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ALAN > SEC Filings for ALAN > Form 10-Q on 14-Feb-2014All Recent SEC Filings

Show all filings for ALANCO TECHNOLOGIES INC

Form 10-Q for ALANCO TECHNOLOGIES INC


14-Feb-2014

Quarterly Report


Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements: 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. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements, which are other than statements of historical facts. The words "believe," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "could," "target," "potential," "is likely," "will," "expect" and similar expressions, as they relate to the Company are intended to identify forward-looking statements within the meaning of the "safe harbor" provisions of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature. All such forward-looking statements are based on the expectations of management when made and are subject to, and are qualified by, 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 following factors, among others, that could affect the outcome of the Company's forward-looking statements: general economic and market conditions; the inability to attract, hire and retain key personnel; failure of a future acquired business to further the Company's strategies; the difficulty of integrating an acquired business; unforeseen litigation; unfavorable result of potential litigation; the ability to maintain sufficient liquidity in order to support operations; the ability to maintain satisfactory relationships with lenders; the ability to maintain satisfactory relationships with current and future suppliers; federal and/or state regulatory and legislative action; the ability to implement or adjust to new technologies and the ability to secure and maintain key contracts and relationships. New risk factors emerge from time to time and it is not possible to accurately predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any risk factor, or combination of risk factors, may cause results to differ materially from those contained in any forward-looking statements. Except as otherwise required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements or the risk factors described in this Annual Report or in the documents we incorporate by reference, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Quarterly Report on Form 10-Q.

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 and pursuant to the rules and regulations of the United States Securities and Exchange Commission. 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 note receivables, 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. For a discussion of our critical accounting policies and estimates, refer to the Company's Form 10-K for the fiscal year ended June 30, 2013. There have been no material changes to our critical accounting policies during 2014.


ALANCO TECHNOLOGIES, INC.

Results of Operations

Presented below is management's discussion and analysis of financial condition and results of operations for the periods indicated:

(A) Three months ended December 31, 2013 versus three months ended December 31, 2012

Net Revenues
Net revenues reported for the quarter ended December 31, 2013 were $69,600 versus $43,800 for the quarter ended December 31, 2012, an increase of $25,800, or 58.9%. While there is improvement for the comparative three month period, revenues continue to be inconsistent as water disposal operations remain in a startup mode and the Company develops relationships with potential customers in the region. Water deliveries are also impacted by the prices of oil and gas which drives drilling activities in the region, the restriction on drilling during winter months which negatively impact water deliveries, and alternative uses of produced water, such as for fracking fluid that some potential customers are utilizing. As additional customers are expected to recognize the savings of using a local water disposal company and improved weather allows additional oil and gas production activity, we expect revenues to increase.

Cost of Revenues
Cost of Revenues for the three months ended December 31, 2013 and 2012 were $86,700 and $93,900, respectively, a decrease of $7,200 or 7.7% when comparing the periods. Cost of revenues consists of direct labor costs, equipment costs (including depreciation), land lease costs and other operating costs. Variable costs of revenues include labor which was decreased during the first two months of the current quarter when compared to the same quarter of the prior year and is the primary reason for the modest decrease. The gross margin for the three months ended December 31, 2013 and 2012 were (24.6%) and (114.4%), respectively. The improvement is due to the increased revenues and reduced cost of revenues during the current three month period.

Selling, General and Administrative Expenses Selling, general and administrative expenses for the quarter ended December 31, 2013 (consisting of corporate expenses, AES selling, general and administrative expense, and amortization of stock-based compensation) was $264,100, a decrease of $87,400, or 24.9%, compared to $351,500 reported for the quarter ended December 31, 2012. Corporate expenses for the current quarter was $78,300 and represented a decrease of $55,900, or 41.7%, compared to corporate expenses of $134,200 reported for the comparable quarter ended December 31, 2012. The decrease resulted primarily from increased allocation of corporate service cost to AES from $91,000 for the three months ended December 31, 2012 to $127,750 for the three months ended December 31, 2013 and reflects the increased activity performed by corporate for the AES operation. The decrease in corporate expense is also due to executive salary reductions which were effective during the quarter ended December 31, 2013. AES expense of $185,800 for the quarter ended December 31, 2013 compared to $183,200 for the quarter ended December 31, 2012 reflects a modest increase overall when comparing the two periods which included decreased management fees paid to TCO under the management agreement offset by increased corporation allocations. The AES operating expenses relate to the Deer Creek Water Disposal facility that initiated operation during the quarter ended September 30, 2012 and represented general overhead associated with the operation. There was no amortization of stock-based compensation during the current quarter versus $34,100 for the quarter ended December 31, 2012. The decrease is reflective of no new stock options being issued during the current period.

Operating Loss
Operating Loss for the quarter ended December 31, 2013 was ($281,200), a decrease of $120,400, or 30%, compared to an Operating Loss of ($401,600) reported for the same quarter of the prior year. The decreased operating loss resulted from a decrease to gross profit (loss) and a decrease to selling, general and administrative expenses during the current quarter as compared to the same quarter of the previous year.


ALANCO TECHNOLOGIES, INC.

Other Income and Expense
Net interest income for the quarter ended December 31, 2013 was $8,300, an improvement of $2,500, or 43.1%, when compared to interest income of $5,800 for the quarter ended December 31, 2012. The increase in interest income related primarily to an increase in the average outstanding balance of the ACC note receivable.

During the quarter ended December 31, 2013, the Company recorded net gains on the sale of marketable securities of $403,900, resulting from the sale of approximately 140,713 shares of its ORBCOMM Common Stock at an average selling price of $5.78 per share, compared to net gains on sale of marketable securities in the comparable quarter of the prior year of $210,200, resulting from the sale of 200,027 shares of ORBCOMM Common Stock at an average selling price of $3.96.

Net Income (Loss)
Net income for the quarter ended December 31, 2013 amounted to $132,100, or $.03 per share, compared to net loss of ($185,600), or ($.04) per share, in the comparable quarter of the prior year for reasons previously discussed.

Comprehensive Income (Loss)
Comprehensive Loss for the current quarter of ($229,400) represents the unrealized change in market value of the Company's Marketable Securities held at December 31, 2013 compared to the same period of the prior fiscal year. Comprehensive income for the quarter ended December 31, 2013 consisted of the net value of three items: 1) the quarter ending market value reclassification adjustment for gain included in Net Income (Loss) of $403,900;
2) an Unrealized Gain (Loss) on Marketable Securities of $116,800 resulting from an increase in the market value of the shares held at December 31, 2013 compared to the value at June 30, 2013, and; 3) the net unrealized gain on marketable securities sold during the period of $57,700. At December 31, 2013 the Company valued 106,180 shares (net of escrow shares) of ORBCOMM, Inc. Common Stock at $6.34 per share for a total value of $673,200.

(B) Six months ended December 31, 2013 versus six months ended December 31, 2012

Net Revenues
Net revenues reported for the six months ended December 31, 2013 were $84,400 compared to $145,000 for December 31, 2012, a decrease of $60,600, or 41.8%. Revenues continue to be inconsistent as water disposal operations remain in a startup mode and the Company develops relationships with potential customers in the region. Water deliveries are also impacted by the prices of oil and gas which drives drilling activities in the region, the restriction on drilling during winter months which negatively impacts water deliveries, and alternative uses of produced water, such as for fracking fluid that some potential customers are utilizing. As additional customers are expected to recognize the savings of using a local water disposal company and improved weather allows additional oil and gas production activity, we expect revenues to increase.

Cost of Revenues
Cost of revenues for the six months ended December 31, 2013 were $155,500 as compared to $158,400 for the same six month period of the prior year, a minimal decrease when comparing the two periods. Cost of revenues consists of direct labor costs, equipment costs (including depreciation), land lease costs and other operating costs. The gross margin for the six months ended December 31, 2013 and 2012 were (84.2%) and (9.2%), respectively. The decline in gross margin when comparing the periods is primarily due to the decreased revenues in the current six month period.

Selling, General and Administrative Expenses Selling, general and administrative expenses for the six months ended December 31, 2013 (consisting of corporate expenses, AES selling, general and administrative expense, amortization of stock-based compensation and depreciation expense) was $574,200, a decrease of $92,100, or 13.8%, compared to $666,300 reported for the six months ended December 31, 2012. Corporate expenses for the six month period was $155,500 and represented a decrease of $174,800, or 52.9%, compared to corporate expenses of $330,300 reported for the comparable six months ended December 31, 2012. The decrease resulted primarily from increased allocation of corporate service cost to AES from $98,000 for the six months ended December 31, 2012 to $268,750 for the six months ended December 31, 2013 and reflects the increased activity performed by corporate for the AES operation. The decrease in corporate expenses was also due to executive salary reductions which were effective during the current period. AES operating expense was $418,700 for the six months ended December 31, 2013 as compared to $267,700 for the same six month period of the prior year, an increase of $151,000, or 56.4%. The primary reason for the increase is the increased allocation of corporate service cost to AES as described above. In addition, the Deer Creek Water Disposal facility initiated operation during August 2012 resulting in the prior year six months not being a full six months of expense. There was no amortization of stock-based compensation during the current quarter versus $68,300 for the six months ended December 31, 2012. The decrease is reflective of no new stock options being issued during the current period.


ALANCO TECHNOLOGIES, INC.

Operating Loss
Operating Loss for the six months ended December 31, 2013 was ($645,300), a decrease of $34,400, or 5.1%, compared to an Operating Loss of ($679,700) reported for the same period of the prior year. The decreased operating loss resulted from decreased selling, general and administrative expenses.

Other Income and Expense
Net interest income for the six months ended December 31, 2013 was $16,100, an improvement of $4,100, or 34.2%, when compared to interest income of $12,000 for the same period ended December 31, 2012. The increase in interest income related primarily to an increase in the average outstanding balance of the ACC note receivable.

During the six months ended December 31, 2012, the Company recorded net gains on the sale of its Symbius investment of $86,800. During the six months ended December 31, 2013, the Company recorded a gain of $608,700 on the sale of 241,831 shares of its ORBCOMM Common Stock at an average selling price of $5.43 per share, compared to net gains on sale of marketable securities of $491,000, resulting from the sale of 602,915 shares of its ORBCOMM Common Stock at an average selling price of $3.72 per share.

The Company had other income during the quarter ended December 31, 2013 of $1,300 as compared to other income in the same period of the prior year of $200. The increase is primarily due to the sale of miscellaneous assets.

Net Loss
Net Loss for the six months ended December 31, 2013 amounted to ($19,200), or ($0.00) per share, compared to a net loss of ($89,700), or ($.02) per share, in the comparable period of the prior year for reasons previously discussed.

Comprehensive Income (Loss)
Comprehensive loss for the six month period ended December 31, 2013 of $185,600 represents the unrealized change in market value of the Company's Marketable Securities held compared to the same period of the prior fiscal year. Comprehensive income for the six months ended December 31, 2013 consisted of the net value of three items: 1) the six months ending market value reclassification adjustment for gain included in Net Income (Loss) of $608,700;
2) an Unrealized Gain on Marketable Securities of $196,500 resulting from an increase in the market value of the shares held December 31, 2013 compared to the value at June 30, 2013, and; 3) the net unrealized gain on marketable securities sold during the period of $226,600. At December 31, 2013 the Company valued 106,180 shares (net of escrow shares) of ORBCOMM, Inc. Common Stock at $6.34 per share for a total value of $673,200.

Liquidity and Capital Resources

The Company's current assets at December 31, 2013 exceeded current liabilities by $2,333,500, resulting in a current ratio of 8.8 to 1. At June 30, 2013, current assets exceeded current liabilities by $2,526,500 reflecting a current ratio of 10.3 to 1. The reduction in net current assets at December 31, 2013 versus June 30, 2013 was due primarily to the sale of Marketable Securities - Restricted the Company held in ORBCOMM, Inc. offset primarily by increases to cash and cash equivalents.


ALANCO TECHNOLOGIES, INC.

Accounts receivable of $62,900 represents the outstanding billings at December 31, 2013 of the AES water disposal operation that initiated operations during August 2012. Other receivables totaling $22,600 represents billings to ACC for accounting services of $15,000 and interest of $7,600.

Cash used in operations for the six month period ended December 31, 2013 was
($531,300), a decrease of ($471,000), or 47% compared to the ($1,002,300)
reported for the same period of the prior year. The decrease in net cash used in operations for the six months ended December 31, 2013 was due primarily to decreases in operating losses for the six months ended December 31, 2013 and less cash used for accounts payable and accrued expenses compared to the same period of the prior year.

Cash provided by investing activities for the six month period ended December 31, 2013 was $1,232,000, a decrease of $501,200, or 28.9% compared to the $1,733,200 provided for the same period of the prior year. The decrease was primarily due to lower proceeds from the sale of marketable securities during the period, offset by a reduction in the purchases of land, property, and equipment.

Cash used by financing activities for the six month period ended December 31, 2013 was ($26,100) compared to cash used by financing activities of ($200,000) for the same period of the prior year, a change of ($173,900). The change was primarily due to the repurchase of treasury shares of $26,100 in the current period as compared to the payment of a $200,000 note payable paid during the same period of the prior year.

During fiscal 2014, the Company expects to meet its working capital and other cash requirements with its current operations, cash reserves and sales of marketable securities as required. However, the Company may require additional working capital for future operations. While the Company believes that it will succeed in attracting additional required capital and will generate capital from future operations, there can be no assurance that the Company's efforts will be successful. The Company's continued existence is dependent upon its ability to achieve and maintain profitable operations, identify profitable acquisition/merger candidates and/or successfully invest its capital.

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