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ALAN > SEC Filings for ALAN > Form 10-K/A on 25-Oct-2012All Recent SEC Filings

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Form 10-K/A for ALANCO TECHNOLOGIES INC


25-Oct-2012

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company refers to Alanco Technologies, Inc. and its wholly owned subsidiaries. As discussed in the Company's fiscal year 2011 Form 10-K, at June 30, 2011 the Company was effectively a holding company without operating entities. The Company had stated in previous filings that its objective was to complete an appropriate merger (possibly a reverse merger) and remain an operating publicly traded company. At June 30, 2012 the Company formed Alanco Energy Services, Inc., which had begun to execute a new business development plan to acquire the assets necessary to construct facilities for the treatment and disposal of large quantities of produced water generated by oil and natural gas producers in Western Colorado.

In previous SEC filings, Alanco reported three business segments: Data Storage, Wireless Asset Management and RFID Technology. During the fiscal year ended June 30, 2009, the Company announced a plan to divest the operations of the Company's Data Storage segment and reinvest the proceeds into the remaining operating units. The divestiture plan was expanded during the quarter ended September 30, 2009 when the Company announced its plan to sell its RFID Technology segment. Finally, the plan was expanded further when, on February 23, 2011, the Company entered into a definitive agreement, subject to shareholder approval, to sell its Wireless Asset Management segment. In compliance with the divestiture plan, the Data Storage segment was sold in March 2010, the RFID Technology segment was sold in August 2010, and the Wireless Asset Management segment was sold in May 2011. As a result, as of June 30, 2011 all segment operations had been sold and the segment's operating results for the fiscal year ended June 30, 2011 were reported as Discontinued Operations.


ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES

Critical Accounting Policies

"Management's Discussion and Analysis of Financial Condition and Results of Operations" discusses our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, we evaluate our estimates and assumptions concerning classification and valuation of investments, valuation of contingent and non-cash consideration received in the sale of the Wireless Asset Management segment, the estimated fair value of stock based compensation, expense recognition, realization of deferred tax assets and notes receivable and the recorded values of accruals and contingencies including the estimated fair values of the Company's asset retirement obligation and the contingent land and purchase price liabilities. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. The result of these estimates and judgments form the basis for making conclusions about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions.

The SEC suggests that all registrants list their most "critical accounting policies" in Management's Discussion and Analysis. A critical accounting policy is one which is both important to the portrayal of the Company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management has identified the critical accounting policies as those accounting policies that affect its more significant judgments and estimates in the preparation of its consolidated financial statements. The Company's Audit Committee has reviewed and approved the critical accounting policies identified. These policies include, but are not limited to, the classification and valuation of marketable securities, realization of notes receivable, stock-based compensation, the recorded values of accruals and fair values of assets and liabilities including the Company's contingent liabilities.

Results of Operations

Net Sales
In compliance with the Company's previously announced divestiture plan and in accordance with accounting principles generally accepted in the United States of America, the Company is not reporting operating revenues for fiscal years ended June 30, 2012 and 2011 because, as of June 30, 2011 all business segments had been sold. At June 30, 2012, the new water treatment facility was under construction and not generating revenues, however, it became operational in August 2012. Consistent with prior year reporting, fiscal year ended June 30, 2011 operating results for the sold business segments are reported as Discontinued Operations.

Operating Expenses
Operating expenses for the year ended June 30, 2012, consisting of corporate expenses, amortization of stock-based compensation and depreciation expense, were $1,048,800, a $332,100, or 24%, decrease when compared to the $1,380,900 reported for the comparable period of the prior year. Corporate expenses reported for the year ended June 30, 2012 of $1,021,200 represents a decrease of $158,600, or 13.4%, when compared to corporate expenses of $1,179,800 reported for the year ended June 30, 2011. The decrease is primarily due to reduction of costs for business insurance, audit fees, consulting and investor relations. Amortization of stock-based compensation for the year ended June 30, 2012 was $24,900, a decrease of $175,200 or 87.6% when compared to $200,100 in the comparable twelve month period of the prior year. The decrease was primarily due to a $187,000 expense in the prior period resulting from the Company's election to re-price certain employee stock options during the quarter ended September 30, 2010 and to expense the entire increase in Black Scholes value of the re-priced options in that period. Depreciation and amortization expense for the year ended June 30, 2012 was $2,700 compared to $1,000 reported in the comparable period of the prior year.

Operating Loss
Since no revenue was reported for fiscal year ended June 30, 2012 and 2011, the operating losses equal the operating expenses discussed above.


ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES

Other Income and Expense
Net interest income for the year ended June 30, 2012 was $14,200, an improvement of $464,300 when compared to net interest expense of $450,100 for the year ended June 30, 2011. The improvement resulted from the May 2011 sale of the Wireless Asset Management segment that allowed the Company to repay debt and terminate its credit agreements. During the year ended June 30, 2012, the Company recorded a net gain on sale of marketable securities of $386,700, resulting from the sale of approximately 993,661 shares of its ORBCOMM Common Stock at an average selling price of $3.30 per share. The Company did not sell any marketable securities during the previous fiscal year. Finally, the Company had $12,700 of other income during the year ended June 30, 2012 as compared to other expense of $8,500 reported in the comparable period of the prior year. Other expense for the prior year was the result of a write down in the value of an investment; there was no such write down in the current period. Other income was primarily the result of the distribution of marketable securities from escrow.

Loss from Continuing Operations
Loss from continuing operations for the year ended June 30, 2012 was ($635,200), an improvement of $1,204,300, or 65.5%, when compared to the loss from continuing operations of ($1,839,500) for the previous year ended June 30, 2011. The improvement was primarily due to the current year gain on the sale of marketable securities of $386,700, a decrease in operating expense of $332,100 and a decrease of net interest expense of $464,300.

Discontinued Operations
The Company reported no activity from discontinued operations for the current year ended June 30, 2012. Total Consolidated Income from Discontinued Operations for the twelve months ended June 30, 2011 was $1,781,700 resulting from a gain on sale of assets held for sale of $1,294,000 and income recognition of $1,372,800 on the dissolution of a subsidiary, offset by a loss from discontinued operations for the year ended June 30, 2011 of ($885,100).

The following table is a summary of the fiscal year 2011 loss from discontinued operations and other financial information by major segment:

                                 DISCONTINUED OPERATIONS

                                 Wireless
                                  Asset         RFID        Data
                                Management   Technology   Storage      Total
          Fiscal year 2011
          Sales               $ 13,740,800 $     38,700 $        - $ 13,779,500
             Cost of Goods       8,174,300       25,200          -    8,199,500
             Sold
          Gross Profit           5,566,500       13,500          -    5,580,000

          Gross Margin               40.5%        34.9%     n/a           40.5%

             Selling, General    5,672,900        7,100     99,800    5,779,800
             & Administrative
             Stock-Based           220,700        3,000          -      223,700
             Compensation
             Expense
             Depreciation and      458,200        3,400          -      461,600
             Amortization
          Total Selling,         6,351,800       13,500     99,800    6,465,100
          General &
          Administrative
          Operating Income    $  (785,300) $          - $ (99,800) $  (885,100)
          (Loss)

          Capital             $    151,400 $          - $        - $    151,400
          Expenditures

Net Loss
Net loss for the year ended June 30, 2012 was ($635,200), an increase of ($577,400) compared to the net loss reported for the year ended June 30, 2011 of ($57,800). The increase in net loss reflects the results reported for the fiscal year ended June 30, 2011 which include a onetime gain on sale of assets held for sale of $1,294,000 and income recognized on dissolution of subsidiary of $1,372,800, offset by a higher loss from continuing operations of ($1,204,300) and a loss from discontinued operations of ($885,100).


ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES

Dividends and Redemption
Preferred stock dividend expense for the twelve months ended June 30, 2012 was $30,500, a decrease of $238,200, or 88.6%, compared to the $268,700 in preferred stock dividend expense recorded in the twelve months ended June 30, 2011. The decrease resulted from the retirement of all Series D and Series E Convertible Preferred Stock in June 2011 and the repurchase of all Series B Convertible Preferred Stock in December 2011. See Note 16 - Shareholders' Equity in the attached consolidated financial statements for the fiscal year ended June 30, 2012 for additional discussions relative to the retirement of the Series D and E Convertible Preferred Stock. The gain on redemption of Series B Preferred Stock of $443,200 was recorded in the quarter ended December 31, 2011 when the company repurchased all outstanding Series B Preferred Stock for an $800,000 non-interest bearing note payable in monthly payments of $200,000 commencing February 1, 2012 and continuing March 1, 2012, April 1, 2012 and May 1, 2012. The difference between the $800,000 note amount and the $1,243,800 Series B Preferred Stock recorded amount, net of related legal expense of $600, was recorded directly to equity as a gain on redemption of Series B Preferred Stock. Since the Preferred Stock was repurchased prior to the quarterly dividend declaration date, the dividends-in-kind for the quarter ended December 31, 2011 were not accrued. At June 30, 2012 there were no shares of Series B Convertible Preferred Stock outstanding.

Net Loss Attributable to Common Shareholders Net Loss Attributable to Common Shareholders for the twelve months ended June 30, 2012 amounted to ($222,500), or ($.04) per share, an improvement of $104,000 when compared to a loss of ($326,500), or ($.06) per share, reported in the twelve months ended June 30, 2011. The improvement is reflective of the reduction in operating costs for current year compared to the same period of the prior year.

Comprehensive Income
Comprehensive Income (Loss) represents the unrealized change in market value of the Company's Marketable Securities held at June 30, 2012 compared to the cost basis. During the year ended June 30, 2012, the Company reported an Unrealized Gain on Marketable Securities, net of tax, of $142,500 resulting from a 12% increase in the market value of the shares held at the end of the year comparing the cost basis of $2.91 per share, determined as market value on the May 16, 2011 acquisition date, and the market value at June 30, 2012. At June 30, 2012 the Company valued 1,095,884 shares (net of escrow shares) of ORBCOMM, Inc. Common Stock at $3.26 per share for a total value of $3,572,600.

Liquidity and Capital Resources

The Company's current assets exceeded its current liabilities by $3,473,900 at June 30, 2012, representing a current ratio of 4.8 to 1. At June 30, 2011 the Company's current assets exceeded current liabilities by $7,028,400 and reflected a current ratio of 14.2 to 1. The reduction in current ratio at June 30, 2012 versus June 30, 2011 resulted primarily from the sale of marketable securities, proceeds of which were invested in Land, Property and Equipment, and used for the redemption of the Series B Preferred Stock.

Net cash used in operating activities for the fiscal year ended June 30, 2012 was ($774,300) compared with net cash used in operating activities for the prior fiscal year of ($1,386,500). The decrease of $612,200 resulted primarily from a reduction in loss from continuing operations, excluding gain on sale of marketable securities in fiscal year ended June 30, 2012, of approximately $386,700.

Consolidated receivables at June 30, 2012 were $16,800 compared to receivables at June 30, 2011 of $101,900. The receivables at June 30, 2011 relate primarily to the sale of the Company's wireless Asset Management business segment in May 2011.

Net cash provided by investing activities during the current year was $959,100, a decrease of $2,067,500 compared to net cash provided by investing activities in the prior year of $3,026,600. The decrease was due primarily to an increase of approximately $1.75 million in the purchase of land, property and equipment. The current fiscal year also included approximately $3.3 million in proceeds from sale of marketable securities compared to approximately $4 million in cash generated in fiscal year 2011 by the sale of the Company's Wireless Asset Management and RFID Technology segments.

Net cash used in financing activities during the fiscal year ended June 30, 2012 amounted to ($683,700), a decrease of $573,700 compared to net cash used in financing activities of ($1,257,400) for the fiscal year ended June 30, 2011. The decrease is primarily due to a reduction in net repayment of borrowings, net of additional borrowing, of approximately $1.6 million, offset by a decrease during the year ended June 30, 2012 compared to 2011 of approximately $1.1 million in cash generated from the sale of common stock and the exercise of warrants and stock options.


ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES

At June 30, 2012, the Company reported Marketable Securities - Restricted that consisted of 1,095,884 shares of ORBCOMM Inc. (NASDAQ: ORBC) Common Stock, valued at approximately $3.6 million. The shares were received as part of the Company's sale of its StarTrak Systems, LLC subsidiary in May 2011. Our agreement with ORBCOMM prevents us from liquidating the ORBCOMM stock at a rate in excess of 279,600 shares per month. Also, we anticipate selling such stock over a period of time to maximize our return. As long as the ORBCOMM Common Stock constitutes a substantial portion of our assets, fluctuations in the market price of such stock may significantly affect our value. See Note 4 - Marketable Securities - Restricted to the consolidated financial statements for additional discussion on the ORBCOMM investment.

The Company has made a significant investment through June 30, 2012 in Alanco Energy Services, Inc. investing approximately $1.4 million in land and $2.1 million (classified as construction in progress) in evaporation ponds and equipment for the Deer Creek water disposal site. We anticipate investing an additional $900,000 in fiscal year ending June 30, 2013, with the majority committed for the quarter ended September 30, 2012. The Company plans on continuing its sale of ORBCOMM stock discussed above to fund the additional investments.

Although management cannot assure that any future acquisitions will be completed, or that it will achieve projections, or that additional debt and/or equity will not be required, we believe our cash balances at year end, operating projections, and working capital will provide adequate capital resources to maintain operations as they currently exist for the next year. If additional working capital is required during fiscal 2013 due to an acquisition or merger and not obtained through additional long-term debt, equity capital or operations, it could adversely affect future operations. Management has historically been successful in obtaining financing and has demonstrated the ability to implement a number of cost-cutting initiatives to reduce working capital needs. Accordingly, the accompanying consolidated financial statements have been prepared assuming the Company will continue to operate and do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

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