(A) | Three months ended MarchDecember 31, 2016 versus three months ended MarchDecember 31, 2015 |
Net Revenues
Net revenues reported for the quarter ended MarchDecember 31, 2016 were $13,800 compared to $231,200$5,800 versus $57,700 for the quarter ended MarchDecember 31, 2015, a decrease of $217,400,$51,900, or 94.0%89.9%. Revenues are comprised of produced water delivery fees and sales of reclaimed oil (net of associated taxes). The decrease in revenues for the comparative three month period is reflective of the Company’s slower than anticipated return of water deliveries after the Company restricted water intake while treating the ponds for anaerobic bacterial conditions during the fourth quarter of fiscal 2015 and first quarter of fiscal 2016. In addition, winter like weather conditions during early spring have delayed deliveries which generally improve during the spring months. Water deliveries may beRevenues were negatively impacted by the decreases in thefalling market prices of oil and gas which drivessignificantly reduced drilling activities and fracking in the region and resulted in the restriction on drilling during winter months which negatively impact water deliveries,temporary closing of many of the producing oil and alternative uses of produced water, suchgas wells in the area. The Company anticipates the revenues will return as for fracking fluid that some currentoil and potential customers are utilizing.gas prices improve.
Cost of Revenues
Cost of revenuesRevenues for the three months ended MarchDecember 31, 2016 and 2015 were $114,800$84,900 and $211,800,$132,200, respectively, a decrease of $97,000$47,100, or 45.8% when comparing the periods.35.6%. Cost of revenues consists of direct labor costs, equipment costs (including depreciation), land lease costs, pond maintenance and other operating costs. The decrease is primarily due to lower variable costs resulting from reducedas a result of decreased revenues and includes labor costs, fees tied to water volumes, plus lower labor costs, fuel costs, pond maintenance and equipment rental.fuel costs. Fixed costs such as depreciation, amortization, accretion and lease costs represent approximately 54.0%73% and 29.4%45% of the cost of revenues for the three months ended MarchDecember 31, 2016 and 2015, respectively. The decrease in net revenues in the current quarter resulted in a gross loss for the current quarter as compared to a gross profit forthree months ended December 31, 2016 and 2015 was essentially the same quarter ofbut the prior year.gross margin in the current three month period was negatively impacted by the reduced water revenues during the current quarter.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended MarchDecember 31, 2016 (consisting of corporate expenses, AES selling, general and administrative expense and stock-based compensation) was $228,100,$229,100, a decrease of $45,700,$48,500, or 16.7%17.5%, compared to $273,800$277,600 reported for the quarter ended MarchDecember 31, 2015. Corporate expenses for the current quarter was $73,500$103,400 and represented an increasedecrease of $5,200,$4,100 or 7.6%3.8%, compared to corporate expenses of $68,300$107,500 reported for the comparable quarter ended MarchDecember 31, 2015. The increasednet decrease includes an increase in corporate development costs primarily relaterelated to the Alanco Behavioral Health, Inc. activities offset by a reduction in professional services.services and a reserve that was recorded against the Company's Note Receivable in the same period of the prior year. AES expense of $154,600$125,700 for the quarter ended MarchDecember 31, 2016 compared to $191,600$156,200 for the quarter ended MarchDecember 31, 2015, reflects a decrease of $37,000$30,500, or 19.3% when comparing the two periods and19.5%, which is primarily relateddue to a decrease in management fees paid for operations of the Deer Creek Water Disposal facility. Stock-based compensation during the current quarter was $0 compared toand $13,900 for the quarter ended March 31, 2015. Stock-based compensation expense in the prior year related to stock options issued to the Company’s officers and directors during the quarterthree months ended December 31, 2014 which have been fully amortized. No new stock options have been issued.2016 and 2015, respectively, a decrease of $13,900, or 100%.
Operating Loss
Operating lossLoss for the quarter ended MarchDecember 31, 2016 was ($329,100)308,200), an increasea decrease of $74,700,$43,900, or 29.4%12.5%, compared to an Operating Loss of ($254,400)352,100) reported for the same quarter of the prior year. The increaseddecreased operating loss resulted primarily from lower gross profit offset slightly by lowera decrease to selling, general and administrative expenses induring the current quarter ended March 31, 2016 whenas compared to the same quarter ended March 31, 2015 as discussed above.of the previous year.
Other Income and Expense
Interest income for the quarter ended MarchDecember 31, 2016 was $7,100,$0, a decrease of $3,300,$7,300, or 31.7%100%, when compared to interest income of $10,400$7,300 for the quarter ended MarchDecember 31, 2015. ACC has not made interest payments for amounts billed during the current quarter, therefore the Company has fully reserved the unpaid amount.
Interest expense for the quarter ended December 31, 2016 was $17,700. There was no interest expense for the quarter ended December 31, 2015. The decrease in interest income related primarily to a decrease in the average outstanding balancecurrent period primarily includes interest on the line of credit with the Anderson Family Trust entered into in June 2016, as well as amortization of associated loan costs and amortization of the ACC note receivable and lower interest income due to decreased cash balances.value of detachable warrants.
Net Loss
Net loss for the quarter ended MarchDecember 31, 2016 amounted to ($322,000)325,900), or ($0.06)0.07) per share, compared to net loss of ($244,000)344,800), or ($0.05)0.07) per share, in the comparable quarter of the prior year for reasons previously discussed.
(B) | NineSix months ended MarchDecember 31, 2016 versus ninesix months ended MarchDecember 31, 2015 |
Net Revenues
Net revenues reported for the ninesix months ended MarchDecember 31, 2016 were $185,900$9,700 compared to $674,800$172,000 for MarchDecember 31, 2015, a decrease of $488,900,$162,300 or 72.5%94.4%. Revenues are comprised of produced water delivery fees and sales of reclaimed oil (net of associated taxes). The decrease in revenues for the comparative nine month period is reflective of the Company’s slower than anticipated return of water deliveries after the Company restricted water intake while treating the ponds for anaerobic bacterial conditions during the fourth quarter of fiscal 2015 and first quarter of fiscal 2016. In addition, winter like weather conditions during early spring have delayed deliveries which generally improve during the spring months. Water deliveries may beRevenues were negatively impacted by the decreases in thefalling market prices of oil and gas which drivessignificantly reduced drilling activities and fracking in the region and resulted in the restriction on drilling during winter months which negatively impacts water deliveries,temporary closing of many of the producing oil and alternative uses of produced water, suchgas wells in the area. The Company anticipates the revenues will return as for fracking fluid that some currentoil and potential customers are utilizing.gas prices improve.
Cost of Revenues
Cost of revenues for the ninesix months ended MarchDecember 31, 2016 were $507,400$175,400 as compared to $590,400$392,600 for the same ninesix month period of the prior year, a decrease of $83,000,$217,200, or 14.1%,55.3% when comparing the two periods. Cost of revenues consists of direct labor costs, equipment costs (including depreciation), land lease costs, pond maintenance and other operating costs. The decrease is primarily due to lower variable costs resulting from reducedas a result of decreased revenues and includes labor costs, fees tied to water volumes, plus lower labor costs, fuelpond maintenance costs and equipment rentalfuel costs. Pond maintenance costs were $194,000 for the nine months ended March 31, 2016 as compared to $68,300 for the nine months ended March 31, 2015, an increase of $125,700, or 184.0%. The significant increase is reflective of the anaerobic bacterial conditions in its evaporation ponds during fiscal year 2015 and the first quarter of fiscal 2016. Fixed costs such as depreciation, amortization, accretion and lease costs represent approximately 35.7%70.7% and 30.7%30.3% of the cost of revenues for the ninesix months ended MarchDecember 31, 2016 and 2015, respectively. The decrease in net revenues in the nine months ended March 31, 2016 resulted in a gross loss for the six months ended December 31, 2016 and 2015 was ($165,700) and ($220,600), respectively. The improvement in the current six month period as comparedis primarily due to a gross profit for the nine months ended March 31, 2015.reduction of variable costs offset by decreased revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the ninesix months ended MarchDecember 31, 2016 (consisting of corporate expenses, AES selling, general and administrative expense and stock-based compensation) was $770,400,$442,200, a decrease of $49,800,$100,000, or 6.1%18.4%, compared to $820,200$542,200 reported for the ninesix months ended MarchDecember 31, 2015. Corporate expenses for the ninesix month period was $274,700$177,000 and represented an increasedecrease of $99,600,$24,200, or 56.9%12%, compared to corporate expenses of $175,100$201,200 reported for the comparable ninesix months ended MarchDecember 31, 2015. The nine months ended March 31, 2015 included the reversal of a previous accrual totaling $30,000 for board compensation. Without this reversal, there would have beennet decrease includes an increase of $69,600, or 33.9% betweenin corporate development costs related to the two periods. The increase resulted primarily fromAlanco Behavioral Health, Inc. activities offset by a $50,000reduction in professional services and a reserve that was recorded against the Company’sCompany's Note Receivable and increased costs related to professional services, offset by decreased payroll and associated employee benefit costs.in the same period of the prior year. AES operating expense was $467,900$265,200 for the ninesix months ended MarchDecember 31, 2016 as compared to $585,800$313,200 for the same ninesix month period of the prior year, a decrease of $117,900,$48,000, or 20.1%15.3%, which is primarily due to a decrease in management fees paid for operations of the Deer Creek Water Disposal facility. Stock-based compensation duringfor the ninesix months ended MarchDecember 31, 2016 was $27,800,$0, a decrease of $31,500,$27,800, or 53.1%100%, compared to $59,300$27,800, for the ninesix months ended MarchDecember 31, 2015, which included stock grants issued to the Company’sCompany's directors.
Operating Loss
Operating Loss for the ninesix months ended MarchDecember 31, 2016 was ($1,091,900)607,900), an increasea decrease of $356,100,$154,900, or 48.4%20.3%, compared to an Operating Loss of ($735,800)762,800) reported for the same period of the prior year. The increaseddecreased operating loss resulted primarily from lowerthe reduced gross profit offset slightly by lowerloss plus a decrease to selling, general and administrative expenses in the nine months ended March 31, 2016 when compared to the nine months ended March 31, 2015 as discussed above.expenses.
ALANCO TECHNOLOGIES, INC.
Other Income and ExpenseInterest income for the ninesix months ended MarchDecember 31, 2016 was $21,800,$4,800, a decrease of $11,700,$9,900, or 34.9%67.3%, when compared to interest income of $33,500$14,700 for the same period ended MarchDecember 31, 2015. TheDuring the current six month period the Company reversed $2,300 of interest income which was previously recorded related to the ACC note receivable due to nonpayment of the amount by ACC. In addition, ACC has not made interest payments for amounts billed during the current quarter, therefore the Company did not record interest income for those amounts. As a result, there is a decrease in interest income related primarilyfor the six months ended December 31, 2016 as compared to the same period of the prior year.
Interest expense for the six months ended December 31, 2016 was $26,400. There was no interest expense for the six months ended December 31, 2015. The interest in the current period includes interest on the line of credit with the Anderson Family Trust entered into in June 2016, as well as amortization of associated loan costs and amortization of the value of detachable warrants.
Loss From Continuing Operations
The loss from continuing operations for the six months ended December 31, 2016 was ($629,500), a decrease of $118,600, or 15.9%, compared to a decrease inloss from continuing operations of ($748,100) reported for the average outstanding balancesame six months of the ACC note receivableprior year. The decreased loss from continuing operations resulted from the reduced gross loss combined with the reduced selling, general and loweradministrative expense, offset by an increase in interest income dueexpense during the current six months as compared to decreased cash balances.the same six months of the prior year.
The Company did not have any sales of marketable securities duringLoss From Discontinued Operations
During the ninesix months ended MarchDecember 31, 2016. During the nine months ended March 31, 2015,2016, the Company recorded an accrual of $176,000 related to the judgment received from litigation whereby the Company is a gaindefendant and counterclaimant involving the Company's former subsidiary known as Alanco/TSI PRISM, Inc. ("TSI") and purchaser of $103,200 on the sale of 85,000 shares of its ORBCOMM Common Stock at an average selling price of $6.38 per share.
The Company did not have other income during the nine months ended March 31, 2016. The Company had other income during the nine months ended March 31, 2015 of $200.TSI's assets, Black Creek Systems Corp.
Net Loss
Net loss for the ninesix months ended MarchDecember 31, 2016 amounted to ($1,070,100)805,500), or ($0.21)0.16) per share, compared to a net loss of ($598,900)748,100), or ($0.12)0.15) per share, in the comparable period of the prior year for reasons previously discussed.
Liquidity and Capital Resources
The Company’sCompany's current assets at MarchDecember 31, 2016 exceeded current liabilities by $1,512,400,$1,177,000, resulting in a current ratio of 5.43.2 to 1. At June 30, 2015,2016, current assets exceeded current liabilities by $670,600$1,449,500 reflecting a current ratio of 2.74.6 to 1. The increasereduction in net current assets at MarchDecember 31, 2016 versus June 30, 2015 is2016 was due primarily due to the reclassification of the 160 acre Indian Mesa land and permits to Assets Held for Sale offset by a reduction in cash balances accounts receivable and prepaid and other current assets.an increase to accrued expenses.
Cash used in operations for the ninesix month period ended MarchDecember 31, 2016 was ($704,000)573,600), an increase of $206,600, $100,700, or 41.5%21.3% compared to the ($497,400)472,900) reported for the same period of the prior year. The increase in net cash used in operations for the ninesix months ended MarchDecember 31, 2016 was due primarily to an increase in operating loss, a decrease tooffset by an increase in accounts payable and accrued expenses offset by a decrease in prepaid expenses and other current assets as compared to the same period of the prior year.expenses.
Cash providedused by investing activities for the ninesix month period ended MarchDecember 31, 2016 was $20,600,($1,000), a decrease of $242,600, or 92.2%$16,600 when compared to the $263,200$15,600 provided by investing activities for the same period of the prior year. The decrease was primarily due to lower proceeds from the sale of marketable securities and repayment of note receivable during the period offset by a decrease in the purchase of land, property and equipment as compared to the prior year. Purchases of land, property and equipment include permitting costs for the Deer Creek facility.
Cash provided by financing activities was $440,000 for the six months ended December 31, 2016 and represents proceeds from the Company's line of credit with the Anderson Family Trust. There was no cash provided or used by financing activities for the ninesix month period ended MarchDecember 31, 2016. Cash used by financing activities for the nine month period ended March 31, 2015 was ($20,800) which represents the repurchase of treasury shares.2015.
The Company's fiscal year 2017 operating plan includes divestiture of the undeveloped AES Indian Mesa land and associated permits, which is currently classified as Assets Held for Sale. Management cannot assure that the sale of Indian Mesa will be finalized which would provide additional cash flow to the Company. The Company is continuing to analyze options to monetize current and future operations of Deer Creek. There is no assurance that the Company will be able to execute options for Deer Creek. The Company recently announced it was entering the behavioral health market and the business plan included the acquisition of behavioral health businesses. The Company has since terminated the business development activities related to behavioral health and has no plans to pursue acquisitions in that market. The Company is developing alterative business plans for investment of its resources. Future business plans may require additional capital. There is no assurance the Company will achieve projections.be able to raise additional financing which may be in the form of public or private debt or equity financing, or both. If adequate funds are not available or are not available on acceptable terms, the Company’sCompany's business, operating results, financial condition and ability to continue operations may be materially adversely affected. 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. The Company has implemented a plan to divest of its 160 acre owned and undeveloped land and associated permits located in Whitewater, Colorado and known as Indian Mesa. Refer to Note D - Assets Held for Sale for further discussion. Accordingly, the accompanying condensed consolidated financial statements have been prepared assuming the Company will continue to operate and do not include any adjustmentadjustments that might be necessary if the Company is unable to continue as a going concern. As a result, the Company’sCompany's independent registered public accounting firm included an explanatory paragraph regarding an uncertainty about the Company’sCompany's ability to continue as a going concern in their audit opinion on the consolidated financial statements of the Company for the fiscal year ended June 30, 20152016 which is further discussed in the Company’sCompany's Form 10-K for that period.
ALANCO TECHNOLOGIES, INC.
Item 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to smaller reporting company.
Item 4 - CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company carried out, under the supervision and with the participation of the Company’sCompany's management, including the Company’sCompany's Chief Executive Officer and the Company’sCompany's Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’sCompany's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended). Based on their evaluation, the Company’sCompany's Chief Executive Officer and its Chief Financial Officer concluded that, as of MarchDecember 31, 2016, the Company’sCompany's disclosure controls and procedures were effective. Management has concluded that the condensed consolidated financial statements in this Form 10-Q fairly present, in all material respects, the Company’sCompany's financial position, results of operations, and cash flows for the periods and dates presented.
(b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Legal Proceedings - The Company is a defendant and counterclaimant in litigation involving its former subsidiary TSI Dissolution Corp. (formerly known as Alanco/TSI Prism, Inc. (“TSI”)("TSI") and the purchaser of TSI’sTSI's assets, Black Creek Integrated Systems Corp. (“("Black Creek”Creek"). Black Creek filed a complaint in the Maricopa County Superior Court against TSI and the Company, being Civil Case NO.No. CV2011-014175, claiming various offsets from the purchase price, primarily concerning inventory adjustments, and TSI counterclaimed for monies due from Black Creek under the purchase agreement. Following a trial during fiscal 2014, the court awarded a net judgment in favor of Black Creek in the amount of $16,800, plus attorney’sattorney's fees and accrued interest, resulting in a total judgment in the amount of $128,300 for which$128,300. At June 30, 2014, the Company recorded an accrued liability at June 30, 2014. In addition,of $128,300 for the Companyjudgment and had posted a bond with the court in conjunction with the Company’sCompany's appeal of the judgment. In May 2015, the State of Arizona Division One Court of Appeals vacated the trial court’scourt's damages award and remanded to the trial court to direct the parties to follow dispute guidelines defined in the asset purchase agreement. In addition, the appellate court’scourt's decision vacated the trial court’s attorney’s feecourt's attorney's fees award and stated thatawarded TSI is entitled to an awardapproximately $21,900 of its fees on appeal. As a result, atAt June 30, 2015, the Company reversed the accrual of $128,300 for the prior judgment. TheUnder the court's direction, the Company is currently following the court’s direction and working underfollowed the dispute guidelines defined in the asset purchase agreement.agreement which resulted in an award to Black Creek of approximately $13,000. The Company believeshas previously stipulated that it owed Black Creek approximately $9,600 for shared expenses incurred from 2010 - 2011. In October 2016, the lower court’scourt ruled on Black Creek's attorney's fees application and the Company's answer to said application. The court granted Black Creek a fee award which, when combined with the judgment failed to address, among other matters, inventory reserves established for the specific itemsamount of inventory which were the subject of Black Creek’s concerns, which if properly addressed would resultapproximately $22,600 plus interest, results in a net judgmentpotential liability to the Company of approximately $176,000 which has been accrued at December 31, 2016 and reported as a loss from discontinued operations in favorthe six month period. The Company vehemently disagrees with Black Creek's attorney's fees claim and the Court ruling and intends to vigorously pursue an appeal of the Company, with an attendant award of attorney’s fees in favor of the Company. Therefore, no accrual for the loss contingency was deemed necessary at March 31, 2016.judgment.
The Company may from time to time be involved in litigation arising from the normal course of business. As of MarchDecember 31, 2016, there was no other such litigation pending deemed material by the Company.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the ninesix months ended MarchDecember 31, 2016, no shares of Company stock were sold.
Item 6. EXHIBITS
| 31.1 | Certification of Chief Executive Officer |
| 31.2 | Certification of Chief Financial Officer |
| 32 | Certification of Chief Executive Officer and Chief Financial Officer |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase |
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)ALANCO TECHNOLOGIES, INC. | |
| /s/ Danielle Haney | | |
| By: | /s/ Danielle L. Haney | |
| Chief Financial Officer | Name: Danielle L. Haney | |
| Alanco Technologies, Inc. | Title: Chief Financial Officer | |
| | | |
February 14, 2017
May 13, 2016