ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
FORM 10-Q

  X  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016

____TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________ to ____________

Commission file number 0-9347

ALANCO TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Arizona
(State or other jurisdiction of incorporation or organization)

86-0220694
(I.R.S. Employer Identification No.)

7950 E. Acoma Drive, Suite 111, Scottsdale, Arizona  85260
(Address of principal executive offices)        (Zip Code)

(480) 607-1010
(Registrant's telephone number)
______________________________________________
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements in the past 90 days.      X  Yes   ___ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   ___ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer
   
Accelerated filer
 
         
Non-accelerated filer
   
Smaller reporting  company
X
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
   
Yes
X
No
 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
As of November 7, 2016 there were 4,982,400 shares of common stock outstanding.

1

ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
INDEX
     
Page
Number
PART I.
FINANCIAL INFORMATION
 
       
 
Item 1.
Financial Statements
 
       
   
Condensed Consolidated Balance Sheets as of September 30, 2016 (Unaudited)
4
     
and June 30, 2016
 
       
   
Condensed Consolidated Statements of Operations (Unaudited)
5
     
For the three months ended September 30, 2016 and 2015
 
       
   
Condensed Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
6
     
For the three months ended September 30, 2016
 
       
   
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
     
For the three months ended September 30, 2016 and 2015
7
       
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
8
   
Note A –
Basis of Presentation, Accounting Policies and Recent Accounting Pronouncements
 
   
Note B –
Stock-Based Compensation and Warrants
 
   
Note C –
Note Receivable – Related Party
 
   
Note D –
Assets Held for Sale and Discontinued Operations
 
   
Note E –
Property and Equipment
 
   
Note F –
Note Payable
 
   
Note G –
Earnings Per Share
 
   
Note H –
Equity
 
   
Note I –
Contingent Payments
 
   
Note J –
Asset Retirement Obligation
 
   
Note K –
Commitments and Contingencies
 
   
Note L –
Related Party Transactions
 
   
Note M –
Subsequent Events
 
   
Note N –
Liquidity and Going Concern
 
       
 
Item 2.
Management's Discussion and Analysis of Financial Condition
 
     
and Results of Operations
18
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
23
       
 
Item 4.
Controls and Procedures
23
     
PART II.
OTHER INFORMATION
 
       
 
Item 1.
Legal Proceedings
23
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
24
       
 
Item 6.
Exhibits
24



2

ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
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 1995Forward-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 profitably run current operations sufficient to cover overhead;  the inability to attract, hire and retain key personnel; 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 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 Quarterly 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.



3

ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS     
 
AS OF SEPTEMBER 30, 2016 AND JUNE 30, 2016     
 
             
   
 
September 30, 2016
   
 
June 30, 2016
 
ASSETS
 
(unaudited)
       
CURRENT ASSETS
           
Cash and cash equivalents
 $
 
9,400
   $
 
139,600
 
Accounts receivable - trade, net
   
200
     
3,900
 
Other receivables - related party
   
2,300
     
2,800
 
Assets held for sale
   
1,653,500
     
1,653,500
 
Prepaid expenses and other current assets
   
63,200
     
47,300
 
Total current assets
   
1,728,600
     
1,847,100
 
                 
PROPERTY AND EQUIPMENT, NET
   
2,065,100
     
2,111,000
 
                 
OTHER ASSETS
               
Trust account - asset retirement obligation
   
90,800
     
86,100
 
TOTAL ASSETS
 $
 
3,884,500
   $
 
4,044,200
 
                 
LIABILITIES AND  SHAREHOLDERS' EQUITY
               
CURRENT LIABILITIES
               
Accounts payable
 $
 
205,200
   $
 
251,400
 
Accrued expenses
   
305,800
     
146,200
 
Note payable, current
   
400,000
     
-
 
Total current liabilities
   
911,000
     
397,600
 
                 
LONG-TERM LIABILITIES
               
Note payable
   
-
     
200,000
 
Contingent payments, long-term
   
677,400
     
672,700
 
Asset retirement obligation
   
434,000
     
434,000
 
TOTAL LIABILITIES
   
2,022,400
     
1,704,300
 
                 
SHAREHOLDERS' EQUITY
               
Preferred Stock - no shares issued or outstanding
   
-
     
-
 
Common Stock
               
Class A - 75,000,000 no par shares authorized, 4,982,400
               
   shares issued and outstanding at September 30, 2016
               
   and June 30, 2016
   
109,190,000
     
109,188,200
 
Accumulated Deficit
   
(107,327,900
)
   
(106,848,300
)
Total shareholders' equity
   
1,862,100
     
2,339,900
 
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 $
 
3,884,500
   $
 
4,044,200
 
                 
See accompanying notes to the condensed consolidated financial statements
 

 



4

ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
FOR THE THREE MONTHS ENDED SEPTEMBER 30, (unaudited)
 
             
   
2016
   
2015
 
             
NET REVENUES
 $
 
3,800
   $
 
114,300
 
Cost of revenues
   
90,400
     
260,400
 
GROSS LOSS
   
(86,600
)
   
(146,100
)
                 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
               
Corporate expenses
   
73,600
     
93,700
 
Alanco Energy Services
   
139,500
     
157,000
 
Stock-based compensation
   
-
     
13,900
 
     
213,100
     
264,600
 
                 
OPERATING LOSS
   
(299,700
)
   
(410,700
)
                 
OTHER INCOME AND (EXPENSE)
               
Interest income
   
7,100
     
7,400
 
Interest expense
   
(11,000
)
   
-
 
LOSS FROM CONTINUING OPERATIONS
   
(303,600
)
   
(403,300
)
                 
DISCONTINUED OPERATIONS
               
Loss from discontinued operations
   
(176,000
)
   
-
 
LOSS FROM DISCONTINUED OPERATIONS
   
(176,000
)
   
-
 
                 
NET LOSS
 $
 
(479,600
)
 $
 
(403,300
)
                 
LOSS PER SHARE - BASIC AND DILUTED
               
Continuing operations
 $
 
(0.06
)
 $
 
(0.08
)
Discontinued operations
 $
 
(0.04
)
 $
 
-
 
Net loss per share
 $
 
(0.10
)
 $
 
(0.08
)
                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED
   
4,982,400
     
4,982,400
 
                 
See accompanying notes to the condensed consolidated financial statements
       
 



 
















5

ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY      
 
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016 (unaudited)         
 
                         
                         
                         
   
COMMON STOCK   
   
ACCUMULATED
       
   
SHARES
   
AMOUNT
   
DEFICIT
   
TOTAL
 
Balances, June 30, 2016
   
4,982,400
   $
 
109,188,200
   $
 
(106,848,300
)
 $
 
2,339,900
 
Value of warrants
   
-
     
1,800
     
-
     
1,800
 
Net loss
   
-
     
-
     
(479,600
)
   
(479,600
)
Balances, September 30, 2016
   
4,982,400
   $
 
109,190,000
   $
 
(107,327,900
)
 $
 
1,862,100
 
                                 
See accompanying notes to the condensed consolidated financial statements
        
 
6

ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
 
FOR THE THREE MONTHS ENDED SEPTEMBER 30, (unaudited)     
 
             
   
2016
   
2015
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
 $
 
(479,600
)
 $
 
(403,300
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
   
45,900
     
46,100
 
Accretion of fair value - contingent payments
   
4,700
     
4,700
 
Stock-based compensation for options
   
-
     
13,900
 
Exercisable warrants issued under note payable to Anderson Family Trust
   
1,800
     
-
 
Changes in operating assets and liabilities:
               
Accounts receivable - trade
   
3,700
     
(8,800
)
Other receivables - related party
   
500
     
(2,400
)
Prepaid expenses and other current assets
   
(15,900
)
   
131,300
 
Trust account - asset retirement obligation
   
(4,700
)
   
(4,700
)
Accounts payable and accrued expenses
   
113,400
     
(57,100
)
Net cash used in operating activities
   
(330,200
)
   
(280,300
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from repayment of American Citizenship Center, LLC note receivable
   
-
     
17,200
 
Purchase of land, property, and equipment
   
-
     
(600
)
Net cash provided by investing activities
   
-
     
16,600
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from note payable to Anderson Family Trust
   
200,000
     
-
 
Net cash provided by financing activities
   
200,000
     
-
 
                 
NET DECREASE IN CASH AND CASH EQUIVALENTS
   
(130,200
)
   
(263,700
)
                 
CASH AND CASH EQUIVALENTS, beginning of period
   
139,600
     
788,900
 
                 
CASH AND CASH EQUIVALENTS, end of period
 $
 
9,400
   $
 
525,200
 
                 
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
               
Non-cash investing & financing activities:
               
Value of exercisable warrants issued under note payable to Anderson Family Trust
 $
 
1,800
   $
 
-
 
Value of stock-based compensation for options
 $
 
-
   $
 
13,900
 
                 
See accompanying notes to the condensed consolidated financial statements       
 
7

ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note A – Basis of Presentation, Accounting Policies and Recent Accounting Pronouncements

Nature of Operations

Alanco Technologies, Inc. (OTCQB:  ALAN) was incorporated in 1969 under the laws of the State of Arizona.  Unless otherwise noted, the "Company" or "Alanco" refers to Alanco Technologies, Inc. and its wholly-owned subsidiaries.  The Company's subsidiary, Alanco Energy Services, Inc. ("AES"), operates a water disposal facility near Grand Junction, CO to receive and dispose of produced water generated as a byproduct from oil and natural gas production in Western Colorado.  During the fiscal year 2016, the Company implemented a plan to divest of its 160 acre owned and undeveloped land and associated permits located near its water disposal facility and known as Indian Mesa.  Refer to Note D - Assets Held for Sale and Discontinued Operations for further discussion.

During the current quarter, 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 planned acquisition in the behavioral health market.  The Company is in the process of performing due diligence with a target closing date of December 1, 2016.

Basis of Presentation

The unaudited condensed consolidated financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and in accordance with the instructions to Form 10-Q.  Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted.  In our opinion, the accompanying condensed consolidated financial statements include all adjustments necessary for a fair presentation of such condensed consolidated financial statements.  Such necessary adjustments consist of normal recurring items and the elimination of all significant intercompany balances and transactions.

The condensed consolidated balance sheet as of June 30, 2016 was derived from audited financial statements, but does not include all disclosures required by GAAP.  These interim condensed consolidated financial statements should be read in conjunction with the  Company's June 30, 2016 Annual Report filed on Form 10-K.  Interim results are not necessarily indicative of results for a full year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.

Fair Value of Assets and Liabilities – The estimated fair values for assets and liabilities are determined at discrete points in time based on relevant information. The Accounting Standards Codification ("ASC") prioritizes inputs used in measuring fair value into a hierarchy of three levels: Level 1 – unadjusted quoted prices for identical assets or liabilities traded in active markets, Level 2 – observable inputs other than quoted prices included within Level 1 such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability; and Level 3 – unobservable inputs in which little or no market activity exists that are significant to the fair value of the assets or liabilities, therefore requiring an entity to develop its own assumptions that market participants would use in pricing.  These estimates involve uncertainties and cannot be determined with precision. The Company's policy is to recognize transfers into and out of Level 1, 2 and 3 categories as of the date of the event or change in circumstances occurs. The carrying amounts of receivables, prepaid expenses, trust account, accounts payable, accrued liabilities and note payable approximate fair value given their short-term nature or their effective interest rates, which represent Level 3 input levels.
 
8

ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
 
The following are the classes of assets and liabilities measured at fair value on a recurring basis at September 30, 2016 and June 30, 2016, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):
 
Fair Value at September 30, 2016           
 
                         
   
Level 1:
                   
   
Quoted Prices
   
Level 2:
             
   
in active
   
Significant
   
Level 3:
   
Total
 
   
Markets
   
Other
   
Significant
   
at
 
   
for Identical
   
Observable
   
Unobservable
   
September 30,
 
   
Assets
   
Inputs
   
Inputs
   
2016
 
Asset Retirement Obligation
 $
 
-
   $
 
-
   $
 
434,000
   $
 
434,000
 
Contigent Land Payment
   
-
     
-
     
677,400
     
677,400
 
   $
 
-
   $
 
-
   $
 
1,111,400
   $
 
1,111,400
 

 
Fair Value at June 30, 2016
 
                         
   
Level 1:
                   
   
Quoted Prices
   
Level 2:
             
   
in active
   
Significant
   
Level 3:
   
Total
 
   
Markets
   
Other
   
Significant
   
at
 
   
for Identical
   
Observable
   
Unobservable
   
September 30,
 
   
Assets
   
Inputs
   
Inputs
   
2016
 
Asset Retirement Obligation
$
 
-
  $
 
-
  $
 
434,000
  $
 
434,000
 
Contigent Land Payment
   
-
     
-
     
672,700
     
672,700
 
  $
 
-
  $
 
-
  $
 
1,106,700
  $
 
1,106,700
 

    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 quarter ended September 30, 2016.

   
Asset
   
Contingent
       
   
Retirement
   
Land
       
   
Obligation
   
Payment
   
Total
 
Opening balance
 $
 
434,000
   $
 
672,700
   $
 
1,106,700
 
Accretion expense
   
-
     
4,700
     
4,700
 
Closing balance
 $
 
434,000
   $
 
677,400
   $
 
1,111,400
 
 
Fair Value of Asset Retirement ObligationThe Deer Creek asset retirement obligation is the estimated cost to close the Deer Creek facility under terms of the lease, meeting environmental and State of Colorado regulatory requirements.  The estimate is determined at discrete points in time based upon significant unobservable inputs in which little or no market activity exists that is significant to the fair value of the liability, therefore requiring the Company to develop its own assumptions.  Management's estimate of the asset retirement obligation is based upon a cost estimate developed by a consultant knowledgeable of government closure requirements and costs incurred at similar water disposal facility operations. A present value discount has not been taken as the estimated closure costs, excluding regulatory changes and inflation adjustments, are anticipated to remain fairly consistent over the operational life of the facility. The lack of an active market to validate the estimated asset retirement obligation results in the fair value of the asset retirement obligation to be a Level 3 fair value measurement. ASC Topic 410-20: Asset Retirement Obligations requires the Company to review the asset retirement obligation on a recurring basis and record changes in the period incurred.
 
9

ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
 
Fair Value of Contingent Payments – The contingent land payment liability is also determined at discrete points in time based upon unobservable inputs in which little or no market activity exists that is significant to the fair value of the liability, therefore requiring the Company to develop its own assumptions.  In calculating the estimate of fair value for the contingent land payment, management completed an estimate of the present value of the contingent liability based upon projected income, cash flows and capital expenditures for the Deer Creek facility developed under plans currently approved by the Company's board of directors.  Different assumptions relative to the expansion or alternative uses of the Deer Creek and Indian Mesa facilities could result in significantly different valuations.  The projected payments have been discounted at a rate of 3% per annum to determine net present value.  The lack of an active market to validate the estimated contingent land liability results in the fair value of the contingent land liability to be a Level 3 fair value measurement.  ASC Topic 820: Fair Value Measurement requires the Company to review the contingent land liability on a recurring basis and record changes in the period incurred.

Assets Held for Sale – 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.  As a result, the value of the land and associated permits has been classified as Assets Held for Sale at September 30, 2016.  A long-lived asset classified as held for sale shall be measured at the lower of its carrying amount or fair value less cost to sell.  The value of Assets Held for Sale represents the carrying amount.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("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 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.
 
10

ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

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.

In August 2016, the FASB issued guidance regarding the classification of certain cash receipts and cash payments in the statement of cash flows.  The guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those years.  Early adoption is permitted provided that all amendments are adopted in the same period.  The Company has adopted the guidance, which had no material impact on its financial position, results of operations or presentation of the statement of cash flows.

There have been no other recent accounting pronouncements or changes in accounting pronouncements during the three months ended September 30, 2016, that are of significance, or potential significance, to us.

Note B – Stock-Based Compensation and Warrants

The Company has stock-based compensation plans and reports stock-based compensation expense for all stock-based compensation awards based on the estimated grant date fair value.  The value of the compensation cost is amortized on a straight-line basis over the requisite service periods of the award (generally the option vesting term).

The Company estimates fair value using the Black-Scholes valuation model.  Assumptions used to estimate compensation expense are determined as follows:

·
Expected term is determined under the simplified method using an average of the contractual term and vesting period of the award as appropriate statistical data required to properly estimate the expected term was not available;

·
Expected volatility of award grants made under the Company's plans is measured using the historical daily changes in the market price of the Company's common stock over the expected term of the award and contemplation of future activity;

·
Risk-free interest rate is the implied yield on zero-coupon U.S. Treasury bonds with a remaining maturity equal to the expected term of the awards; and,

·
Forfeitures are based on the history of cancellations of awards granted by the Company and management's analysis of potential future forfeitures.

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 and are more fully discussed in our Form 10-K for the year ended June 30, 2016.

The following table summarizes the Company's stock option activity during the first three months of fiscal 2017:



11

ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

                   
Weighted
             
             
Weighted
   
Average
             
             
Average
   
Remaining
   
Aggregate
   
Aggregate
 
             
Exercise Price
   
Contractual
   
Fair
   
Intrinsic
 
        
Shares
   
Per Share
   
Term (1)
   
Value (3)
   
Value (2)
 
                                   
Outstanding July 1, 2016
   
1,200,000
   
$
0.58
     
2.03
   
$
273,500
   
$
-
 
   
Granted
   
-
     
-
     
-
     
-
     
-
 
   
Exercised
   
-
     
-
     
-
     
-
     
-
 
   
Forfeited or expired
   
-
     
-
     
-
     
-
     
-
 
Outstanding September 30, 2016
   
1,200,000
   
$
0.58
     
1.78
   
$
273,500
   
$
-
 
Exercisable September 30, 2016
   
1,200,000
   
$
0.58
     
1.78
   
$
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 September 30, 2016, for those awards that
         
     
have an exercise price currently below the closing price as of September 30, 2016 of $0.18.
                 
 
(3
)
Aggregate Fair Value is calculated using the Black Scholes option pricing model to estimate fair value of stock-based
         
     
compensation on the date of grant.
                                       
 
 
As of September 30, 2016, there was no unamortized Black Scholes value remaining to be recognized as stock-based compensation expense.

As of September 30, 2016, the Company had 140,000 outstanding warrants.  The following table summarizes the Company's warrant activity during the quarter ended September 30, 2016:
 
   
 
Warrants Outstanding  
   
 
Warrants Exercisable
 
         
Weighted
         
Weighted
 
   
Number of
   
Average
   
Number of
   
Average
 
   
Shares
   
Exercise Price
   
Shares
   
Exercise Price
 
Warrants Outstanding, July 1, 2016
   
140,000
   $
 
0.75
     
20,000
   $
 
0.75
 
Granted
   
-
     
-
     
-
     
-
 
Previously Granted, Vested
   
-
     
-
     
30,000
     
0.75
 
Exercised
   
-
     
-
     
-
     
-
 
Canceled/Expired
   
-
     
-
     
-
     
-
 
Warrants Outstanding, September 30, 2016
   
140,000
   $
 
0.75
     
50,000
   $
 
0.75
 
 
 
Note C – Note Receivable – Related Party

Note receivable at September 30, 2016 and June 30, 2016 represents a note due from American Citizenship Center, LLC ("ACC"), a related party.  Note receivable at September 30, 2016 and June 30, 2016 consists of the following:



12

ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

   
September 30,
   
June 30,
 
   
2016
   
2016
 
Note receivable, gross
 $
 
295,400
   $
 
295,400
 
Accounting and loan fees reversed against deferred income
   
(29,000
)
   
(29,000
)
Less reserve
   
(266,400
)
   
(266,400
)
Note receivable, net
 $
 
-
   $
 
-
 

The gross balance of $295,400 at September 30, 2016 and June 30, 2016 represents the outstanding amount drawn by ACC on a $295,400 credit line provided by the Company.  The note is secured by all assets of ACC and bears interest at the rate of 9.5% per annum.  Interest of $2,300 is unpaid at September 30, 2016.

ACC's business plan is based on the Executive Action, known as DAPA, issued by President Obama in November 2014.  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 5th 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.  Due to the uncertainty of the court case and overall immigration reform, the Company has fully reserved for the amount of the note as of September 30, 2016 and June 30, 2016.

Note D – Assets Held for Sale and Discontinued Operations

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 condensed consolidated balance sheet as of September 30, 2016 and June 30, 2016 represents the Indian Mesa land and associated permits.  The classification 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 discontinued operations.

During the quarter ended September 30, 2016, the Company recorded a loss from discontinued operations in the amount of $176,000 which represents an accrual related to the judgment received from litigation whereby the Company is a defendant and counterclaimant involving the Company's former subsidiary known as Alanco/TSI Prism, Inc. ("TSI") and the purchaser of TSI's assets, Black Creek Systems Corp. ("Black Creek").  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 judgment.  The case is more fully described in Note K – Commitments and Contingencies.

Note E – Property and Equipment

Property and Equipment, net, at September 30, 2016 and June 30, 2016 consist of the following:


13

ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
 
                   
   
June 30, 2016
   
Additions
   
September 30, 2016
 
Office furniture and equipment
 $
 
51,300
   $
 
-
   $
 
51,300
 
Water disposal facility
   
2,220,900
     
-
     
2,220,900
 
Production equipment
   
514,400
     
-
     
514,400
 
     
2,786,600
     
-
     
2,786,600
 
Less accumulation depreciation
   
(675,600
)
   
(45,900
)
   
(721,500
)
  Net book value
 $
 
2,111,000
   $
 
(45,900
)
 $
 
2,065,100
 

Note F – Note Payable

Note payable at September 30, 2016 and June 30, 2016 consists of the following:
 
   
September 30,
   
June 30,
 
   
2016
   
2016
 
Note payable
 $
 
400,000
   $
 
200,000
 
   Less current
   
(400,000
)
   
-
 
Note payable, long-term
 $
 
-
   $
 
200,000
 

 
At September 30, 2016, the Note Payable balance of $400,000 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 September 30, 2016, the line of credit has an available balance of $100,000.  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 each month thereafter..  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 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.

During the three months ended September 30, 2016, the Company expensed approximately $5,500, in interest related to the note, approximately $3,600 related to amortization of deferred loan costs, and approximately $1,800 related to the value of 30,000 warrants which vested during the current quarter.  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.

Note G – Earnings Per Share

Basic and diluted loss per share of common stock was computed by dividing net loss, loss from continuing operations and loss from discontinued operations by the weighted average number of shares of common stock outstanding.

Diluted earnings per share are computed based on the weighted average number of shares of common stock and dilutive securities outstanding during the period.  Dilutive securities are any options, warrants, convertible debt, and preferred stock that are freely exercisable into common stock at less than the prevailing market price.  Dilutive securities are not included in the weighted average number of shares when inclusion would increase the earnings per share or decrease the loss per share. For the three months ended September 30, 2016 and 2015, there were no dilutive securities included in the loss per share calculation as the effect would be antidilutive.  Considering all holders' rights, total common stock equivalents issuable under these potentially dilutive securities are approximately 1,340,000 and 1,200,000 at September 30, 2016 and 2015, respectively.

14

ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
 
Note H – Equity

The Company did not issue any shares of Common Stock during the three months ended September 30, 2016.

During the three months ended September 30, 2016, the Company recognized the value of exercisable detachable warrants issued with debt in the amount of $1,800.

The Company has authorized 25,000,000 shares of Preferred Stock of which 5,000,000 shares 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.  At September 30, 2016 and June 30, 2016, no Preferred Stock of any series was issued or outstanding.

Note I - Contingent Payments

Contingent payments at September 30, 2016 and June 30, 2016 are as follows:

   
September 30,
   
June 30,
 
   
2016
   
2016
 
Contingent land payment
 $
 
677,400
   $
 
672,700
 
         Less current portion
   
-
     
-
 
Contingent payments, long-term
 $
 
677,400
   $
 
672,700
 

Contingent land payment of $677,400 at September 30, 2016 represents the net present value of $800,000 of estimated 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 current operating plans as approved by the Alanco Board of Directors, with the payments discounted at a rate of 3% per annum.  Accretion expense is being imputed at 3% per annum, increasing the fair value of the contingent land payment during the three months ended September 30, 2016 by $4,700.  During the three months ended September 30, 2016, no contingent land payment was earned or payable under the contingency formula.  The contingent land payment is an obligation of the Company which will not be transferred to the buyer of the Indian Mesa land and associated permits discussed in Note D - Assets Held for Sale and Discontinued Operations.  The Company will maintain the liability for contingent payments resulting from future revenues on the Indian Mesa land resulting from the buyer's operations.

The Company also has a contingent purchase price liability with TC Operating, LLC ("TCO") under the original agreement executed in April 2012 which transferred the Deer Creek facility land lease to the Company.  TCO can 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 September 30, 2016 and June 30, 2016, the Company had no liability recorded for the contingent purchase price based on the probability of the contingent payment being realized.


15

ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

Note J – Asset Retirement Obligation

The Company has recognized estimated asset retirement obligations (closure cost) of $434,000 at September 30, 2016 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 closure cost estimate, in 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.  A present value discount has not been taken as the estimated closure costs, excluding regulatory changes and inflation adjustments, are anticipated to remain fairly consistent over the operational life of the facility.

The Company reviews the asset retirement obligation quarterly and performs a formal annual assessment of its estimates to determine if an adjustment to the value of the asset retirement obligation is required.

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 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.  During the three months ended September 30, 2016, the Company made the required quarterly payments.  The balances in the trust account for the asset retirement obligation as of September 30, 2016 and June 30, 2016 were $90,800 and $86,100, respectively.

Note K – Commitments and Contingencies

Legal Proceedings

The Company is a defendant and counterclaimant in litigation involving its former subsidiary 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.  In October 2016, the court 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 amount of approximately $22,600 plus interest, results in a potential liability to the Company of approximately $176,000 which has been accrued at September 30, 2016 and reported as a loss from discontinued operations in the current quarter.  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 judgment.


16

ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

The Company may from time to time be involved in litigation arising from the normal course of business.  As of September 30, 2016, other than the litigation discussed above, there was no such litigation pending deemed material by the Company.

Note L – Related Party Transactions

At September 30, 2016 and June 30, 2016, the Company had a note due from American Citizenship Center, LLC ("ACC"), a related party, with a gross balance of $295,400 which has been fully reserved.  During the current quarter, the Company billed ACC a total of approximately $7,100 for interest of which $2,300 is unpaid at September 30, 2016.

At September 30, 2016 and June 30, 2016, the Company had accrued board fees in the total amount of $28,000 and $14,000, respectively.

At September 30, 2016 and June 30, 2016, the Company had accrued deferred compensation of $58,400 payable to John Carlson, the Company's Chief Executive Officer and a Director of the Company.

Note M – Subsequent Events

Subsequent to September 30, 2016, the Company drew an additional $100,000 from its line of credit with the Anderson Family Trust resulting in a current balance of $500,000, the full amount of the credit line.

Note N – Liquidity and Going Concern

             During the three months ended September 30, 2016, the Company reported a net loss of ($479,600) and for fiscal year ended June 30, 2016, the Company reported a net loss of ($1,594,800).  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 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 condensed 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.






17

ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES

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 1995Forward-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 profitably run current operations sufficient to cover overhead;  the inability to attract, hire and retain key personnel; 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 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 Quarterly 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.

Current Status of Deer Creek facility

The Deer Creek produced water disposal facility, located near Grand Junction, CO, became operational in August 2012 with annual evaporative capacity of approximately 300,000 barrels without using enhanced evaporation methods, providing some Piceance Basin producers with significant transportation cost savings compared to alternative water disposal sites.  Water deliveries have been negatively impacted by the falling market prices of oil and gas which significantly reduced drilling activities and fracking in the region and resulted in the temporary closing of many of the producing oil and gas wells in the area.  The Company is continuing to analyze options to monetize current and future operations of Deer Creek.

Current Status of Indian Mesa facility

The permitting process for the Indian Mesa facility, located approximately 4 miles North West of the Deer Creek site, has been in process for a number of years with an initial County Use Permit issued in 2010 covering, among other things, evaporation ponds and land farming.  In December 2013, in response to an AES request to amend its County User Permit ("CUP"), the Mesa County Board of Commissioners unanimously approved a new CUP for AES to construct and operate on its 160 acre Indian Mesa site evaporation ponds and/or landfill for disposal of solid oil and gas (O&G) waste, such as drill cuttings, tank bottoms, sock filters, etc.  The county approval also allows for solid and produced water disposal of Naturally-Occurring Radioactive Materials (NORM) and Technically Enhanced Naturally-Occurring Radioactive Materials (TENORM), and is in the permitting process with the State of Colorado.  In June 2014 AES received final construction approval from the Colorado Department of Public Health and Environment (CDPHE) for twelve produced water disposal ponds.

18

ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES

The capacity of Indian Mesa is dependent on its type of development.  If 80 acres is developed as 12 ponds as discussed above, the annual capacity at Indian Mesa for produced water, not considering enhanced evaporation, would be approximately 1 million barrels.  If the remaining 80 acres were developed into landfills, the capacity would be approximately 3 million cubic yards.  If the entire 160 acres were developed into landfill, the solid waste capacity would increase to approximately 8 million cubic yards.  Complete build-out of its Indian Mesa facility, including both landfill and evaporative ponds, would result in a unique Western Colorado "one stop shop" for all O&G waste products, including NORM and TENORM contaminated waste streams.  During fiscal year 2016, Alanco's Board of Directors approved a formal plan to sell Indian Mesa, consisting of land and associated permits.  Accordingly, the land and associated permit costs are being presented as "Assets Held for Sale" in the attached condensed consolidated balance sheet as of September 30, 2016 and June 30, 2016.

Alanco Behavioral Health, Inc.

During the current quarter, 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 of ABH.  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 planned acquisition in the behavioral health market.  The Company is in the process of performing due diligence with a target closing date by the end of the calendar year.

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 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 value of fixed assets, the recorded values of accruals and contingencies, 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.  We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances.  The result of these estimates and judgments form the basis for making conclusions about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may materially differ from these estimates under different assumptions or conditions.

The SEC suggests that all registrants discuss their most "critical accounting policies" in Management's Discussion and Analysis.  A critical accounting policy is one which is both important to the portrayal of the Company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  Management has identified the critical accounting policies as those accounting policies that affect its more significant judgments and estimates in the preparation of its consolidated financial statements.  The Company's Audit Committee has reviewed and approved the critical accounting policies identified.  These policies include, but are not limited to, revenue recognition, estimated useful lives and carrying value of fixed assets, classification of assets as held for sale, the recorded values of accruals and fair values of assets and liabilities including the Company's contingent liabilities.

19

ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
Revenue Recognition
The Company uses four factors to determine the appropriate timing of revenue recognition.  Three of these factors are generally factual considerations that are not subject to material estimates (evidence of an arrangement exists, the service has been performed and the fee is determinable).  The fourth factor includes judgment regarding the collectability of the sales price.  The Company's written arrangement with customers establishes payment terms and the Company only enters into arrangements when it has reasonable assurance that it will receive payment from the customer.  The assessment of a customer's credit-worthiness is reliant on management's judgment on factors such as credit references and market reputation.  If any sales are made that become uncollectible, the Company establishes a reserve for the uncollectible amount.  Any sales tax for which the Company is responsible is recorded as a reduction of the associated revenue.

Estimated Useful Lives and Carrying Value of Fixed Assets
The Company values fixed assets based on cost and depreciates fixed assets based on estimated useful lives using the straight-line method, generally over a 3 to 20 year period.  Expenditures for ordinary maintenance and repairs are expensed as incurred.  Upon retirement or disposal of assets, the cost and accumulated depreciation are eliminated and a gain or loss is recorded in the statement of operations.  The Company analyzes the carrying value of fixed assets by reviewing income projections and undiscounted cash flows which include assumptions based on current market conditions for anticipated revenues and expenses.  These assumptions are reasonably likely to change in the future based on changing markets, which may have a material effect on the carrying value or useful life.

Classification of Assets as Held for Sale
The Company reclassifies assets as held for sale based on meeting the criteria for the classification including approval of a formal plan to sell assets by the Company's Board of Directors.  During the quarter ended March 31, 2016, the Board of Directors approved a formal plan to sell the land and associated permits and therefore the Company has classified the assets as Assets Held for Sale.  The Company is using an investment banker to represent the Company in the sale of these assets and expects the sale to occur within six months.

Recorded Values of Accruals
The Company makes accruals for contingent liabilities based on reasonable estimates for known or anticipated obligations.  Estimates may be based on known inputs, experience with similar situations, or anticipated outcomes.  Estimates for the Company's asset retirement obligation, contingent  land and purchase price liabilities are determined at discrete points in time based upon unobservable inputs in which little or no market activity exists that is significant to the fair value of the liability, therefore requiring the Company to develop its own assumptions.  Estimates for the asset retirement obligation were developed by a consultant knowledgeable about the State of Colorado regulatory requirements and use vendor estimates for the various activities required for the closure of the Deer Creek facility.  Estimates for the contingent land and purchase price liabilities were determined based on projected income, cash flows and capital expenditures for the Deer Creek and Indian Mesa facilities under current plans.

Fair Values of Assets and Liabilities
The Company estimates fair values for assets and liabilities at certain points in time based on information known at that time using the Accounting Standards Codification ("ASC") and recognizes transfers as they occur.  The ASC uses a three level hierarchy:  Level 1 – unadjusted quoted prices for identical assets or liabilities traded in active markets, Level 2 – observable inputs, other than quoted prices included with Level 1, and Level 3 – unobservable inputs in which little or no market activity exists that are significant to the fair value.  The asset retirement obligation and contingent payments discussed above use Level 3 inputs.

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 September 30, 2016 versus three months ended September 30, 2015

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ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES

Net Revenues
Net revenues reported for the quarter ended September 30, 2016 were $3,800 versus $114,300 for the quarter ended September 30, 2015, a decrease of $110,500, or 96.7%.  Revenues are comprised of produced water delivery fees and sales of reclaimed oil (net of associated taxes).  Revenues were negatively impacted by the falling market prices of oil and gas which significantly reduced drilling activities and fracking in the region and resulted in the temporary closing of many of the producing oil and gas wells in the area.  The Company anticipates the revenues will return as oil and gas prices improve.

Cost of Revenues
Cost of revenues for the three months ended September 30, 2016 and 2015 were $90,400 and $260,400, respectively, a decrease of $170,000 or 65.3% when comparing the 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 pond maintenance costs in the current period as well as decreases in variable costs resulting from decreased revenues such as fees tied to water volumes.  Fixed costs such as depreciation, amortization and lease costs represent approximately 68.6% and 22.7% of the cost of revenues for three months ended September 30, 2016 and 2015, respectively.  The gross loss for the three months ended September 30, 2016 and 2015 were ($86,600) and ($146,100), respectively.  The decrease in gross loss between the two periods is primarily the result of decreased pond maintenance costs in the current quarter.

Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended September 30, 2016 (consisting of corporate expenses, AES selling, general and administrative expense and stock-based compensation) was $213,100, a decrease of $51,500, or 19.5%, compared to $264,600 reported for the quarter ended September 30, 2015.  Corporate expenses for the current quarter was $73,600 and represented a decrease of $20,100, or 21.5%, compared to corporate expenses of $93,700 reported for the comparable quarter ended September 30, 2015.  The net decrease is primarily comprised of reductions to professional services offset by costs related to corporate development for activities related to the Alanco Behavioral Health, Inc. subsidiary.  AES expense of $139,500 for the quarter ended September 30, 2016 compared to $157,000 for the quarter ended September 30, 2015 reflects a decrease of $17,500 or 11.1% when comparing the two periods and primarily reflects a decrease in the management fees for the operations of the Deer Creek facility.  Stock-based compensation was $0 for the quarter ended September 30, 2016, a decrease of $13,900, or 100%, compared to $13,900 reported for the quarter ended September 30, 2015.

Operating Loss
Operating loss for the quarter ended September 30, 2016 was ($299,700), a decrease of $111,000, or 27.0%, compared to an operating loss of ($410,700) reported for the same quarter of the prior year.  The decreased operating loss resulted from the reduced gross loss combined with the reduced selling, general and administrative expenses during the current quarter as compared to the same quarter of the previous year as discussed above.

Other Income and Expense
Interest income for the quarter ended September 30, 2016 was $7,100, a decrease of $300, or 4.1%, when compared to interest income of $7,400 for the quarter ended September 30, 2015.

Interest expense for the quarter ended September 30, 2016 was $11,000.  There was no interest expense for the quarter ended September 30, 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 quarter ended September 30, 2016 was ($303,600), a decrease of $99,700, or 24.7%, compared to an operating loss of ($403,300) reported for the same quarter of the prior year.  The decreased loss from continuing operations resulted from the reduced gross loss combined with the reduced selling, general and administrative expense, offset by an increase to interest expense during the current quarter as compared to the same quarter of the previous year.

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ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
Loss From Discontinued Operations
During the quarter ended September 30, 2016, the Company recorded an accrual of $176,000 related to the judgment received from litigation whereby the Company is a defendant and counterclaimant involving the Company's former subsidiary known Alanco/TSI PRISM, Inc. ("TSI") and the purchaser of TSI's assets, Black Creek Systems Corp.

Net Loss
Net loss for the quarter ended September 30, 2016 amounted to ($479,600), or ($.10) per share, compared to net loss of ($403,300), or ($.08) per share, in the comparable quarter of the prior year for reasons previously discussed.

Liquidity and Capital Resources

The Company's current assets at September 30, 2016 exceeded current liabilities by $817,600, resulting in a current ratio of 1.9 to 1.  At June 30, 2016, current assets exceeded current liabilities by $1,449,500 reflecting a current ratio of 4.6 to 1.  The reduction in net current assets at September 30, 2016 versus June 30, 2016 was due primarily to a reduction in cash balances and an increase to accrued expenses and short-term note payable.

Cash used in operations for the three month period ended September 30, 2016 was ($330,200), an increase of $49,900, or 17.8% compared to ($280,300) reported for the same period of the prior year.  The increase in net cash used in operations for the three months ended September 30, 2016 was due primarily to a decrease in prepaid expenses and other assets, offset by an increase in accounts payable and accrued expenses as compared to the same period of the prior year.

 There was no cash provided or used by investing activities for the three month period ended September 30, 2016.  During the three month period ended September 30, 2015, cash provided by investing activities was $16,600 and represented proceeds provided by repayments of the note receivable in the amount of $17,200 offset by the purchase of land, property and equipment in the amount of $600.

Cash provided by financing activities was $200,000 for the three month period ended September 30, 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 three month period ended September 30, 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 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 adjustments 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 included an explanatory paragraph regarding an uncertainty about the Company'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, 2016 which is further discussed in the Company's Form 10-K for that period.

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ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
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's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company'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's Chief Executive Officer and its Chief Financial Officer concluded that, as of September 30, 2016, the Company'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'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 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.  In October 2016, the court 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 amount of approximately $22,600 plus interest, results in a potential liability to the Company of approximately $176,000 which has been accrued at September 30, 2016 and reported as a loss from discontinued operations in the current quarter.  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 judgment.

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ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
The Company may from time to time be involved in litigation arising from the normal course of business.  As of September 30, 2016, there was no such litigation pending deemed material by the Company.

Item 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three months ended September 30, 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)  
 
By:
/s/ Danielle L. Haney  
    Danielle L. Haney  
    Chief Financial Officer  
     Alanco Technologies, Inc.  

November 14, 2016
24