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ALAN > SEC Filings for ALAN > Form 10-K on 25-Sep-2013All Recent SEC Filings

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Form 10-K for ALANCO TECHNOLOGIES INC


25-Sep-2013

Annual Report


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

During fiscal year ended June 30, 2012, the Company formed Alanco Energy Services, Inc. ("AES") as a wholly owned subsidiary and constructed the Deer Creek water treatment and disposal facility located near Grand Junction, CO. The facility started to receive produced water in August 2012. During fiscal 2013, the Company also continued the permitting process for the 160 acre site known as Indian Mesa for water treatment and disposal and a landfill/land farm operation.

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, the estimated fair value of stock-based compensation, expense recognition, realization of deferred tax assets, accounts and notes receivable, estimated useful lives of fixed assets, the recorded values of accruals and contingencies including the ORBCOMM fuel sensor escrow and working capital adjustment liabilities, 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.


ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES

The SEC suggests that all registrants discuss 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, revenue recognition, the classification and valuation of marketable securities, realization of accounts and 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 Revenues
Revenues for the year ended June 30, 2013 were $390,600. At June 30, 2012, the new water treatment facility was under construction and not generating revenues. Revenues for fiscal 2013 were concentrated approximately 96.6% to two customers. The Company does not anticipate a similar concentration in the coming fiscal years as it continues to develop relationships with potential customers in the region. Revenues can be impacted by weather conditions in the winter and the prices of oil and gas which may impact drilling activities in the region and accordingly produced water deliveries.

Cost of Revenues
Cost of revenues for the year ended June 30, 2013 of $402,000 consist of direct labor costs, equipment costs (including depreciation), land lease costs and other operating costs. Approximately 47% of the cost of revenues for the year consisted of fixed costs such as depreciation, amortization, accretion and lease costs.

Selling, General and Administrative Expenses Selling, general and administrative expenses for the year ended June 30, 2013 (consisting of corporate expenses, AES selling, general and administrative expense and amortization of stock-based compensation) was $1,533,300, an increase of $484,500, or 46.2%, compared to $1,048,800 reported for the year ended June 30, 2012. Corporate expenses for the current year was $592,400 and represented a decrease of $428,800, or 42%, compared to corporate expenses of $1,021,200 reported for the comparable year ended June 30, 2012. The decrease resulted from reduced corporate operating expense and increased allocation of corporate service cost to AES and billings for accounting services provided to ACC. AES operating expense of $702,300 for the year ended June 30, 2013 relates to the new Deer Creek Water Disposal facility that initiated operation during August 2012 and represented general overhead associated with the operation. Amortization of stock-based compensation increased to $238,600 for the year ended June 30, 2013, from $24,900 for the comparable prior year. The increase relates primarily to options with immediate vesting granted in the current year. The related value was expensed immediately upon grant.

Operating Loss
Operating Loss for the year ended June 30, 2013 was ($1,544,700), an increase of $495,900, or 47.3%, compared to an Operating Loss of ($1,048,800) reported for the prior year. The increased operating loss resulted from increased operating costs associated with the completed Deer Creek water disposal facility and additional selling, general and administrative expenses. Since no revenue was reported for fiscal year ended June 30, 2012, the operating losses equal the operating expenses discussed above.

Other Income and Expense
Net interest income for the year ended June 30, 2013 was $22,900, an improvement of $8,700 when compared to interest income of $14,200 for the year ended June 30, 2012. The increase in interest income related to the ACC note outstanding and other short term investments.

During fiscal year 2013, the Company recorded net gains on the sale of its Symbius investment of $86,800, and a gain of $751,500 on the sale of 747,873 shares of its ORBCOMM Common Stock at an average selling price of $3.91 per share. During the prior year the Company reported the sale of 993,661 shares of ORBCOMM Common Stock at an average selling price of $3.30 per share resulting in a gain on sale of $386,700. Finally, the Company had $500 of other income during the year ended June 30, 2013 as compared to other income of $12,700 reported in the comparable period of the prior year. Other income in fiscal 2012 was primarily the result of the distribution of marketable securities from escrow.


ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES

Net Loss
Net loss for the year ended June 30, 2013 was ($683,000), an increase of ($47,800), or 7.5%, when compared to the net loss of ($635,200) for the previous year ended June 30, 2012. The increase in net loss was primarily due to the current year startup of AES water treatment and disposal facility offset by a $364,800 increase in gains on sale of marketable securities.

Dividends and Redemption
The Company had zero dividend expense for the year ended June 30, 2013 compared to $30,500 in dividend expense for the comparable period of the prior year. The decrease resulted from the repurchase of all the Series B Convertible Preferred Stock in December 2011 resulting in a gain on redemption of $443,200 reported in the prior year. See Note 16 - Shareholders' Equity in Form 10-K for the fiscal year ended June 30, 2012 for additional discussion relative to the redemption of the Series B Convertible Preferred Stock.

Net Loss Attributable to Common Shareholders Net Loss Attributable to Common Shareholders for the year ended June 30, 2013 amounted to ($683,000), or ($.14) per share, compared to a net loss of ($222,500), or ($.04) per share, in the prior year for reasons discussed above.

Comprehensive Income
Comprehensive Income for the year ended June 30, 2013 represents the unrealized change in market value of the Company's Marketable Securities held at June 30, 2013 compared to June 30, 2012. Comprehensive income for the year ended June 30, 2013 consisted of the net value of three items: 1) the reclassification adjustment for realized gains included in Net Income of $751,500; 2) an Unrealized Gain (Loss) on Marketable Securities, net of tax, of $428,000 resulting from an increase in the market value of the shares held at June 30, 2013 compared to the market value at June 30, 2012, and; 3) the net unrealized gain on marketable securities sold during the period of $489,800. At June 30, 2013 the Company valued 348,011 shares (net of escrow shares) of ORBCOMM, Inc. Common Stock at $4.49 per share for a total value of $1,562,600.

Liquidity and Capital Resources

The Company's current assets exceeded its current liabilities by $2,526,500 at June 30, 2013, representing a current ratio of 10.3 to 1. At June 30, 2012 the Company's current assets exceeded current liabilities by $3,473,900 and reflected a current ratio of 4.8 to 1. The increase in current ratio at June 30, 2013 versus June 30, 2012 resulted primarily from the sale of marketable securities, proceeds of which were used to reduce accounts payable and accrued expense and notes payable, as well as invest in Land, Property and Equipment.

Net cash used in operating activities for the fiscal year ended June 30, 2013 was ($1,588,200) compared with net cash used in operating activities for the prior fiscal year of ($774,300). The increase of $813,900 resulted primarily from an increase in net loss of $47,800, an increase in the gain on the sale of investments of $451,600, a decrease in accounts payable and accrued expenses of $635,800, an increase in a trust account of $30,000 offset by increases in amortization and depreciation of $144,400 and stock compensation of $213,700.

Consolidated receivables at June 30, 2013 were $42,400 compared to receivables at June 30, 2012 of $16,800. The receivables at June 30, 2013 relate to $9,600 of trade receivables for AES plus $32,800 of receivables from ACC. The receivable at June 30, 2012 related to ACC.

Net cash provided by investing activities during the current year was $2,239,300, an increase of $1,280,200 compared to net cash provided by investing activities in the prior year of $959,100. The increase was due primarily to proceeds received for the sale of the Company's investment in Symbius and repayments of Symbius and ACC notes receivable, combined with a reduction in expenditures of approximately $794,400 for the purchase of land, property and equipment as compared to the prior year.

Net cash used in financing activities during the fiscal year ended June 30, 2013 amounted to ($239,000), a decrease of $444,700 compared to net cash used in financing activities of ($683,700) for the fiscal year ended June 30, 2012. The decrease is primarily due to a reduction in net repayment of borrowings.

At June 30, 2013, the Company reported Marketable Securities - Restricted that consisted of 348,011 shares of ORBCOMM Inc. (NASDAQ: ORBC) Common Stock, valued at approximately $1.6 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.


ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES

The Company has made a significant investment through June 30, 2013 in Alanco Energy Services, Inc. investing approximately $1.4 million in land and $3.1 million in evaporation ponds and equipment for the Deer Creek water disposal site. The Company plans on continuing its sale of ORBCOMM stock discussed above to fund the additional investments.

The Company has a note receivable from American Citizenship Center, LLC ("ACC"), a related party, established to provide ACC working capital. As of June 30, 2013, the note has an outstanding balance of $375,000 drawn on a $400,000 credit line. The note is secured by all assets of ACC and bears interest at the rate of 7.5% per annum. An additional $25,000 was drawn subsequent to June 30, 2013 resulting in ACC reaching the $400,000 maximum under the agreement. Under the agreement and amendments thereto, the Company was issued a total of 300,000 warrants to purchase membership units of ACC at an exercise price of $1.25 per unit. The expiration date of the warrants are August 31, 2016 and the value of said warrants is considered immaterial at both June 30, 2013 and 2012 due to the startup nature of ACC and the significant premium (39%) over the exercise price compared to the most recent membership unit sales. Therefore, no value has been recorded for these warrants.

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, projected cash flows from operations, 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 2014 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.

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