Any sales tax for which the Company is responsible is recorded as a reduction of the associated revenue.
The following are the classes of assets and liabilities measured at fair value on a recurring basis at June 30, 2016 and 2015, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):
The following is a reconciliation of the opening and closing balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the fiscal year ended June 30, 2016 and 2015.
The Company makes significant estimates and assumptions concerning the estimated fair value of stock
-
based compensation and detachable warrants
,
realization of deferred tax assets, collectability of accounts and note receivable, estimated useful lives and carrying values of fixed assets, the recorded values of accruals and contingencies including the Black Creek contingent liability and the estimated fair values of the Company's asset retirement obligation and the contingent land and purchase price liabilities, and the Company's ability to continue as a going concern. Due to the uncertainties inherent in the estimation process and the significance of these items, it is at least reasonably possible that the estimates in connection with these items could be materially revised within the next year.
The Company has a total of 1,340,000 potentially dilutive securities outstanding at June 30, 2016 which includes stock options representing 1,200,000 shares of Class A Common Stock with exercise prices ranging between $
0.
50 and $
0.
75 and 140,000 outstanding stock warrants with exercise prices ranging between $0.50 and $1.00. At June 30, 2015, the Company had stock options representing 1,203,200 shares of Class A Common Stock outstanding at June 30, 2015 with exercise prices ranging between $0.50 and $1.50. There were no outstanding warrants as of June 30, 2015.
The Company estimates the fair value of stock-based awards using the Black-Scholes valuation model. Assumptions used to estimate compensation expense are determined as follows:
Approximately 71.6% of AES revenues were generated by three customers during the fiscal year 2016 and all three customer accounts were current or paid in full as of June 30, 2016. During fiscal year 2015, 85
.
1% of AES revenues were generated by four customers and all amounts billed to those customers were current or paid in full as of June 30, 2015. The significant customers represented $3,800, or 97.4% of the accounts receivable balance at June 30, 2016, while the significant customers for fiscal 2015 represented $14,900, or 32.4% of the accounts receivable balance at June 30, 2015.
In May 2014, the FASB issued guidance regarding revenue from contracts with customers. The guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance. In August 2015, this accounting pronouncement was deferred for one year, and is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of reporting periods beginning after December 15, 2016. The Company is currently assessing the impact on its financial position and results of operations.
In August 2015, the FASB issued guidance regarding the presentation and subsequent measurement of debt issuance costs for lines of credit. The guidance allows for the presentation of debt issuance costs related to line-of-credit agreements as an asset and subsequently amortizing the deferred costs ratably over the term of the line-of-credit arrangement. The guidance is effective for annual reporting periods beginning after December 15, 2015 and early adoption is permitted. The Company has adopted the guidance, which had no material impact on its financial position and results of operations.
In January 2016, the FASB issued guidance regarding the enhancement of reporting financial instruments including aspects of recognition, measurement, presentation and disclosure. The guidance is effective for periods beginning after December 15, 2017 including interim periods within those fiscal years. While a portion of the guidance allows for early application, it does not permit complete early adoption. The Company is currently assessing the impact on its financial position and results of operations.
In February 2016, the FASB issued guidance regarding lease reporting. The guidance requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by leases with terms of more than 12 months. The guidance is effective for periods beginning after December 15, 2018 including interim periods within those fiscal years and early adoption is permitted. The Company is currently assessing the impact on its financial position and results of operations.
In March 2016, the FASB issued guidance under the simplification initiative regarding stock compensation. The guidance is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted provided that all amendments are adopted in the same period. The Company is currently assessing the impact on its financial position and results of operations.
In June 2016, the FASB issued guidance regarding credit losses on financial instruments including loans. The guidance is effective for annual periods beginning after December 15, 2019 including interim periods within those annual periods. The Company is currently assessing the impact on its financial position and results of operations.
There have been no other recent accounting pronouncements or changes in accounting pronouncements that are of significance, or potential significance, to us.
The Company has several employee stock option and officer and director stock option plans that have been approved by the shareholders of the Company. The plans require that options be granted at a price not less than market on the date of grant.
The Company uses the Black-Scholes option pricing model to estimate fair value of stock-based awards.
No options were granted during the year ended June 30, 2016. Assumptions for the award of options granted during the year ended June 30, 2015 were:
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the Company's stock option activity during fiscal years 2016 and 2015:
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Contractual
|
|
|
Fair
|
|
|
Instrinsic
|
|
|
|
Options
|
|
|
Per Share
|
|
|
Term (1)
|
|
|
Value (3)
|
|
|
Value (2)
|
Outstanding July 1, 2014
|
|
|
823,400
|
|
|
$
|
0.63
|
|
|
|
3.35
|
|
|
$
|
212,600
|
|
|
$
|
-
|
|
Granted
|
|
|
390,000
|
|
|
|
0.50
|
|
|
|
4.35
|
|
|
|
69,500
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited, expired or cancelled
|
|
|
(10,200
|
)
|
|
|
1.50
|
|
|
|
-
|
|
|
|
(6,300
|
)
|
|
|
-
|
Outstanding June 30, 2015
|
|
|
1,203,200
|
|
|
$
|
0.58
|
|
|
|
3.03
|
|
|
$
|
275,800
|
|
|
$
|
-
|
|
Exercisable June 30, 2015
|
|
|
1,047,200
|
|
|
$
|
0.59
|
|
|
|
2.83
|
|
|
$
|
248,100
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding July 1, 2015
|
|
|
1,203,200
|
|
|
$
|
0.58
|
|
|
|
3.03
|
|
|
$
|
275,800
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited, expired or cancelled
|
|
|
(3,200
|
)
|
|
|
1.50
|
|
|
|
-
|
|
|
|
(2,300
|
)
|
|
|
-
|
Outstanding June 30, 2016
|
|
|
1,200,000
|
|
|
$
|
0.58
|
|
|
|
2.03
|
|
|
$
|
273,500
|
|
|
$
|
-
|
Exercisable June 30, 2016
|
|
|
1,200,000
|
|
|
$
|
0.58
|
|
|
|
2.03
|
|
|
$
|
273,500
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Remaining contractual term presented in years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing price of the Company's common stock as of June 30, 2016 and 2015, for those awards that have an exercise price currently below the closing price as of June 30, 2016 and 2015 of $0.22 and $0.28, respectively.
|
|
|
(3)
|
Aggregate Fair Value is calculated using the Black Scholes option pricing model to estimate the initial fair value of stock-based compensation.
|
|
The Company recognized approximately $27,800 of stock-based compensation expense during the fiscal year ended June 30, 2016, which was for options granted during the fiscal year ended June 30, 2015 that vested in the fiscal year ended June 30, 2016. There is no unamortized stock-based compensation expense related to these options as of June 30, 2016.
All options granted had an exercise price of not less than the market price on date of grant, as stipulated in the stock option plans, of the Company's common stock. There are no unvested options at June 30, 2016. If not previously exercised, options outstanding at June 30, 2016 will expire as follows:
Calendar Year
|
|
Number of
|
|
|
Weighted Average
|
|
of Expiration
|
|
Shares
|
|
|
Exercise Price
|
|
2017
|
|
|
385,000
|
|
|
$
|
0.75
|
|
2018
|
|
|
425,000
|
|
|
|
0.50
|
|
2019
|
|
|
390,000
|
|
|
|
0.50
|
|
|
|
|
1,200,000
|
|
|
$
|
0.58
|
|
Additional information about outstanding options to purchase the Company's Common Stock as of June 30, 2016 is as follows:
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
Options Outstanding & Exercisable
|
|
|
|
|
Weighted Avg.
|
|
Weighted
|
|
|
Number
|
|
Remaining
|
|
Average
|
Exercise
|
|
of
|
|
Contractual
|
|
Exercise
|
Price
|
|
Shares
|
|
Life (in years)
|
|
Price
|
$0.50
|
|
|
815,000
|
|
|
2.63
|
|
$0.50
|
$0.75
|
|
|
385,000
|
|
|
0.78
|
|
$0.75
|
Totals
|
|
|
1,200,000
|
|
|
2.03
|
|
$0.58
|
The Company's Stock Option Plans are administered by the Compensation/Administration Committee, currently comprised of two independent members of the Company's Board of Directors. Company stock options are issued to employees and directors at an exercise price of not less than the fair market value, as determined under the option plan on the date of grant and must be granted within 10 years from the effective date of the Plan, with the term of the option not exceeding 10 years. Options granted to employees under the Stock Option Plans, which are terminated prior to exercise, are considered to be available for grant to subsequent employees. Total issued stock options for any plan may exceed those authorized due to termination of prior non-exercised grants. Under the Employee Incentive Stock Option Plans, incentive and non-qualified stock options may be granted with the incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended. Stock options issued during the fiscal year ended June 30, 2015 vested 20% on December 31, 2014 and 20% each quarter thereafter and there were no options issued during the fiscal year ended June 30, 2016.
|
Alanco Stock Option Summary (1)
|
|
as of June 30, 2016
|
|
|
|
|
|
|
Options
|
|
|
Issued and
|
|
|
Options
|
|
|
Options
|
|
|
Balance
|
|
|
Exercise
|
|
Plan
|
|
Authorized
|
|
|
Granted
|
|
|
Exercised
|
|
|
Cancelled
|
|
|
Outstanding
|
|
|
to Issue (6)
|
|
|
Price Range (5)
|
2002
|
(2)
|
|
75,000
|
|
|
|
156,000
|
|
|
|
27,000
|
|
|
|
94,200
|
|
|
|
34,800
|
|
|
|
--
|
|
|
$
|
0.75
|
2002 D&O
|
(3)
|
|
25,000
|
|
|
|
40,800
|
|
|
|
5,200
|
|
|
|
16,600
|
|
|
|
19,000
|
|
|
|
--
|
|
|
$
|
0.75
|
2004
|
(2)
|
|
100,000
|
|
|
|
188,500
|
|
|
|
67,600
|
|
|
|
88,500
|
|
|
|
32,400
|
|
|
|
--
|
|
|
$
|
0.75
|
2004 D&O
|
(3)
|
|
50,000
|
|
|
|
83,100
|
|
|
|
13,200
|
|
|
|
36,300
|
|
|
|
33,600
|
|
|
|
--
|
|
|
$
|
0.75
|
2005
|
(2)
|
|
150,000
|
|
|
|
310,108
|
|
|
|
81,971
|
|
|
|
160,108
|
|
|
|
68,029
|
|
|
|
--
|
|
|
$
|
0.50 - $0.75
|
2005 D&O
|
(3)
|
|
50,000
|
|
|
|
142,000
|
|
|
|
4,000
|
|
|
|
92,000
|
|
|
|
46,000
|
|
|
|
--
|
|
|
$
|
0.50
|
2006
|
(2)
|
|
375,000
|
|
|
|
851,769
|
|
|
|
82,003
|
|
|
|
476,769
|
|
|
|
292,997
|
|
|
|
--
|
|
|
$
|
0.50 - $0.75
|
2006 D&O
|
(3)
|
|
125,000
|
|
|
|
261,924
|
|
|
|
23,750
|
|
|
|
136,924
|
|
|
|
101,250
|
|
|
|
--
|
|
|
$
|
0.50
|
2011
|
(4)
|
|
750,000
|
|
|
|
777,948
|
|
|
|
291,024
|
|
|
|
30,000
|
|
|
|
456,924
|
|
|
|
2,052
|
|
|
$
|
0.50 - $0.75
|
2014
|
(7)
|
|
500,000
|
|
|
|
115,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
115,000
|
|
|
|
385,000
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
2,200,000
|
|
|
|
2,927,149
|
|
|
|
595,748
|
|
|
|
1,131,401
|
|
|
|
1,200,000
|
|
|
|
387,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Only includes plans with options currently outstanding or having a balance available to issue.
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Employee Incentive Stock Option Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
Directors and Officers Stock Option Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
Employee Incentive Stock Option Plan which permits granting of stock or stock options. Grants include 291,000 Common Shares issued under the plan as payment of deferred employee compensation.
|
(5)
|
Range of exercise prices for outstanding options only.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6)
|
ny options not issued under the 2002, 2002 D&O, 2004, 2004 D&O, 2005, 2005 D&O, 2006, and 2006 D&O Plans are no longer available for issue as those plans were 10 year plans and have expired.
|
(7)
|
Stock Incentive Plan which permits granting of stock options and awards. All grants are stock options.
|
|
|
|
|
|
|
|
|
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of June 30, 2016, the Company had 140,000 outstanding warrants. The following table summarizes the Company's warrant activity during the year ended June 30, 2016:
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Number of
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
Warrants Outstanding, June 30, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
Granted
|
|
|
140,000
|
|
|
|
0.75
|
|
|
|
20,000
|
|
|
|
0.75
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
Canceled/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
Warrants Outstanding, June 30, 2016
|
|
|
140,000
|
|
|
$
|
0.75
|
|
|
|
20,000
|
|
|
$
|
0.75
|
The remaining 120,000 outstanding and unexercisable warrants will vest monthly throughout fiscal 2017 in the amount of 10,000 per month on the anniversary date of the Anderson Family Trust Credit Line as long as some portion of the credit line remains outstanding. Refer to Note 7 – Note Payable for more information on the note and detachable warrants.
3. NOTE RECEIVABLE – RELATED PARTY
Note receivable at June 30, 2016 and 2015 represents a note due from American Citizenship Center, LLC ("ACC"), a related party. Note receivable activity for fiscal years ended June 30, 2016 and 2015 consists of the following:
|
|
2016
|
|
|
2015
|
|
Note receivable - beginning of year
|
|
$
|
322,800
|
|
|
$
|
409,000
|
|
Advances
|
|
|
-
|
|
|
|
-
|
|
Payments
|
|
|
(27,400
|
)
|
|
|
(115,200
|
)
|
Accounting and loan fees added to note
|
|
|
-
|
|
|
|
29,000
|
|
Accounting and loan fees reversed against deferred income
|
|
|
(29,000
|
)
|
|
|
-
|
|
Less reserve
|
|
|
(266,400
|
)
|
|
|
-
|
|
Total
|
|
|
-
|
|
|
|
322,800
|
|
Less long-term
|
|
|
-
|
|
|
|
(262,800
|
)
|
Notes receivable - current
|
|
$
|
-
|
|
|
$
|
60,000
|
|
The gross balance of $295,400 at June 30, 2016 represents the outstanding amount drawn by ACC on a $295,400 credit line provided by the Company at June 30, 2016. The note is secured by all assets of ACC and at June 30, 2016 bears interest at the rate of 9.5% per annum. At June 30, 2016, ACC owed the company approximately $2,800 consisting of interest of $2,300 plus $500 of legal fees associated with a note modification which was paid subsequent to year end. The note was modified twice during the fiscal year 2016 including a modification in January 2016 which deferred minimum principal payments of $10,000 to August 31, 2016.
ACC's business plan is based on the Executive Action, known as DAPA, issued by President Obama in November 2014. The action is designed to expand the original deferred action program to eligible parents and spouses of U.S. citizens and agricultural workers with a demonstrated history. In February 2015, twenty-six states filed a lawsuit to stop the program and the court granted an injunction meaning that the U.S. Government cannot proceed with rolling out the program. The U.S. government appealed the lawsuit which went to the 5
th
Circuit Court of Appeals. The appeal was unsuccessful and in January 2016, the Supreme Court granted an oral hearing which was held in April 2016. In June 2016, the Supreme Court announced that the justice votes were even for and against the DAPA case, effectively a no decision. As a result, it is presumed that the case will go back to trial at the District Court in Texas. As of June 30, 2016, the Company has fully reserved for the amount of the note. The required interest payments are current.
In August 2016, ACC and the Company again modified the loan agreement by requiring minimum monthly payments of $10,000 per month starting 60 days following implementation of an immigration reform program
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
which allows DAPA or a similar program to be implemented in the United States. In addition, the maturity date was extended to August 31, 2018. All other terms of the note remained the same.
4.
ALANCO ENERGY SERVICES
During fiscal 2012, the Company formed Alanco Energy Services, Inc. ("AES"), a wholly-owned subsidiary, and in April 2012 executed an agreement with TC Operating, LLC ("TCO") of Grand Junction, CO to transfer a land lease for approximately 24 acres near Grand Junction, CO and all related assets to AES with the intent for AES to construct facilities for the treatment and disposal of large quantities of produced water generated by oil and natural gas producers in Western Colorado. The site was chosen due to its unique ability to meet stringent government requirements for disposal of the high saline water produced as a by-product of oil and gas production, and termed "produced water". The agreement included the transfer of all related tangible and intangible assets as well as Federal, State and County permits (issued or in process) required to construct the facilities. The lease terms payable to the landlord include a minimum monthly lease payment of $100 per acre ($2,400 per month) during the initial ten year term of the lease, plus approximately $0.25 per barrel of produced water received at the site.
The design and construction of the Deer Creek water disposal facility required certain changes to the Goodwin Solid Waste facility ("Goodwin") resulting in extra costs to the landlord, who also owned Goodwin. As incentive for the landlord to approve the facility design, AES agreed to limit landlord construction improvement costs related to the leased land to $200,000. Included in the $200,000 limited amount was $100,000 of landlord improvement costs to be paid by AES and reimbursed through a 50% credit against the $0.25 per barrel royalty payments due landlord discussed above. AES recorded the $100,000 payment as prepaid royalties which expired on August 31, 2015 under terms of the agreement and therefore had a zero balance at June 30, 2016. The prepaid balance June 30, 2015 was $5,100.
TCO can also earn additional purchase price payments based upon a percentage of the net cumulative EBITDA (net of all related AES capital investments) over a period of approximately 10 years (contingent purchase price), approximately the initial term of the lease. As of June 30, 2016 and 2015, the Company had no liability recorded for the contingent purchase price based on the probability of the contingent payment being realized.
During April 2012, AES also entered into a definitive agreement with Deer Creek Disposal, LLC ("DCD") whereby AES acquired a 160 acre site near Grand Junction, CO, for additional expansion to the proposed water treatment and disposal facility. As consideration for the land purchase, AES paid $500,000 at the April 13, 2012 closing and assumed a non-interest bearing, secured, $200,000 note due November 15, 2012, which was repaid upon maturity. AES has also agreed to potential additional quarterly earn-out payments to DCD up to a maximum total of $800,000, generally determined as 10% of quarterly revenues in excess of operating expenses up to $200,000 per quarter (contingent land payment). See Note 8 - Contingent Payments for additional discussion of the contingent land payment. The land, known as Indian Mesa, is currently undeveloped. In June 2014 AES received final construction approval from the Colorado Department of Public Health and Environment (CDPHE) for twelve produced water disposal ponds. During fiscal year 2016, the Company implemented a plan to divest the undeveloped Indian Mesa facility. See Note 5 – Assets Held for Sale for additional discussion.
Related to the treatment and disposal facilities, in fiscal year 2012 AES entered into a management agreement with TCO to manage the project for a monthly management fee of $10,000 initially and $20,000 after final permits for the Deer Creek operation were obtained in May 2012. The management agreement expired in January 2013 and continued on a month to month basis through March 31, 2015, at which time the Company elected not to continue the month to month arrangement. Effective April 1, 2015, the Company entered into an agreement for operations management services for the Deer Creek facility with a separate management company. The agreement is cancellable by either party at any time and was cancelled by the Company subsequent to year end. The Company continues to have one employee who is responsbile for accepting water deliveries at the site.
.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. ASSETS HELD FOR SALE
During the fiscal year 2016, Alanco's Board of Directors approved a formal plan to sell its 160 acre owned and undeveloped land and associated permits known as Indian Mesa. The plan was contemplated because the Company is expanding into other markets that are unrelated to waste disposal. The Company is utilizing the services of an investment banker to represent the Company in the sale of these assets and expects the sale to occur within one year. Accordingly, the Assets Held for Sale of $1,653,500 presented in the attached balance sheet as of June 30, 2016 represents the Indian Mesa land and associated permits. The reclassification of the assets to Assets Held for Sale does not affect the Consolidated Statements of Operations as the Indian Mesa land is undeveloped and has no associated operations.
6. LAND, PROPERTY AND EQUIPMENT
At June 30, 2016 and 2015, Land, Property and Equipment consist of the following:
|
|
2016
|
|
|
2015
|
|
Office furniture and equipment
|
|
$
|
51,300
|
|
|
$
|
51,300
|
|
Water disposal facility
|
|
|
2,220,900
|
|
|
|
2,219,200
|
|
Production equipment
|
|
|
514,400
|
|
|
|
514,400
|
|
|
|
|
2,786,600
|
|
|
|
2,784,900
|
|
Less accumulated depreciation
|
|
|
(675,600
|
)
|
|
|
(491,900
|
)
|
Land and permit costs
|
|
|
-
|
|
|
|
1,645,600
|
|
Net book value
|
|
$
|
2,111,000
|
|
|
$
|
3,938,600
|
|
Water disposal facility assets at June 30, 2016 consist of $1,810,900 in costs related to the construction and permitting of the evaporation ponds and $410,000 in asset retirement cost. Production equipment at June 30, 2016 of $514,400 represents the cost of equipment required to support the Deer Creek facility.
Related depreciation expense for the years ended June 30, 2016 and 2015 was $183,700 and $120,100, respectively.
During the current fiscal year, the Company implemented a plan to divest of its land and related permit costs know as Indian Mesa. As a result, the value of those assets has been reclassified to Assets Held for Sale as of June 30, 2016.
7.
NOTE PAYABLE
Note payable at June 30, 2016 and 2015 consists of the following:
|
|
2016
|
|
|
2015
|
Note payable
|
|
$
|
200,000
|
|
|
$
|
-
|
Less current
|
|
|
-
|
|
|
|
-
|
Note payable, long-term
|
|
$
|
200,000
|
|
|
$
|
-
|
At June 30, 2016, the Note Payable balance of $200,000 represents the amount drawn against a $500,000 line of credit with the Anderson Family Trust ("Trust") entered into on June 28, 2016. As of June 30, 2016, the line of credit has an available balance of $300,000. The line of credit matures on July 1, 2017 when the full outstanding balance is due. The balance accrues interest at 7% per annum payable monthly and is collateralized by the Company's AES Indian Mesa property. In addition, the Trust was paid a loan fee of $10,000 plus a warrant to purchase 140,000 shares of Alanco Common Stock of which 20,000 warrants vested immediately and 10,000 warrants vest monthly. The exercise price per share for the warrants is $0.50 per share for one half of each vested group and $1.00 for the other half of each vested group
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
with a five year term following the issuance date. The Company uses the Black-Scholes option pricing model to estimate fair value of stock-based awards.
Assumptions for warrants granted during the year ended June 30, 2016 were:
|
|
Awards Granted
|
|
Awards Granted
|
|
|
With an Exercise
|
|
With an Exercise
|
Assumption
|
|
Price of $0.50
|
|
Price of $1.00
|
Dividend yield
|
|
|
0%
|
|
|
0%
|
Expected volatility
|
|
|
62%
|
|
|
62%
|
Risk-free interest rate
|
|
|
2%
|
|
|
2%
|
Expected life of options (in years)
|
|
|
5.0
|
|
|
5.0
|
Weighted average grant-date Black Scholes calculated fair value
|
|
|
$0.07
|
|
|
$0.04
|
During the fiscal year ended June 30, 2016, the Company expensed approximately $100 in interest related to the note, approximately $1,200 related to amortization of deferred loan costs, and approximately $1,200 related to the value of vested warrants. The line of credit has a provision allowing the lender, at the lender's option, to convert up to the full amount of the credit line into shares of a then available class of preferred stock outstanding any time prior to the full repayment of the line of credit. There is currently no such preferred stock outstanding and the rights and privileges of preferred stock have not been determined.
8.
CONTINGENT PAYMENTS
Contingent payments at June 30, 2016 and 2015 are as follows:
|
|
2016
|
|
|
2015
|
|
Contingent land payment
|
|
$
|
672,700
|
|
|
$
|
653,900
|
|
Less current portion
|
|
|
-
|
|
|
|
(50,000
|
)
|
Contingent payments, long-term
|
|
$
|
672,700
|
|
|
$
|
603,900
|
|
Contingent land payment represents the net present value of $800,000 of contingent land payments due under an agreement whereby Alanco Energy Services, Inc. ("AES") acquired 160 acres of land known as Indian Mesa. The maximum total of $800,000 of contingent land payments is based upon 10% of quarterly revenues in excess of operating expenses up to $200,000 per quarter for activity at both the Deer Creek and the Indian Mesa locations. The payments were projected considering operating plans as approved by the Alanco Board of Directors, with the payments discounted at a rate of 3% per annum. During the fiscal year ended June 30, 2016 no contingent land payments were made while $8,600 was paid in fiscal year 2015. The Company will maintain the liability for contingent payments resulting from future revenues on the Indian Mesa land resulting from an eventual buyer's operations. See Note 4 – Alanco Energy Services for additional discussion on AES operations.
TCO can also earn additional purchase price payments based upon a percentage of the net cumulative EBITDA (net of all related AES capital investments) over a period of approximately 10 years (contingent purchase price), approximately the initial term of the lease. As of June 30, 2016 and 2015, the Company had no liability recorded for the contingent purchase price based on the probability of the contingent payment being realized.
The significant unobservable inputs used in the fair value measurement of the Company's fair value calculation for the contingent land payment and contingent purchase price include cash flow projections, the probability of the contingent payments being realized, the timing of when the payments are paid and the discount rate applied. Significant changes in any of those inputs in isolation would result in a significantly different fair value measurement. See Note 4 – Alanco Energy Services for additional discussion on AES operations.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9.
ASSET RETIREMENT OBLIGATION
The Company initially recognized an estimated asset retirement obligation (closure cost) at June 30, 2012 of $410,000 to remove leasehold improvements, remediate any pollution issues and return the Deer Creek water disposal property to its natural state at the conclusion of the Company's lease. The closure process is a requirement of both the Deer Creek lease and the State of Colorado, a permitting authority for such facilities. The initial closure cost estimate, in then current dollars, was completed by an approved independent consultant experienced in estimating closure costs for water disposal operations and the estimated amount was approved by the State of Colorado.
The Company reviews the contingent asset retirement obligation on a recurring basis and records changes in the period incurred. At June 30, 2016, the estimated closure costs were again reviewed and the only adjustment was a 1.01% inflation adjustment as required under agreement with the Colorado Department of Public Health and Environment, increasing the asset retirement obligation to $434,000, AES's approximate 75% share of the $566,000 estimated closure costs for both the Deer Creek facility and the adjacent Goodwin Solid Waste facility (Goodwin is not owned by AES). At June 30, 2015, the only adjustment was a 1.014% inflation adjustment, increasing the asset retirement obligation to $429,700. The significant unobservable inputs used in the fair value measurement of the Company's fair value calculation for the asset retirement obligation include the estimated cost to close the Deer Creek facility in accordance with state approved closure plans. Significant changes in any of those inputs in isolation would result in a significantly different fair value measurement. See Note 4 – Alanco Energy Services for additional discussion on AES operations.
The laws of the State of Colorado require companies to meet environmental and asset retirement obligations by selecting an approved payment method. The Company has elected to meet its obligation by making an initial payment of approximately $25,300 and quarterly payments of approximately $4,700 into a trust that over the expected lease period will build liquid assets to meet the asset retirement obligation. For the fiscal years ended June 30, 2016 and 2015, the trust account balance was $86,100 and $67,400, respectively.
10
.
INCOME TAXES
A reconciliation of anticipated statutory rates is as follows:
|
|
2016
|
|
2015
|
Statutory rate
|
|
34.0%
|
|
34.0%
|
State income taxes, net of federal income
|
|
|
|
|
tax benefit
|
|
5.0%
|
|
5.0%
|
Change in valuation allowance related to net
|
|
|
|
|
operating loss carry-forwards and change
|
|
|
|
|
in temporary differences
|
|
-39.0%
|
|
-39.0%
|
|
|
|
|
|
|
|
0.0%
|
|
0.0%
|
The components of the net deferred tax asset (liability) recognized as of June 30, 2016 and 2015 are as follows:
|
|
2016
|
|
|
2015
|
|
Deferred tax asset
|
|
$
|
12,100,000
|
|
|
$
|
11,800,000
|
|
Less: estimated Section 382 adjustment
|
|
|
(4,000,000
|
)
|
|
|
(4,000,000
|
)
|
Net operating loss and capital loss carryforwards
|
|
|
8,100,000
|
|
|
|
7,800,000
|
|
Less: Valuation allowance
|
|
|
(8,100,000
|
)
|
|
|
(7,800,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax
|
|
$
|
-
|
|
|
$
|
-
|
|
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A valuation allowance is recognized if it is more likely than not that some or all of the deferred income tax assets will not be realized. A valuation allowance is used to offset the related income tax assets due to uncertainties of realizing the benefits of certain net operating loss and tax credits. The valuation allowance, which reflects a 100% reserve for all years reported above, increased $300,000 from June 30, 2015 to June 30, 2016 primarily due to the expiration of state operating loss carryforwards. At June 30, 2016, the Company had net operating loss carry-forwards for federal tax purposes of approximately $34,900,000. The loss carry-forwards, unless utilized, will expire from 2018 through 2035. With few exceptions, the Company is no longer subject to U.S. federal, state and local examinations by tax authorities for years before 2011.
Internal Revenue Code Section 382 limits the ability to utilize net operating losses if a 50% change in ownership occurs over a three year period. Such limitation of the net operating losses may have occurred which the Company has not fully analyzed at this time as the deferred tax asset is fully reserved, however, the Company has estimated a limitation effect on deferred tax assets of approximately $4 million at June 30, 2016 and 2015.
11.
RELATED PARTY TRANSACTIONS
American Citizenship Center, LLC
At June 30, 2016 and 2015 the Company had a note due from American Citizenship Center, LLC ("ACC"), a related party, with gross balances of $295,400 and $322,800, respectively. At June 30, 2016, the Company fully reserved the note balance. Refer to Note 3 – Note Receivable – Related Party for further discussion.
During the fiscal year 2016, the Company billed ACC a total of $29,100 which includes amounts for interest on the note and legal services. During the fiscal year 2015, the Company billed ACC a total of $46,300 which includes amounts for interest on the note, legal services related to note modifications and accounting services. At June 30, 2016, the Company had unpaid receivables from ACC in the amount of $2,800, consisting of $2,300 representing one month of interest plus $500 of legal services. Subsequent to year end, ACC made payments bringing these balances current. At June 30, 2015, the Company had unpaid receivables from ACC in the amount of $4,200, consisting of $2,500 representing one month of interest plus $1,700 of legal services.
Board of Directors
During fiscal 2016, the Company added a fifth member to the Board of Directors. During fiscal 2016, each of the four continuing directors earned $12,000 in fees of which cash payments of $9,000 were paid during the year and $3,000 was accrued at June 30, 2016. The new director earned $4,000 in fees of which cash payments of $2,000 were paid during the year and $2,000 was accrued at June 30, 2016.
During fiscal 2015, the Company made cash payments of $7,500 to each of the Company's three independent members of the Board of Directors and issued each 25,000 stock grants for a total of 75,000 shares valued at $31,500. The Company recorded $16,500 of expense related to the stock grants during the current fiscal year and had accrued $15,000 at June 30, 2014. In addition, each independent director received 80,000 stock options during fiscal year 2015.
As of June 30, 2016 and 2015, the Company had accrued deferred compensation of $58,400 and $5,300 respectively, payable to John Carlson, the Company's Chief Executive Officer and a Director of the Company.
12
.
COMMITMENTS AND CONTINGENCIES
Employment agreements
- On June 30, 2014, the Company entered into employment agreements, effective July 1, 2014 with the Company's Chief Executive and Chief Financial Officers. The employment agreements provide for levels of compensation and continuation of benefit under Company benefit plans. The agreements have severance provisions and are effective until 18 months after notice of termination is given by either party. Copies of the employment agreements were attached as exhibits to the Form 8-K filed on July 1, 2014.
Leases –
The Company's corporate office is located at 7950 E. Acoma Drive, Suite 111, Scottsdale, Arizona 85260, in an approximately 1,500 square foot facility. At June 30, 2016 the facility was occupied on a month to month basis with monthly payments of $1,800 (including rental tax). Effective August 1, 2016, the month to month payment increased to $1,900 (including rental tax).
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The ten year land lease related to Deer Creek, was effective May 1, 2012 and has two additional ten year option periods that may be activated by AES. The initial terms of the lease requires minimum monthly lease payments of $100 per acre (increasing to $150 and $200 per acre for the second and third ten year option periods, respectively) plus additional royalty payments based upon quantities of produced water received (approximately $0.25 per barrel) at the site. The design and construction of the Deer Creek water disposal facility required certain changes to the Goodwin Solid Waste facility resulting in extra costs to the landlord (owner of Goodwin Solid Waste). As incentive for the landlord to approve the facility design, AES agreed to limit landlord construction improvement costs related to the leased land to $200,000. Included in the $200,000 limited amount was $100,000 of landlord improvement costs to be paid by AES and reimbursed through a 50% credit against the $0.25 per barrel royalty payments due to the landlord. The prepaid royalty expired on August 31, 2015 under terms of the agreement and therefore had a zero balance at June 30, 2016. Under certain circumstances, the acreage covered by the lease may be expanded by up to 50 acres to allow for additional expansion at the site.
Rent expense for the fiscal years ended June 30, 2016 and 2015 were $60
,
500 and $53
,
300, respectively. Future minimum non-contingent payments as of June 30, 2016 are as follows:
FUTURE MINIMUM PAYMENTS
|
FOR THE YEAR ENDED JUNE 30,
|
2017
|
|
$
|
28,600
|
2018
|
|
|
28,600
|
2019
|
|
|
28,600
|
2020
|
|
|
28,600
|
2021
|
|
|
28,600
|
Thereafter
|
|
|
23,900
|
TOTAL
|
|
$
|
166,900
|
Legal Proceedings
–
The Company is a defendant and counterclaimant in litigation involving its subsidiary, TSI Dissolution Corp. (formerly known as Alanco/TSI Prism, Inc.) ("TSI") and the purchaser of TSI's assets, Black Creek Integrated Systems Corp. ("Black Creek"). Black Creek filed a complaint in the Maricopa County Superior Court against TSI and the Company, being Civil Case 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's fees and accrued interest, resulting in a total judgment in the amount of $128,300. At June 30, 2014, the Company recorded an accrued liability of $128,300 for the judgment and had posted a bond with the court in conjunction with the Company's appeal of the judgment. In May 2015, the State of Arizona Division One Court of Appeals vacated the trial court'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's decision vacated the trial court's attorney's fees award and awarded TSI approximately $21,900 of its fees on appeal. At June 30, 2015, the Company reversed the accrual of $128,300 for the prior judgment. Under the court's direction, the Company followed the dispute guidelines defined in the asset purchase agreement which resulted in an award to Black Creek of approximately $13,000. The Company has previously stipulated that it owed Black Creek approximately $9,600 for shared expenses incurred from 2010 - 2011. The court is currently reviewing Black Creek's recent attorney's fees application and the Company's answer to said application. If the court were to grant a fee award to Black Creek, the range could be any amount from zero to the amount applied for, approximately $160,000. The Company vehemently disagrees with Black Creek's attorney's fees claim and believes that its legal defenses in its answer to Black Creek's attorney's fees application will preclude any award and accordingly the Company has not recorded a liability.
The Company may from time to time be involved in litigation arising from the normal course of business. As of June 30, 2016, other than the litigation discussed above, there was no such litigation pending deemed material by the Company.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13.
SHAREHOLDERS' EQUITY
Preferred Shares
– the Company has 25,000,000 authorized no par shares of Preferred Stock of which 5,000,000 have been allocated to Series A, 500,000 have been allocated to Series B, 400,000 have been allocated to Series C Junior Participating
,
500,000 have been allocated to Series D, and 750,000 have been allocated to Series E. As of June 30, 2016 and 2015, no Preferred Stock of any series is issued or outstanding. The Board of Directors is authorized to issue preferred stock in one or more series and denominations and to fix the rights, preferences, privileges, and restrictions, including dividend, conversion, voting, redemption, liquidation rights or preferences, and the number of shares constituting any series and the designation of such series, without any further vote or action by our shareholders.
Common Shares
- The authorized capital stock of the Company consists of 75,000,000 shares of no par Class A Common Stock, each entitled to one vote per share, and 25,000,000 shares of no par Class B Common Stock, each entitled to one-one hundredth (1/100th) of one vote per share. No Class B Common Stock has been issued and none was outstanding at June 30, 2016 and 2015.
During fiscal year ended June 30, 2016, the Company did not issue any shares of Class A Common Stock. The value of stock-based compensation recognized during fiscal year ended June 30, 2016 was $27,800 and $1,100 was recognized for the value of exercisable detachable warrants issued with debt.
During fiscal year ended June 30, 2015, the Company issued 75,000 shares of Class A Common Stock for services valued at $31,500. During the same period, the Company repurchased and retired 55,100 shares for $20,800 resulting in a 55,100 reduction in outstanding shares of Common Stock. The value of stock-based compensation recognized during fiscal year ended June 30, 2015 was $41,800.
During the year ended June 30, 2015, the Company recognized a comprehensive income adjustment in the amount of ($121,200), reported in the Consolidated Statement of Changes in Shareholders' Equity. There was no comprehensive income adjustment during the fiscal year ended June 30, 2016 since all marketable securities were sold in the prior year.
On December 12, 2011 the Company announced that its board of directors had authorized a stock repurchase program whereby the Company could repurchase up to 2 million shares of its outstanding common stock over the next 12 months. The stock repurchase program was extended several times and expired on December 31, 2015. For the year ended June 30, 2015, the Company had repurchases under the program for a total of 55,100 shares at a cost of approximately $20,800, or $0.38 per share.
14. RETIREMENT PLAN
The Company provides a 401(k) retirement plan for its employees. Employees are eligible to participate in the plan on the first of the month following 90 days of continuous employment. Employee salary deferral rates are not restricted by the Company, however, IRS limits and limitations imposed by discrimination tests may affect the allowed salary deferral rate. The Company's 401(k) retirement plan has a Safe Harbor provision which requires all employees receive a 3% match based on gross wages. The Company's matching contributions totaled $6,900 and $12,000 for the years ended June 30, 2016 and 2015, respectively.
15.
LIQUIDITY AND GOING CONCERN
During the fiscal years ended June 30, 2016 and 2015, the Company reported a net loss of ($1,594,800) and ($900,600), respectively and operating loss of ($1,620,900) and ($1,173,800), respectively. Historically, the Company had relied on the liquidation of its investment in Marketable Securities to fund working capital needs. The Company sold all remaining marketable securities during fiscal 2015. These factors raise doubt about the Company's ability to continue as a going concern for the next year. The Company's fiscal 2017 operating plan includes divestiture of the undeveloped AES Indian Mesa site 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
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Company announced it is entering the behavioral health market and the business plan includes the acquisition of behavioral health businesses which requires capital. There is no assurance the Company will 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'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 accompanying consolidated financial statements have been prepared assuming the Company will continue to operate and do not include any adjustment that might be necessary if the Company is unable to continue as a going concern. As a result, the Company's independent registered public accounting firm has included an explanatory paragraph in their audit opinion on the consolidated financial statements of the Company for the fiscal year ended June 30, 2016 discussing the substantial doubt of the Company's ability to continue as a going concern.
16
.
SUBSEQUENT EVENTS
Subsequent to June 30, 2016, ACC and the Company amended the loan agreement by requiring minimum monthly payments of $10,000 per month starting 60 days following implementation of an immigration reform program which allows DAPA or a similar program to be implemented in the United States. In addition, the maturity date was extended to August 31, 2018. All other terms of the note remained the same and all amounts payable were current. The ACC note receivable is fully reserved for as of June 30, 2016.
Subsequent to June 30, 2016, the Company formed Alanco Behavioral Health, Inc. ("ABH"), a wholly-owned subsidiary incorporated in the State of Arizona. The venture will be led by David C. Johnson, President. The Company launched ABH to pursue its business plan to consolidate small cap private behavioral health companies through acquisition. The Company's objective is to create a market leader in behavioral health treatment services helping people and their families while adding value to the Company's shareholders through strong revenue growth and cash flow. On September 23, 2016 the Company executed a Letter of Intent to purchase the operations of Bella Monte Recovery, LLC, its first acquisition in the behavioral health market.
Subsequent to June 30, 2016, the Company received a board resignation notice from Joshua Silverman, effective immediately on the date thereof, September 6, 2016. Mr. Silverman noted the need to fulfill other professional obligations and confirmed there are no disagreements with the Company.
Subsequent to June 30, 2016, the Company drew an additional $200,000 from its line of credit with the Anderson Family Trust resulting in a current balance of $400,000 with $100,000 of remaining available credit.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES