCO TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) FOR THE SIX MONTHS ENDED DECEMBER 31, (Continued) 2005 2004 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Advances on borrowings $ 170,500 $ - Repayment on borrowings - (3,500) Net proceeds from sale of Equity Transactions 1,173,600 1,112,400 ------------ ------------ Net cash provided by financing activities 1,344,100 1,108,900 ------------ ------------ NET (DECREASE) IN CASH (607,400) (506,900) CASH AND CASH EQUIVALENTS, beginning of period 737,300 1,975,600 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 129,900 $ 1,468,700 ============ ============ SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Net cash paid during the period for interest $ 47,400 $ 16,700 ============ ============ Non-Cash Activities: Value of stocks and warrants issued for services and prepayments $ 135,100 $ 59,900 ============ ============ Valuation adjustment $ (80,700) $ - ============ ============ Value of warrants issued for credit line extension $ - $ 23,300 ============ ============ Series B preferred stock dividend, paid in kind $ 34,300 $ 30,000 ============ ============ Series A preferred stock dividend, paid in kind $ 248,800 $ 221,800 ============ ============
See accompanying notes to the consolidated financial statements 8 ALANCO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 2005 Note A - Basis of Presentation and Recent Accounting Pronouncements Alanco Technologies, Inc., an Arizona corporation ("Alanco" or "Company"), operates in two business segments: Computer Data Storage Segment and RFID Technology Segment. The unaudited condensed consolidated balance sheet as of December 31, 2005, the related unaudited condensed consolidated statements of operations, changes in shareholders' equity and cash flows for the six months ended December 31, 2005 presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-QSB. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In our opinion, the accompanying condensed consolidated financial statements include all adjustments necessary for a fair presentation of such condensed consolidated financial statements. Such necessary adjustments consist of normal recurring items and the elimination of all significant intercompany balances and transactions. These interim condensed consolidated financial statements should be read in conjunction with the Company's June 30, 2005, Annual Report on Form 10-KSB. Interim results are not necessarily indicative of results for a full year. Certain reclassifications have been made to conform prior period financials to the presentation in the current reporting period. The reclassifications had no effect on net loss. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. All stock options issued to employees have an exercise price not less than the fair market value of the Company's Common Stock on the date of grant. In accordance with accounting for such options utilizing the intrinsic value method under APB 25, there is no related compensation expense recorded in the Company's financial statements for the six months ended December 31, 2005 and 2004. Had compensation cost for stock-based compensation been determined based on the fair value of the options at the grant dates consistent with the method of SFAS 123, the Company's net loss and loss per share would have been increased to the pro forma amounts presented below. 9 ALANCO TECHNOLOGIES, INC.
6 months ended December 31, 2005 2004 ------------ ------------ Net loss, as reported $ (2,389,100) $ (2,031,600) Deduct: Total stock-based Employee compensation expense determined under fair value based methods for all awards, net of related tax effects $ (521,000) $ (43,500) ------------ ------------ Pro forma net loss $ (2,910,100) $ (2,075,100) ============ ============ Net loss per common share, basic and diluted As reported $ (0.09) $ (0.08) ============ ============ Pro forma $ (0.10) $ (0.08) ============ ============ Weighted Average Shares Outstanding, Basic and Diluted 27,486,000 24,887,000 ============ ============
During the six months ended December 31, 2005, the Company granted employee stock options to purchase 2,205,000 shares of the Company's Class A Common Stock at an average purchase price of $0.74, market price on date of grant. The fair value of option grants is estimated as of the date of grant, in accordance with SFAS 123, utilizing the Black-Scholes option-pricing model, with the assumptions substantively utilized in the year-end financial statements. Long-lived assets and intangible assets - The Company reviews carrying values at least annually or whenever events or circumstances indicate the carrying values may not be recoverable through projected discounted cash flows. Recent Accounting Pronouncements - In November 2004, the FASB issued Statement No. 151 ("SFAS 151"), "Inventory Cost - An Amendment of ARB No. 43, Chapter 4." SFAS 151 clarifies accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. It requires that those items be recognized as current-period charges regardless of whether they meet the criterion of abnormal. Currently, we do not have any inventory items that fall into the classifications discussed; accordingly, adoption of SFAS 151 does not have a significant impact on our financial statements. In December 2004, the FASB issued Statement No. 152 ("SFAS 152"), "Accounting for Real Estate Time-Sharing Transactions -- An Amendment of Statements 66 and 67." SFAS 152 amends SFAS 66 and 67 to reference the financial accounting and reporting guidance for real estate time-sharing transactions and to state that the guidance for incidental operations and costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. SFAS 152 is effective for financial statements for fiscal years beginning after June 15, 2005. Currently, the Company does not have any real estate transactions. Accordingly, adoption of SFAS 152 does not have a significant impact on our financial statements. In December 2004, the FASB issued Statement No. 153 ("SFAS 153"), "Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29." SFAS 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. Adoption of SFAS 153 does not have a significant impact on our financial statements. In December 2004, the FASB issued Statement No. 123R ("SFAS 123R"), "Share-Based Payment." This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. It requires that the fair-value-based method be used to account for these transactions for all public entities. This Statement is effective for small business issuers for the first fiscal year beginning after December 15, 2005 and will effect any stock-based compensation for options issued after that date, or not vested as of that date. 10 ALANCO TECHNOLOGIES, INC. In May 2005, the FASB issued Statement No. 154 ("SFAS 154"), "Accounting Changes and Error Corrections." SFAS 154 replaces APB Opinion No. 20, ("APB 20") and SFAS No. 3 to require retrospective application of changes to all prior period financial statements so that those financial statements are presented as if the current accounting principle had always been applied. APB 20 previously required most voluntary changes in accounting principles to be recognized by including in net income of the period of change the cumulative effect of changing to the new accounting principle. In addition, SFAS 154 carries forward without change the guidance contained in APB 20 for reporting a correction of an error in previously issued financial statements and a change in accounting estimate. SFAS 154 is effective for changes and corrections made after January 1, 2006, with early adoption permitted. The Company is currently not contemplating changes that would be impacted by SFAS 154. Note B - Inventories Inventories are recorded at the lower of cost or market. The composition of inventories as of December 31, 2005 and June 30, 2005 are summarized as follows: December 31, June 30, 2005 2005 ------------ ------------ (unaudited) Raw materials and purchased parts $ 2,394,600 $ 2,011,900 Work-in-progress 122,000 106,000 Finished goods 97,700 99,300 ------------ ------------ 2,614,300 2,217,200 Less reserves for obsolescence (347,000) (314,600) ------------ ------------ $ 2,267,300 $ 1,902,600 ============ ============
Note C - Contracts In Process Costs incurred, estimated earnings and billings in the RFID Technology segment, related to contracts for the installation of TSI PRISM system in process at December 31, 2005 and June 30, 2005 consist of the following: December 31, June 30, 2005 2005 ------------ ------------ (unaudited) Costs incurred on uncompleted contracts $ 64,300 $ 34,100 Estimated gross profit earned to date 9,700 1,700 ------------ ------------ Revenue earned to date 74,000 35,800 Less Billing to date (77,000) (40,000) ------------ ------------ Billing in excess of costs and estimated earnings $ (3,000) $ (4,200) ============ ============
11 ALANCO TECHNOLOGIES, INC. Note D - Deferred Revenue Deferred Revenues at December 31 and June 30, 2005 consist of the following: December 31, June 30, 2005 2005 ------------ ------------ (unaudited) Extended warranty revenue $ 94,700 $ 60,100 Less - current portion (94,700) (60,100) ------------ ------------ Deferred revenue - long term $ - $ - ============ ============
Note E - Loss Per Share Basic loss per share of common stock was computed by dividing net loss by the weighted average number of shares of common stock outstanding. Diluted earnings per share are computed based on the weighted average number of shares of common stock and dilutive securities outstanding during the period. Dilutive securities are options and warrants that are freely exercisable into common stock at less than the prevailing market price. Certain potentially dilutive securities are not included in the weighted average number of shares when inclusion would increase the earnings per share or decrease the loss per share. As of December 30, 2005, when the closing market price of the Company's Class A Common Stock on the NASDAQ Capital Market was $0.56, there were 1,150,000 potentially dilutive in-the-money warrants outstanding and 2,362,500 potentially dilutive in-the-money options outstanding. In addition, as of December 31, 2005, there are 3,555,000 out-of-the-money warrants outstanding and 7,137,500 out-of-the-money options outstanding. There were also 2,947,100 shares of Series A Convertible Preferred Stock outstanding (convertible into 8,841,400 shares of Class A Common Stock) and 71,400 shares of Series B Convertible Preferred Stock outstanding (convertible into 928,500 shares of Class A Common Stock). Note F - Equity During the six months ended December 31, 2005, the Company issued a total of 2,215,000 shares of the Company's Class A Common Stock. Included were 1,990,000 shares issued upon exercise of outstanding warrants and options generating $1,188,600 in proceeds to the Company. In addition, the Company granted 225,000 shares, valued at fair market value on date of issue of $135,100, in exchange for future services to be rendered to the Company. During March 2005, the Company entered into a technology license agreement with a developer of RFID real-time location services technology utilizing 2.4 GHz wireless networking standards. In conjunction with the execution of the license agreement, the Company issued 250,000 shares of the Company's Class A Common Stock, the value of which may be applied to future royalty payments and inventory purchases. Another 150,000 shares were issued on December 30, 2005 as consideration to amend the agreement. The definitive value for the 400,000 shares issued will be determined at market value on the effective date of the applicable stock registration statement; however, at December 31, 2005, the value of the 400,000 issued shares was determined to be $224,000, based upon the closing market price on December 30, 2005 of $.56 per share. At June 30, 2005, the 250,000 shares previously issued had been valued at $220,700. The value of those 250,000 shares at December 31, 2005 was $140,000, resulting in a net valuation decrease of $80,700. On January 19, 2006, the Company filed an S-3 registration statement, which included the 400,000 shares discussed above. That S-3 filing is currently under review by the SEC and is anticipated to become effective after SEC comments are received (within 30 days) and appropriate corrections, if necessary, are made to the S-3 filing. In October 2005, the Company reduced the exercise price for warrants (due to expire on December 31, 2005) from $1.00 per share to $.70 per share to purchase 1,450,000 shares of the Company's Class A Common Stock, granted to a group of equity investors in conjunction with a private placement in October 2002. The price was further reduced to $.50 on November 16, 2005 and for every $.50 warrant exercised, a new 3 year warrant was issued at an exercise price of $.50. (In all instances, the adjusted exercise price of the warrants outstanding and the exercise price of the warrants granted represented a value equal to or 12 ALANCO TECHNOLOGIES, INC. greater than market on date modified or granted.) Warrants to purchase 600,000 (41.3%) of the 1,450,000 shares were held by officers and directors of the Company, including warrants to purchase 100,000 shares held by Robert R. Kauffman, CEO, Director and greater than five percent (5%) owner of the Company, and warrants to purchase 400,000 shares controlled by Don Anderson, a Director and greater than five percent (5%) owner of the Company. 1,150,000, or 79.3%, of the 1,450,000 warrants modified were exercised by December 31, 2005 (included in the total warrants and options exercised above), resulting in proceeds of $575,000 to the Company. The Company declared and paid dividends-in-kind on the Company's preferred shares through the issuance of 165,900 shares of Series A Preferred Stock valued at $248,800 and 3,400 shares of Series B Preferred Stock valued at $34,300. The Preferred Stocks are more fully discussed in the Form-10KSB for the year ended June 30, 2005. Note G -Industry Segment Data Information concerning operations by industry segment follows (unaudited):
Six Months ended 12/31 Three Months ended 12/31 2005 2004 2005 2004 -------------------------- --------------------------- Revenue Data Storage $ 2,990,600 $ 3,187,500 $ 1,526,000 $ 1,821,800 RFID Technology 235,900 635,200 98,900 263,700 ------------ ------------ ------------ ------------ Total Revenue 3,226,500 3,822,700 1,624,900 2,085,500 ============ ============ ============ ============ Gross Profit Data Storage 991,500 1,047,000 481,500 567,100 RFID Technology 64,500 257,500 29,600 116,000 ------------ ------------ ------------ ------------ Total Gross Profit 1,056,000 1,304,500 511,100 683,100 ------------ ------------ ------------ ------------ Gross Margin Data Storage 33.2% 32.8% 31.6% 31.1% ------------ ------------ ------------ ------------ RFID Technology 27.3% 40.5% 29.9% 44.0% ------------ ------------ ------------ ------------ Overall Gross Margin 32.7% 34.1% 31.5% 32.8% ------------ ------------ ------------ ------------ Selling, General and Administrative Expense Data Storage 1,085,100 878,500 522,900 433,300 RFID Technology 1,369,300 1,393,900 696,000 703,900 ------------ ------------ ------------ ------------ Total Segment Operating Expense 2,454,400 2,272,400 1,218,900 1,137,200 ------------ ------------ ------------ ------------ Operating Profit (Loss) Data Storage (93,600) 168,500 (41,400) 133,800 RFID Technology (1,304,800) (1,136,400) (666,400) (587,900) Corporate Expense, net (682,200) (795,200) (320,500) (411,700) ------------ ------------ ------------ ------------ Operating Loss $ (2,080,600) $(1,763,100) $ (1,028,300) $ (865,800) ============ ============ ============ ============ Depreciation and Amortization Data Storage 12,300 8,000 6,200 4,400 RFID Technology 205,400 158,700 120,000 80,300 Corporate 1,800 1,400 900 700 ------------ ------------ ------------ ------------ Total Depreciation and Amortization $ 219,500 $ 168,100 $ 127,100 $ 85,400 ============ ============ ============ ============
13 ALANCO TECHNOLOGIES, INC. Note H - Related Party Transactions The Company has a $1.5 million line of credit agreement ("Agreement"), more fully discussed in the Company's Form 10-KSB for the year ended June 30, 2005, with a private trust controlled by Mr. Donald Anderson, a greater than five percent stockholder and a member of the Company's Board of Directors. See Note - F Equity for discussion of modification to warrants granted to a group of equity investors, including entities controlled by Mr. Anderson, and including Mr. Robert Kauffman, the Company's CEO and member of the Company's Board of Directors who is also a greater than 5% owner of the Company. Note I - Line of Credit At December 31, 2005, the Company had an outstanding balance under the line of credit agreement of $1,000,000. The balance is under a $1.5 million line of credit agreement with a private trust ("Lender"), entered into in June 2002 and last modified on June 29, 2005. Under the Agreement, the Company must maintain a minimum balance due under the line of at least $1,000,000 through the July 1, 2007 expiration date. As such, the $1,000,000 due under the line of credit agreement is recorded as Notes payable, long term. At December 31, 2005, the Company had $500,000 available under the line of credit agreement. Note J - Litigation The Company continues to be a defendant in litigation that relates to the acquisition, in May of 2002, of substantially all the assets of Technology Systems International, Inc., a Nevada corporation. No significant new activity has occurred subsequent to our report of litigation in our Form 10-KSB filed for the year ended June 30, 2005. Due to internal governance issues affecting the plaintiff, the litigation has been indefinitely stayed. The Company's management, in consultation with legal counsel, believes the plaintiff's claims are without merit and the Company will aggressively defend against the action. Litigation previously reported as arising from an expired property lease between the Company's subsidiary, Arraid, Inc., and Arraid Property L.L.C., a Limited Liability Company, is continuing. The Company's management, in consultation with legal counsel, believes the plaintiff's claims are without merit and the Company is aggressively defending against this action. The Company intends to pursue legal expense reimbursement from both the Company's insurance carrier (where appropriate) and the Plaintiffs in the litigation matters. Note K - Subsequent Events The Company completed on January 17, 2006 the sale, in a private offering to an institutional investor, of 1,500,000 units consisting of one share of its Class A Common Stock together with a 3-year warrant to purchase one-half share of the Company's Common Stock at a price of $.85 per share ("Unit") for a unit sale price of $.60. The Company received $837,000, net of commission, from the offering. The Company granted additional warrants to purchase 52,500 shares of its Common Stock on terms identical to those granted in the private offering as additional commission related to the offering. On February 1, 2006 the Company received notification from Nasdaq granting the Company an extension until July 31, 2006, to comply with Nasdaq's $1.00 per share minimum bid price continued listing requirement. Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for historical information, the statements contained herein are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by those statements. These risks and uncertainties include, but are not limited to, the 14 ALANCO TECHNOLOGIES, INC. following factors: general economic and market conditions; reduced demand for information technology equipment; competitive pricing and difficulty managing product costs; development of new technologies which make the Company's products obsolete; rapid industry changes; failure by the Company's suppliers to meet quality or delivery requirements; the inability to attract, hire and retain key personnel; failure of an acquired business to further the Company's strategies; the difficulty of integrating an acquired business; undetected problems in the Company's products; the failure of the Company's intellectual property to be adequately protected; unforeseen litigation; the ability to maintain sufficient liquidity in order to support operations; the ability to maintain satisfactory relationships with lenders and to remain in compliance with financial loan covenants and other requirements under current banking agreements; and the ability to maintain satisfactory relationships with suppliers and customers. General Information on industry segments is incorporated by reference from Note G - Segment Reporting to the Condensed Consolidated Financial Statements. Critical Accounting Policies and Estimates Management's discussion and analysis of financial condition and results of operations are based upon the condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an ongoing basis, estimates are revalued, including those related to areas that require a significant level of judgment or are otherwise subject to an inherent degree of uncertainty. These areas include allowances for doubtful accounts, inventory valuations, carrying value of goodwill and intangible assets, estimated profit on uncompleted contracts in process, income and expense recognition, income taxes, ongoing litigation, and commitments and contingencies. Our estimates are based upon historical experience, observance of trends in particular areas, information and/or valuations available from outside sources and on various other assumptions that we believe to be reasonable under the circumstances and which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts may differ from these estimates under different assumptions and conditions. Accounting policies are considered critical when they are significant and involve difficult, subjective or complex judgments or estimates. We considered the following to be critical accounting policies: Principles of consolidation - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Revenue recognition - The Company recognizes revenue from the Data Storage Segment, net of anticipated returns, at the time products are shipped to customers, or at the time services are provided. Revenue from material long-term contracts (in excess of $250,000 and over a 90-day completion period) in both the Data Storage Segment and the RFID Technology Segment are recognized on the percentage-of-completion method for individual contracts, commencing when significant costs are incurred and adequate estimates are verified for substantial portions of the contract to where experience is sufficient to estimate final results with reasonable accuracy. Revenues are recognized in the ratio that costs incurred bear to total estimated costs. Changes in job performance, estimated profitability and final contract settlements would result in revisions to cost and income, and are recognized in the period in which the revisions were determined. Contract costs include all direct materials, subcontracts, labor costs and those direct and indirect costs related to contract performance. General and administrative costs are charged to expense as incurred. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is accrued. Long-lived assets and intangible assets - The Company reviews carrying values at least annually or whenever events or circumstances indicate the carrying values may not be recoverable through projected discounted cash flows. 15 ALANCO TECHNOLOGIES, INC. Results of Operations (A) Three months ended 12/31/05 versus 12/31/04 Sales Consolidated sales for the quarter ended December 31, 2005 were $1,624,900, a decrease of $460,600, or 22.0%, when compared to $2,085,500 for the comparable quarter of the prior year. The decrease resulted from a sales decrease in the RFID Technology segment of $164,800, or 62.4%, from $263,700 for the quarter ended December 31, 2004 to $98,900 for the current quarter. Sales of the RFID Technology segment decreased due to the lack of revenue during the quarter related to the sale of TSI PRISM contracts. The Data Storage segment decreased sales by 16.2% to $1,526,000 from $1,821,800 reported for the quarter ended December 31, 2004. The 16.2% decrease in Data Storage segment sales resulted primarily from delayed shipments related to international sales. Gross Profit and Operating Expenses Gross profit reported during the quarter amounted to $511,100, a decrease of $172,000, or 25.1%, when compared to $683,100 reported for the same quarter of the prior year. The decrease in gross profit resulted from reduced sales of both the RFID Technology segment and the Data Storage segment. Consolidated gross margins decreased from 32.8% for the quarter ended December 31, 2004 to 31.5% for the current quarter. The decrease in gross margin resulted from the minimal sales of the RFID Technology segment which reduced the gross margin percentage. The gross margin for the Data Storage segment increased to 31.6% from 31.1% for the same quarter of the prior year. Selling, general and administrative expenses for the current quarter increased to $1,539,400, a $9,500 decrease when compared to $1,548,900 incurred in the comparable quarter of fiscal year 2004. Sales, general and administrative expenses related to Data Storage increased to $522,900, an increase of $89,600, or 20.7%, when compared to sales, general and administrative expense for the same quarter of the prior year. The increase in selling, general and administrative expenses for the Data Storage segment resulted from an increase in unallocated engineering project expenses of approximately $33,000 and increased administrative and sales support expense incurred in anticipation of increased revenues. Sales, general and administrative expenses related to the RFID Technology segment decreased from $703,900 for the quarter ended December 31, 2004 to $696,000 for the current quarter. Corporate expenses reported as Sales, general and administrative expense decreased to $320,500, a decrease of $91,200, or 22.2 %, when compared to the $411,700 reported for the same quarter of the prior year. The decrease resulted from a decrease in legal expense. Operating Loss The Operating Loss for the quarter was ($1,028,300) compared to a loss of ($865,800) for the same quarter of the prior year, an increase of $162,500, or 18.7%. The increased Operating Loss resulted from the RFID Technology segment increasing its Operating Loss by $78,500 to ($666,400), an increase of 13.3%, when compared to the Operating Loss reported in the same quarter of the prior year of ($587,900); and the Data Storage segment reporting a Operating Loss of ($41,400), compared to an Operating profit of $133,800 reported in the comparable quarter of the prior year. The Data Storage segment's reduction in operating profit was due primarily to the increase in unallocated engineering project expense and cost increases incurred in anticipation of increased future revenues. Interest Expense, Other Income and Dividends Expense Net interest expense for the quarter amounted to $21,700 compared to interest expense of $11,200 for the same quarter in the prior year. The interest expense increase resulted from increases in the prime rate, and an increase in the minimum borrowing limit of our credit line. Other Income increased to $8,200 from $5,800 reported for the comparable quarter of the prior year. The Company paid quarterly in-kind Series B Preferred Stock dividends with values of $17,300 and $15,000 in the quarters ended December 31, 2005 and 2004, respectively. Net Loss Attributable to Common Stockholders Net Loss Attributable to Common Stockholders for the quarter ended December 31, 2005 amounted to ($1,059,100), or ($.04) per share, compared to a loss of ($886,200), or ($.03) per share, in the comparable quarter of the prior year. Although the Company has reported operating losses in both the RFID 16 ALANCO TECHNOLOGIES, INC. Technology segment and its Data Storage segment, it anticipates improved future operating results in both segments. However, actual results in both the Data Storage segment and the RFID Technology segments may be affected by unfavorable economic conditions and reduced capital spending budgets. If the economic conditions in the United States worsen or if a wider or global economic slowdown occurs, Alanco may experience a material adverse impact on its operating results and business conditions. (B) Six months ended 12/31/2005 versus 12/31/2004 Sales Consolidated Sales for the six months ended December 31, 2005 were $3,226,500, a decrease of $596,200, or 15.6%, compared to $3,822,700 reported for the comparable period of the previous year. The sales decrease is attributed to decreases in both of the Company's two business segments. The Company's Data Storage segment reported sales of $2,990,600, a decrease of $196,900, or 6.1%, for the six months ended December 31, 2005, compared to $3,187,500 reported for the six months ended December 31, 2004. The RFID Technology segment reported sales of $235,900, a 62.9% decrease when compared to $635,200 reported for the comparable period in the prior fiscal year. Gross Profit and Operating Expenses Gross profit generated during the current quarter amounted to $1,056,000, a decrease of $248,500, or 19.0% when compared to the same period of the prior year. Gross margins decreased from 34.1% for the six months ended December 31, 2004 to 32.7% for the current period. The decrease in gross margin resulted primarily from a reduced gross margin in the RFID Technology segment due to low sales volumes. The gross margin in the Data Storage segment increased from 32.8% to 33.2% when comparing the current quarter to the comparable quarter of the previous year. Selling, general and administrative expenses for the six months ended December 31, 2005 increased to $3,136,600, a 2.2% or $69,000 increase, when compared to $3,067,600 incurred in the comparable period of fiscal year 2004. The increase was due to an increase in sales and administrative expenses and increases in unallocated engineering project expenses in the Company's Data Storage segment, offset by a decrease in corporate legal expense. Operating Loss The Operating Loss for the six-month period was ($2,080,600) compared to a loss of ($1,763,100) for the same six-month period of the prior fiscal year, an increase of $317,500 or 18.0%. The increased Operating Loss resulted from the RFID Technology segment increasing its loss by $168,400, or 14.8%, to ($1,304,800), compared to a loss of ($1,136,400) in the prior year, and the Data Storage Segment reporting a loss of ($93,600) compared to a $168,500 operating profit last year. Interest and Dividends Expense Net interest expense for the six months ended December 31, 2005 amounted to $42,200 compared to net interest expense of $27,600 for the same six-month period in the prior year. The increase resulted from increases in the prime rate, and an increase in the minimum borrowing limit of our credit line. The Company paid in-kind Series A and Series B Preferred Stock dividends with values of $283,100 and $251,700 in the six months ended December 31, 2005 and 2004, respectively. Net Loss Attributable to Common Stockholders Net Loss Attributable to Common Stockholders for the six months ended December 31, 2005 amounted to ($2,389,100), or ($.09) per share, compared to a loss of ($2,031,600), or ($.08) per share, in the comparable period of the prior year. Although the Company has reported increased operating losses in both the RFID Technology segment and its Data Storage segment, it anticipates improved future operating results in both segments as markets improve. However, actual results in both the Data Storage segment and the RFID Technology segments, may be affected by unfavorable economic conditions and reduced capital spending budgets. If the economic conditions in the United States worsen or if a wider or global economic slowdown occurs, Alanco may experience a material adverse impact on its operating results and business conditions. 17 ALANCO TECHNOLOGIES, INC. Liquidity and Capital Resources The Company's current assets at December 31, 2005 exceeded current liabilities by $2,334,300, resulting in a current ratio of 2.7 to 1. At June 30, 2005 the Company's current assets exceeded current liabilities by $2,845,600, reflecting a current ratio of 3.12 to 1. The decrease in the current ratio at December 31, 2005 when compared to June 30, 2005 resulted primarily from funding operating losses during the period. Accounts receivable of $769,400 at December 31, 2005, reflects a decrease of $322,000, or 29.5%, when compared to the $1,091,400 reported as consolidated accounts receivable at June 30, 2005. The accounts receivable balance at December 31, 2005 represented forty-three days' sales in receivables compared to forty days' sales at June 30, 2005. The Data Storage segment reported 26.3 days' sales while days' sales in the RFID Technology segment amounted to 247 days due to a contract holdback and a disputed balance. Both issues are anticipated to be rectified during the current quarter. Consolidated inventories at December 31, 2005 amounted to $2,267,300, an increase of $364,700, or 19.2%, when compared to $1,902,600 at June 30, 2005. December 31, 2005 reflects an inventory turnover of 1.9 compared to an inventory turnover of 2.5 reported at June 30, 2005. Although the December 31, 2005 inventory balance of $2,267,300 reflects a significant increase from the inventory balance at June 30, 2005 of $1,902,600, it reflects a slight increase from the $2,260,400 reported as of December 31, 2004. The current inventory levels reflect management's continued anticipated revenue increases for both the Data Storage segment and the RFID Technology segment. At December 31, 2005, the Company had an outstanding balance of $1,000,000 under a $1.5 million formula-based revolving bank line of credit agreement with interest calculated at prime plus 2%. The line of credit agreement formula is based upon current asset values and is used to finance working capital. At December 31, 2005, the Company had $500,000 available under the line of credit. See Line of Credit Footnote I for additional discussion of the existing line of credit agreement. Cash used in operations for the six-month period ended December 31, 2005 was $1,988,600, an increase of $354,600 when compared to cash used in operations of $1,634,000 for the comparable period ended December 31, 2004. The increase resulted primarily from increases in operating losses and inventory levels during the current period. During the six months ended December 31, 2005, the Company reported cash flows from investing activities of $37,100, compared to $18,200 reported for the six months ended December 31, 2004. The increase is primarily the result of reduced purchases of property, plant and equipment and a reduction in assets held for sale. Cash provided by financing activities for the six months ended December 31, 2005 consisted of $1,173,600 in net proceeds received from the exercise of options and warrants, and $170,500 of additional borrowing against the credit line. Cash provided by financing activities during the same period in the prior fiscal year included the net proceeds from the sale of common and preferred stock of $1,112,400, offset by net repayment on borrowings during the period of $3,500. Cash and cash equivalents at December 31, 2005 amounted to $129,000. In addition, the Company had $500,000 available under its line of credit agreement (see Note 1 - Line of Credit) and subsequent to December 31, 2005, the Company completed the sale of 1,500,000 units consisting of one share of its Class A Common Stock together with a 3-year warrant to purchase one-half share of the Company's Common Stock at a price of $.85 per share ("Unit") for a unit sale of price of $.60. The Company received $837,000, net of commission, from the offering (See Note K - Subsequent Events). The Company believes that additional cash resources will be required for working capital to achieve planned operating results for fiscal year 2006 and, if working capital requirements exceed current availability, the Company anticipates raising capital through additional borrowing, the exercise of stock options and warrants and/or the sale of stock in a private placement. The additional capital would supplement the projected cash flows from operations and the line of credit agreement in place at December 31, 2005. If additional working capital is required and the Company is unable to raise the required additional capital, it may materially affect the ability of the Company to achieve its financial plan. The Company has raised a significant amount of capital in the past and believes it has the ability, if needed, to raise the additional capital to fund the planned operating results for fiscal year 2006. 18 ALANCO TECHNOLOGIES, INC. See Footnote F - Equity for additional information related to working capital raised by the Company during the six months ended December 31, 2005, necessary to achieve planned operating results for the current fiscal year results. Item 3 - CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the Securities and Exchange Commission (SEC), and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on various evaluations of the Company's disclosure controls and procedures, some of which occurred during the 90 days prior to the filing date of this report, the Chief Executive and Chief Financial Officers believe that these controls and procedures are effective to ensure that the Company is able to collect, process and disclose the information it is required to disclose in the reports it files with the SEC within the required periods. The Company also maintains a system of internal controls designed to provide reasonable assurance that: transactions are executed in accordance with management's general or specific authorization; transactions are recorded as necessary (1) to permit preparation of financial statements in conformity with generally accepted accounting principles, and (2) to maintain accountability for assets. Access to assets is permitted only in accordance with management's general or specific authorization; and the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Since the date of the most recent evaluation of the Company's internal controls by the Chief Executive and Chief Financial Officers, there have been no significant changes in such controls or in other factors that could have significantly affected those controls, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company continues to be a defendant in litigation that relates to the acquisition, in May of 2002, of substantially all the assets of Technology Systems International, Inc., a Nevada corporation. No significant new activity has occurred subsequent to our report of litigation in our Form 10-KSB filed for the year ended June 30, 2005. Due to internal governance issues affecting the plaintiff, the litigation has been indefinitely stayed. The Company's management, in consultation with legal counsel, believes the plaintiff's claims are without merit and the Company will aggressively defend against the action. Litigation previously reported as arising from an expired property lease between the Company's subsidiary, Arraid, Inc., and Arraid Property L.L.C., a Limited Liability Company, is continuing. The Company's management, in consultation with legal counsel, believes the plaintiff's claims are without merit and the Company is aggressively defending against this action. The Company intends to pursue legal expense reimbursement from both the Company's insurance carrier (where appropriate) and the Plaintiffs in the litigation matters. Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS During the six months ended December 31, 2005, the Company issued 165,900 shares of Series A Preferred Stock and 3,400 Shares of Series B Preferred Stock as dividend in-kind payments, 1,990,000 shares of Class A Common Stock for the exercise of existing warrants and options and 225,000 shares of Common Stock for services rendered. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Shareholders held on January 20, 2006, the following proposals were voted upon and approved by the stockholders. 19 ALANCO TECHNOLOGIES, INC. Proposal #1 Election of Directors For Withhold Total Voting --- -------- ------------ Harold S. Carpenter 30,205,909 288,583 30,494,492 Robert R. Kauffman 30,200,040 294,452 30,494,492 James T. Hecker 30,239,851 254,641 30,494,492 Thomas C. LaVoy 30,243,751 250,741 30,494,492 John A. Carlson 30,200,990 293,502 30,494,492 Steven P. Oman 30,210,890 290,602 30,501,492 Donald E. Anderson 30,905,009 289,483 31,194,492
Proposal #2 Approval of the Alanco 2005 Stock Option Plan. Shares ------ For 16,114,596 Against 892,054 Abstain 122,396 Broker not voted 13,466,446 Proposal #3 Approval of the Alanco 2005 Directors and Officers Stock Option Plan. Shares ------ For 16,289,307 Against 809,089 Abstain 30,650 Broker not voted 10,752,276 Proposal #4 Authorize the Board of Directors, only if necessary, to reverse split the Company's outstanding Class A Common Stock up to a 10 to 1 reverse split. Shares ------ For 29,821,107 Against 750,143 Abstain 24,242 Item 6. EXHIBITS 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 32.1 Certification of Chief Executive Officer and Chief Financial Officer SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized. ALANCO TECHNOLOGIES, INC. (Registrant) /s/ John A. Carlson ------------------- John A. Carlson Executive Vice President and Chief Financial Officer 20 ALANCO TECHNOLOGIES, INC. EXHIBIT 31.1 Certification of Chairman and Chief Executive Officer of Alanco Technologies, Inc. I, Robert R. Kauffman, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Alanco Technologies, Inc.; 2. Based on my knowledge, this 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 report. 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report; 4. The registrant's other certifying officer(s) 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)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that 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 report is being prepared; (b) 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 (c) 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 (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) 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 the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control 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. Date: February 13, 2006 /s/ Robert R. Kauffman --------------------- Robert R. Kauffman Chairman and Chief Executive Officer 21 ALANCO TECHNOLOGIES, INC. EXHIBIT 31.2 Certification of Vice President and Chief Financial Officer of Alanco Technologies, Inc. I, John A. Carlson, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Alanco Technologies, Inc.; 2. Based on my knowledge, this 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 report. 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report; 4. The registrant's other certifying officer(s) 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)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that 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 report is being prepared; (b) 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 (c) 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 (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) 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 the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control 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. Date: February 13, 2006 /s/ John A. Carlson --------------------- John A. Carlson Executive Vice President and Chief Financial Officer 22 ALANCO TECHNOLOGIES, INC. EXHIBIT 32.1 Certification of Chief Executive Officer and Chief Financial Officer of Alanco Technologies, Inc. This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies this quarterly report of Form 10-QSB (the "Report") for the period ended December 31, 2005 of Alanco Technologies, Inc. (the "Issuer"). Each of the undersigned, who are the Chief Executive Officer and Chief Financial Officer, respectively, of Alanco Technologies, Inc., hereby certify that, to the best of each such officer's knowledge: (i) the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Dated: February 13, 2006 /s/ Robert R. Kauffman ---------------------- Robert R. Kauffman Chief Executive Officer /s/ John A. Carlson ---------------------- John A. Carlson Chief Financial Officer 23