6f37e88b87ba48b

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended October 31, 2013

 

 

( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                      to                                          

 

Commission file number 000-19608

ARI Network Services, Inc.

(Exact name of registrant as specified in its charter)

 

WISCONSIN       39-1388360

(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)

 

10850 West Park Place, Suite 1200, Milwaukee, Wisconsin  53224

(Address of principal executive offices)

(414) 973-4300

(Registrant's telephone number, including area code)

 

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 for the past 90 days.

YESüNO

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (S232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YESüNO

 

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 filerAccelerated filer

Non-accelerated filerSmaller reporting companyü

(Do not check if a smaller reporting

reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YESNOü

 

As of December 9, 2013 there were  13,131,588 shares of the registrant’s common stock outstanding.

 


 

 

ARI Network Services, Inc.

 

FORM 10-Q

FOR THE THREE MONTHS ENDED OCTOBER 31, 2013

INDEX

 

 

 

 

 

 

TABLE OF CONTENTS

 

 

 

 

 

PART I

FINANCIAL INFORMATION

Page

 

 

 

 

 

 

Item 1

 

Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of October 31, 2013 (unaudited) and July 31, 2013

3

 

 

 

 

 

 

 

 

Consolidated Statements of Income (unaudited) for the three months ended

5

 

 

 

October 31, 2013 and 2012

 

 

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive  Income (unaudited) for the three

5

 

 

 

months ended October 31, 2013 and 2012

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the three months ended

6

 

 

 

October 31, 2013 and 2012

 

 

 

 

 

 

 

 

 

Notes to the Unaudited Consolidated Financial Statements

7

 

 

 

 

 

 

Item 2

 

Management's Discussion and Analysis of Financial Condition and Results

23

 

 

 

of Operations

 

 

 

 

 

 

 

Item 3

 

Quantitative and Qualitative Disclosures about Market Risk

34

 

 

 

 

 

 

Item 4

 

Controls and Procedures

34

 

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1

 

Legal Proceedings

35

 

 

 

 

 

 

Item 1A

 

Risk Factors

35

 

 

 

 

 

 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

35

 

 

 

 

 

 

Item 3

 

Defaults upon Senior Securities

35

 

 

 

 

 

 

Item 4

 

Mine Safety Disclosures

35

 

 

 

 

 

 

Item 5

 

Other Information

35

 

 

 

 

 

 

Item 6

 

Exhibits

35

 

 

 

 

 

 

 

 

Signatures

37

 

 

Page 2


 

 

Item  1. Financial Statements    

 

 

 

 

 

 

 

 

 

 

 

 

ARI Network Services, Inc.

 

 

Consolidated Balance Sheets

 

 

(Dollars in Thousands, Except per Share Data)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

October 31

 

July 31

 

 

 

 

2013

 

2013

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,121 

 

$

2,195 

 

 

Trade receivables, less allowance for doubtful accounts of $227

 

 

 

 

 

 

 

 

  and $220 at October 31, 2013 and July 31, 2013, respectively

 

 

1,369 

 

 

945 

 

 

Work in process

 

 

117 

 

 

154 

 

 

Prepaid expenses and other

 

 

819 

 

 

934 

 

 

Deferred income taxes

 

 

2,817 

 

 

2,938 

 

 

Total current assets

 

 

6,243 

 

 

7,166 

 

 

Equipment and leasehold improvements:

 

 

 

 

 

 

 

 

Computer equipment and software for internal use

 

 

2,752 

 

 

2,641 

 

 

Leasehold improvements

 

 

612 

 

 

609 

 

 

Furniture and equipment

 

 

2,636 

 

 

2,561 

 

 

 

 

 

6,000 

 

 

5,811 

 

 

Less accumulated depreciation and amortization

 

 

4,125 

 

 

3,948 

 

 

Net equipment and leasehold improvements

 

 

1,875 

 

 

1,863 

 

 

Capitalized software product costs:

 

 

 

 

 

 

 

 

Amounts capitalized for software product costs

 

 

21,362 

 

 

20,814 

 

 

Less accumulated amortization

 

 

17,048 

 

 

16,604 

 

 

Net capitalized software product costs

 

 

4,314 

 

 

4,210 

 

 

Deferred income taxes

 

 

3,451 

 

 

3,451 

 

 

Other long term assets

 

 

120 

 

 

141 

 

 

Other intangible assets

 

 

3,949 

 

 

4,099 

 

 

Goodwill

 

 

12,198 

 

 

12,198 

 

 

Total assets

 

$

32,150 

 

$

33,128 

 

 

 

 

 

Page 3


 

 

 

 

 

 

 

 

 

 

 

 

 

 

ARI Network Services, Inc.

 

 

Consolidated Balance Sheets

 

 

(Dollars in Thousands, Except per Share Data)

 

 

(Unaudited)

 

 

 

October 31

 

July 31

 

 

 

 

2013

 

2013

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

506 

 

$

450 

 

 

Current portion of contingent liabilities

 

 

318 

 

 

303 

 

 

Accounts payable

 

 

553 

 

 

710 

 

 

Deferred revenue

 

 

7,933 

 

 

8,571 

 

 

Accrued payroll and related liabilities

 

 

1,295 

 

 

1,434 

 

 

Accrued sales, use and income taxes

 

 

104 

 

 

147 

 

 

Other accrued liabilities

 

 

590 

 

 

316 

 

 

Current portion of capital lease obligations

 

 

30 

 

 

24 

 

 

Total current liabilities

 

 

11,329 

 

 

11,955 

 

 

Long-term debt

 

 

3,882 

 

 

4,050 

 

 

Common stock warrants at fair value

 

 

276 

 

 

254 

 

 

Long-term portion of contingent liabilities

 

 

151 

 

 

418 

 

 

Capital lease obligations

 

 

163 

 

 

169 

 

 

Other long term liabilities

 

 

228 

 

 

233 

 

 

Total non-current liabilities

 

 

4,700 

 

 

5,124 

 

 

Total liabilities

 

 

16,029 

 

 

17,079 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Cumulative preferred stock, par value $.001 per share, 1,000,000 shares authorized; 0 shares issued and outstanding at October 31, 2013 and July 31, 2013, respectively

 

 

 -

 

 

 -

 

 

Junior preferred stock, par value $.001 per share, 100,000 shares authorized; 0 shares issued and outstanding at October 31, 2013 and July 31, 2013, respectively

 

 

 -

 

 

 -

 

 

Common stock, par value $.001 per share, 25,000,000 shares authorized; 12,996,588 and 12,976,588 shares issued and outstanding at October 31, 2013 and July 31, 2013, respectively

 

 

13 

 

 

13 

 

 

Additional paid-in capital

 

 

104,868 

 

 

104,816 

 

 

Accumulated deficit

 

 

(88,737)

 

 

(88,762)

 

 

Other accumulated comprehensive loss

 

 

(23)

 

 

(18)

 

 

Total shareholders' equity

 

 

16,121 

 

 

16,049 

 

 

Total liabilities and shareholders' equity

 

$

32,150 

 

$

33,128 

 

 

 

 

See accompanying notes

Page 4


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ARI Network Services, Inc.

 

 

Consolidated Statements of Income

 

 

(Dollars in Thousands, Except per Share Data)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Three months ended October 31

 

 

 

 

2013

 

2012

 

 

Net revenue

 

$

8,160 

 

$

5,942 

 

 

Cost of revenue

 

 

1,560 

 

 

1,408 

 

 

Gross profit

 

 

6,600 

 

 

4,534 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

 

2,457 

 

 

1,221 

 

 

Customer operations and support

 

 

1,611 

 

 

1,046 

 

 

Software development and technical support (net

 

 

 

 

 

 

 

 

of capitalized software product costs)

 

 

556 

 

 

613 

 

 

General and administrative

 

 

1,488 

 

 

1,071 

 

 

Depreciation and amortization (exclusive of amortization

 

 

 

 

 

 

 

 

of software product costs included in cost of revenue)

 

 

321 

 

 

280 

 

 

Net operating expenses

 

 

6,433 

 

 

4,231 

 

 

Operating income

 

 

167 

 

 

303 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense

 

 

(70)

 

 

(68)

 

 

Loss on change in fair value of stock warrants

 

 

(22)

 

 

 -

 

 

Gain on change in fair value of estimated contingent liabilities

 

 

26 

 

 

 -

 

 

Other, net

 

 

 

 

 

 

Total other expense

 

 

(58)

 

 

(64)

 

 

Income before provision for income tax

 

 

109 

 

 

239 

 

 

Income tax expense

 

 

(84)

 

 

(126)

 

 

Net income

 

$

25 

 

$

113 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

Basic

 

$

0.00 

 

$

0.01 

 

 

Diluted

 

$

0.00 

 

$

0.01 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income

 

 

(Dollars in Thousands)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Three months ended October 31

 

 

 

 

2013

 

2012

 

 

Net income

 

$

25 

 

$

113 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(5)

 

 

(10)

 

 

Total other comprehensive income

 

 

(5)

 

 

(10)

 

 

Comprehensive Income

 

$

20 

 

$

103 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes

Page 5


 

 

 

 

 

 

 

 

 

 

 

 

 

ARI Network Services, Inc.

 

 

Consolidated Statements of Cash Flows

 

 

(Dollars in Thousands)

 

 

(Unaudited)

 

 

 

 

 

 

 

Three months ended October 31

 

 

 

 

2013

 

2012

 

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

25 

 

$

113 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Amortization of software products

 

 

444 

 

 

396 

 

 

Amortization of discount related to present value of earnout

 

 

(4)

 

 

(8)

 

 

Amortization of bank loan fees

 

 

31 

 

 

12 

 

 

Depreciation and other amortization

 

 

321 

 

 

279 

 

 

Loss on change in fair value of stock warrants

 

 

22 

 

 

 -

 

 

Gain on change in fair value of contingent liabilities

 

 

(26)

 

 

 -

 

 

Provision for bad debt allowance

 

 

32 

 

 

25 

 

 

Deferred income taxes

 

 

121 

 

 

105 

 

 

Stock based compensation related to stock options

 

 

36 

 

 

37 

 

 

Net change in assets and liabilities:

 

 

 

 

 

 

 

 

Trade receivables

 

 

(453)

 

 

(153)

 

 

Work in process

 

 

37 

 

 

(119)

 

 

Prepaid expenses and other

 

 

115 

 

 

15 

 

 

Other long term assets

 

 

(17)

 

 

(32)

 

 

Accounts payable

 

 

(158)

 

 

(195)

 

 

Deferred revenue

 

 

(638)

 

 

(295)

 

 

Accrued payroll and related liabilities

 

 

(140)

 

 

85 

 

 

Accrued sales, use and income taxes

 

 

(43)

 

 

(97)

 

 

Other accrued liabilities

 

 

269 

 

 

341 

 

 

Net cash provided by (used in) operating activities

 

$

(26)

 

$

509 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Purchase of equipment, software and leasehold improvements

 

 

(189)

 

 

(381)

 

 

Earnest money paid for business acquisition

 

 

 -

 

 

(900)

 

 

Cash received on earnout from disposition of a component of the business

 

 

37 

 

 

49 

 

 

Cash paid for contingent liabilities related to acquisitions

 

 

(252)

 

 

 -

 

 

Net cash paid for net assets related to acquisitions

 

 

 -

 

 

(898)

 

 

Software development costs capitalized

 

 

(548)

 

 

(396)

 

 

Net cash used in investing activities

 

$

(952)

 

$

(2,526)

 

 

Financing activities:

 

 

 

 

 

 

 

 

Borrowings (repayments) under line of credit

 

 

 -

 

 

220 

 

 

Payments on long-term debt

 

 

(112)

 

 

(247)

 

 

Borrowings under long-term debt

 

 

 -

 

 

1,000 

 

 

Payments of capital lease obligations

 

 

 -

 

 

(49)

 

 

Proceeds from issuance of common stock

 

 

16 

 

 

 

 

Net cash provided by (used in) financing activities

 

$

(96)

 

$

932 

 

 

Effect of foreign currency exchange rate changes on cash

 

 

 -

 

 

(4)

 

 

Net change in cash and cash equivalents

 

 

(1,074)

 

 

(1,089)

 

 

Cash and cash equivalents at beginning of period

 

 

2,195 

 

 

1,350 

 

 

Cash and cash equivalents at end of period

 

$

1,121 

 

$

261 

 

 

Cash paid for interest

 

$

71 

 

$

65 

 

 

Cash paid for income taxes

 

$

66 

 

$

114 

 

 

 

 

 

 

 

 

 

 

 

Noncash investing and financing activities

 

 

 

 

 

 

 

 

Issuance of common stock in connection with acquisitions

 

$

 -

 

$

101 

 

 

Accrued liabilities assumed in connection with acquisitions

 

 

 -

 

 

86 

 

 

Issuance of common stock related to payment of executive compensation

 

 

 -

 

 

22 

 

 

Contingent liabilities incurred in connection with acquisition

 

 

 -

 

 

749 

 

See accompanying notes

Page 6


 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

 

 

 

1. Description of the Business and Significant Accounting Policies

 

Description of the Business

 

ARI Network Services, Inc. (“ARI” or “the Company”) creates software-as-a-service (“SaaS”) and data-as-a-service (“DaaS”) solutions that help equipment manufacturers, distributors and dealers in selected vertical markets to Sell More Stuff!™ – online and in-store. We remove the complexity of selling and servicing new and used inventory, parts, garments, and accessories (”PG&A”) for customers in the outdoor power equipment (“OPE”), powersports, automotive tire and wheel (“ATW”), durable medical equipment (“DME”), marine, recreational vehicle (“RV”) and white goods industries.  Our innovative products are powered by a proprietary library of enriched original equipment and aftermarket content that spans more than 469,000 models from over 1,400 manufacturers.  More than 22,000 equipment dealers, 195 distributors and 140 manufacturers worldwide leverage our web and eCatalog platforms to Sell More Stuff!™

 

We were incorporated in Wisconsin in 1981.  Our principal executive office and headquarters is located in Milwaukee, Wisconsin.  The office address is 10850 West Park Place, Suite 1200, Milwaukee, WI 53224, and our telephone number at that location is (414) 973-4300. Our principal website address is www.arinet.com.  ARI also maintains operations in Duluth, Minnesota; Cypress, California; Virginia Beach, Virginia; Floyds Knobs, Indiana; and Leiden, The Netherlands.

 

Basis of Presentation

 

These consolidated financial statements include the financial statements of ARI and its wholly-owned subsidiary, ARI Europe B.V.  We eliminated all significant intercompany balances and transactions in consolidation.  Certain reclassifications were made to amounts previously reported in our financial statements in order to conform to the current presentation related to certain shared corporate overhead expenses which were reclassified between sales and marketing, customer operations and support, software development and technical support and general and administrative expenses. This had no impact on gross profit, total operating expenses or net income.

 

Significant Accounting Policies

 

Our accounting policies are fully described in the footnotes to our Consolidated Financial Statements for the fiscal year ended July 31, 2013, which appear in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 29, 2013.  There were no changes to our accounting policies during the three months ended October 31, 2013.

 

Revenue Recognition

 

Revenue from software licenses, annual or periodic maintenance fees and catalog subscription fees, which are included in multiple element arrangements, are all recognized ratably over the contractual term of the arrangement, as vendor specific objective evidence does not exist for these elements. ARI considers all arrangements with payment terms extending beyond 12 months not to be fixed or determinable and evaluates other arrangements with payment terms longer than normal to determine whether the arrangement is fixed or determinable. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer. Arrangements that include acceptance terms beyond the standard terms are not recognized until acceptance has occurred. If collectability is not considered probable, revenue is recognized when the fee is collected.

 

Revenue for use of the network and for information services is recognized on a straight-line basis over the term of the contract.

Arrangements that include professional services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. Types of services that are considered essential to software license arrangements include customizing complex features and functionality in a product’s base software code or developing complex interfaces within a customer’s environment. When professional services are considered essential to software license arrangements, the professional service revenue is recognized pursuant to contract accounting using the percentage-of-

Page 7


 

 

completion method with progress-to-completion measured based upon labor hours incurred. Professional services revenue for set-up and integration of hosted websites, or other services considered essential to the functionality of other elements of this type of arrangement, is amortized over the term of the contract. When professional services are not considered essential, the revenue allocable to the professional services is recognized as the services are performed.  When the current estimates of total contract revenue and contract cost indicate a loss, a provision for the entire loss on the contract is made in the period the amount is determined.

 

Revenue for variable transaction fees, primarily for use of the shopping cart feature of our websites, is recognized as it is earned.

 

Amounts invoiced to customers prior to recognition as revenue, as discussed above, are reflected in the accompanying balance sheets as deferred revenue.

 

Amounts received for shipping and handling fees are reflected in revenue.  Costs incurred for shipping and handling are reported in cost of revenue.

 

Trade Receivables, Credit Policy and Allowance for Doubtful Accounts

 

Trade receivables are uncollateralized customer obligations due on normal trade terms, most of which require payment within thirty (30) days from the invoice date.  Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.

 

The carrying amount of trade receivables is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected.  Management individually reviews receivable balances that exceed ninety (90) days from the invoice date and, based on an assessment of current creditworthiness, estimates the portion of the balance that will not be collected.  The allowance for potential doubtful accounts is reflected as an offset to trade receivables in the accompanying balance sheets.

 

Capitalized and Purchased Software Product Costs

 

Certain software development and acquisition costs are capitalized when incurred. Capitalization of these costs begins upon the establishment of technological feasibility. The establishment of technological feasibility and the on-going assessment of recoverability of software costs require considerable judgment by management with respect to certain external factors, including, but not limited to, the determination of technological feasibility, anticipated future gross revenue, estimated economic life and changes in software and hardware technologies. 

 

The annual amortization of software products is the greater of the amount computed using: (a) the ratio that current gross revenue for the network or a software product bear to the total of current and anticipated future gross revenue for the network or a software product, or (b) the straight-line method over the estimated economic life of the product which currently runs from two to nine years. Amortization starts when the product is available for general release to customers.  The Company capitalizes software enhancements on an on-going basis; all other software development and support expenditures are charged to expense in the period incurred.

 

Fair Value Assets and Liabilities

 

ARI uses the three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers include Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted market prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.  The asset’s or liability’s fair value measurement level within the hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

 

Common Stock Warrants

 

ARI has periodically issued common stock warrants in connection with debt and equity financing arrangements.  The terms of the agreements are assessed to determine whether the instrument qualifies as an equity arrangement or a debt arrangement.  Arrangements determined to be derivatives are recorded at fair value as liabilities on the balance sheet, with periodic gains and losses related to the change in fair value recorded to earnings on the Statement of Income.  

 

Page 8


 

 

Legal Provisions

 

ARI may be periodically involved in legal proceedings arising from contracts, patents or other matters in the normal course of business. We reserve for any material estimated losses if the outcome is probable and can be reasonably estimated.   We had no legal provisions for the three months ended October  31, 2013 and 2012.

 

Deferred Loan Fees and Debt Discounts

 

Fees associated with securing debt are capitalized and included in prepaid and other and other long term assets on the balance sheet.  Stock issued in connection with securing debt is recorded to debt discount, reducing the carrying amount of the debt on the balance sheet.  Deferred loan fees and debt discounts are amortized to interest expense over the life of the debt using the effective interest method.

 

Deferred Income Taxes

 

The tax effect of the temporary differences between the book and tax bases of assets and liabilities and the estimated tax benefit from tax net operating losses is reported as deferred tax assets and liabilities in the balance sheet. An assessment of the likelihood that net deferred tax assets will be realized from future taxable income is performed at each reporting date or when events or changes in circumstances indicate that there may be a change in the valuation allowance. Because the ultimate realizability of deferred tax assets is highly subject to the outcome of future events, the amount established as valuation allowance is considered to be a significant estimate that is subject to change in the near term. To the extent a valuation allowance is established or there is a change in the allowance during a period, the change is reflected with a corresponding increase or decrease in the tax provision in the Statement of Income.

 

2. Basic and Diluted Net Income per Share

 

Basic net income per common share is computed by dividing net income by the basic weighted average number of common shares outstanding during the period.  Diluted net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period and reflects the potential dilution that could occur if all of the Company’s outstanding stock options and warrants that have a strike price below the market price were exercised (calculated using the treasury stock method). 

 

Page 9


 

 

The following table is a reconciliation of basic and diluted net income per common share for the periods indicated (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended October 31

 

 

 

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

25 

 

$

113 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

12,995 

 

 

8,123 

 

 

Effect of dilutive stock options and warrants

 

 

763 

 

 

126 

 

 

Diluted weighted-average common shares outstanding

 

 

13,758 

 

 

8,249 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

Basic

 

$

0.00 

 

$

0.01 

 

 

Diluted

 

$

0.00 

 

$

0.01 

 

 

 

 

 

 

 

 

 

 

 

Options and warrants that could potentially dilute net income per share in the future that are not included in the computation of diluted net income per share, as their impact is anti-dilutive

 

 

 -

 

 

902 

 

 

 

 

 

 

 

 

 

 

 

3. Stock-based Compensation Plans

 Stock Option Plans

 

We used the Black-Scholes model to value stock options granted. Expected volatility is based on historical volatility of the Company’s stock. The expected life of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual term of the options is based on the United States Treasury yields in effect at the time of grant.

 

As recognizing stock-based compensation expense is based on awards ultimately expected to vest, the amount of recognized expense has been reduced for estimated forfeitures based on the Company’s historical experience. Total stock compensation expense recognized by the Company was approximately $36,000 and $37,000 for the three month periods ended October 31, 2013 and 2012, respectivelyThere was approximately $110,000 and $155,000 of total unrecognized compensation costs related to non-vested options granted under the Company’s stock option plans as of October  31, 2013 and 2012, respectively.  There were no capitalized stock-based compensation costs at October  31, 2013 or July 31, 2012. 

 

The fair value of each option granted was estimated in the period of issuance using the assumptions in the following table for the three months ended October  31, 2013 and 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended October 31

 

 

 

2013

 

2012

 

 

Expected life (years)

 

n/a

 

 

 

10 years

 

 

Risk-free interest rate

 

n/a

 

 

 

1.6 

%

 

 

Expected volatility

 

n/a

 

 

 

130.1 

%

 

 

Expected forfeiture rate

 

n/a

 

 

 

22.0 

%

 

 

Expected dividend yield

 

n/a

 

 

 

 -

%

 

 

Weighted-average estimated

 

 

 

 

 

 

 

 

 

     fair value of options granted

 

 

 

 

 

 

 

 

 

during the year

$

n/a

 

 

$

0.96 

 

 

 

Cash received from the exercise

 

 

 

 

 

 

 

 

 

    of stock options

$

15,400 

 

 

$

8,191 

 

 

2000 Stock Option Plan

 

The Company’s 2000 Stock Option Plan (the “2000 Plan”) had 1,950,000 shares of common stock authorized for issuance.  Each incentive stock option that was granted under the 2000 Plan is exercisable for a period of not more than 10 years from the date of grant (five years in the case of a participant who is a 10% shareholder of the Company, unless the stock options are

Page 10


 

 

nonqualified), or such shorter period as determined by the Compensation Committee, and shall lapse upon the expiration of said period, or earlier upon termination of the participant’s employment with the Company. The 2000 Plan expired on December 13, 2010, at which time it was terminated except for outstanding options.  As a result, no new options may be granted under the 2000 Plan.  Changes in option shares under the 2000 Plan during the three months ended October  31, 2013 and 2012 were as follows:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of
Options

 

Wtd. Avg.
Exercise
Price

 

Wtd. Avg.
Remaining
Contractual
Period
(Years)

 

Aggregate
Instrinsic
Value

 

 

Outstanding at 7/31/12

 

1,099,769 

 

$

1.41 

 

5.06 

 

$

105,849 

 

 

Granted

 

 -

 

 

n/a

 

n/a

 

 

n/a

 

 

Exercised

 

(10,800)

 

 

0.58 

 

n/a

 

 

6,194 

 

 

Forfeited

 

(86,508)

 

 

1.58 

 

n/a

 

 

n/a

 

 

Outstanding at 10/31/12

 

1,002,461 

 

$

1.40 

 

4.97 

 

$

114,006 

 

 

Exercisable at 10/31/12

 

926,874 

 

$

1.46 

 

4.73 

 

$

78,772 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at 7/31/13

 

986,786 

 

$

1.41 

 

4.22 

 

$

1,564,296 

 

 

Granted

 

 -

 

 

n/a

 

n/a

 

 

n/a

 

 

Exercised

 

(20,000)

 

 

0.77 

 

n/a

 

 

50,000 

 

 

Forfeited

 

(3,125)

 

 

0.95 

 

n/a

 

 

n/a

 

 

Outstanding at 10/31/13

 

963,661 

 

$

1.43 

 

3.93 

 

$

1,773,485 

 

 

Exercisable at 10/31/13

 

948,700 

 

$

1.44 

 

3.88 

 

$

1,733,891 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The range of exercise prices for options outstanding under the 2000 Plan was $0.49 to $2.74 and $0.15 to $2.74 at October 31, 2013 and 2012, respectively.

 

Changes in the 2000 Plan's non-vested option shares included in the outstanding shares above during the three months ended October 31, 2013 and 2012 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of
Options

 

Wtd. Avg.
Exercise Price

 

 

 

 

 

 

 

Non-vested at 7/31/12

 

78,087 

 

$

0.69 

 

 

 

 

 

 

 

Granted

 

 -

 

 

n/a

 

 

 

 

 

 

 

Vested

 

 -

 

 

n/a

 

 

 

 

 

 

 

Forfeited

 

(2,500)

 

 

0.73 

 

 

 

 

 

 

 

Non-vested at 10/31/12

 

75,587 

 

$

0.68 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-vested at 7/31/13

 

27,461 

 

$

0.64 

 

 

 

 

 

 

 

Granted

 

 -

 

 

n/a

 

 

 

 

 

 

 

Vested

 

(12,500)

 

 

0.67 

 

 

 

 

 

 

 

Forfeited

 

 -

 

 

n/a

 

 

 

 

 

 

 

Non-vested at 10/31/13

 

14,961 

 

$

0.62 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The weighted average remaining vesting period was .75 and 1.12 years at October  31, 2013 and 2012, respectively.

 

2010 Equity Incentive Plan

 

The Board of Directors adopted the ARI Network Services, Inc. 2010 Equity Incentive Plan (the “2010 Plan”) on November 9, 2010, and the plan was approved by the Company's shareholders in December 2010.  The 2010 Plan is the successor to the Company’s 2000 Plan. 

 

The 2010 Plan includes the following provisions:

 

·

the aggregate number of shares of Common Stock subject to the 2010 Plan is 650,000 shares;

·

the exercise price for options and stock appreciation rights cannot be less than 100% of the fair market value, as defined, of the Company’s Common Stock on the date of grant;

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·

the exercise prices for options and stock appreciation rights cannot be repriced without shareholder approval, except to reflect changes to the capital structure of the Company as described in the 2010 Plan;

·

a maximum term of ten (10) years for options and stock appreciation rights;

·

a maximum of 325,000 of the shares available for issuance under the 2010 Plan can be in the form of restricted shares or restricted stock units, and the 2010 Plan does not have liberal share counting provisions (such as provisions that would permit shares withheld for payment of taxes or the exercise price of stock options to be re-granted under the plan); and

·

awards cannot be transferred to third parties, with the exception of certain estate planning transfers, which can be made if the committee that administers the 2010 Plan approves such transfers.

 

Changes in option shares under the 2010 Plan during the three months ended October  31, 2013 and 2012 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of
Options

 

Wtd. Avg.
Exercise
Price

 

Wtd. Avg.
Remaining
Contractual
Period
(Years)

 

Aggregate
Instrinsic
Value

 

 

Outstanding at 7/31/12

 

310,667 

 

$

1.10 

 

9.28 

 

$

41,962 

 

 

Granted

 

20,000 

 

 

1.00 

 

n/a

 

 

n/a

 

 

Exercised

 

(3,000)

 

 

0.66 

 

n/a

 

 

1,485 

 

 

Forfeited

 

(3,500)

 

 

0.66 

 

n/a

 

 

n/a

 

 

Outstanding at 10/31/12

 

324,167 

 

$

1.10 

 

9.09 

 

$

57,070 

 

 

Exercisable at 10/31/12

 

111,710 

 

$

1.09 

 

8.97 

 

$

22,325 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at 7/31/13

 

394,460 

 

$

1.25 

 

8.70 

 

$

691,485 

 

 

Granted

 

 -

 

 

n/a

 

n/a

 

 

n/a

 

 

Exercised

 

 -

 

 

n/a

 

n/a

 

 

n/a

 

 

Forfeited

 

(8,875)

 

 

1.43 

 

n/a

 

 

n/a

 

 

Outstanding at 10/31/13

 

385,585 

 

$

1.24 

 

8.45 

 

$

781,652 

 

 

Exercisable at 10/31/13

 

224,440 

 

$

1.21 

 

8.24 

 

$

463,167 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The range of exercise prices for options outstanding under the 2010 Plan was $.58 to $2.50 and $0.58 to $1.70 at October 31, 2013 and 2012, respectively.

 

Changes in the 2010 Plan's non-vested option shares included in the outstanding shares above during the three months ended October 31, 2013 and 2012 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of
Options

 

Wtd. Avg.
Exercise Price

 

 

 

 

 

 

 

Non-vested at 7/31/12

 

192,707 

 

$

1.12 

 

 

 

 

 

 

 

Granted

 

20,000 

 

 

1.00 

 

 

 

 

 

 

 

Vested

 

 -

 

 

n/a

 

 

 

 

 

 

 

Forfeited

 

(250)

 

 

0.66 

 

 

 

 

 

 

 

Non-vested at 10/31/12

 

212,457 

 

$

1.11