15a7989d075248d

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 April 30, 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.

YES                        ü                        NO            

 

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).

YES                        ü                        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                                    ü

(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).

YES                                                NO                        ü

 

As of June  4, 2013 there were  12,058,171 shares of the registrant’s common stock outstanding.

 


 

 

ARI Network Services, Inc.

 

FORM 10-Q

FOR THE THREE MONTHS ENDED APRIL 30, 2013

INDEX

 

 

 

 

 

 

TABLE OF CONTENTS

 

 

 

 

 

PART I

FINANCIAL INFORMATION

Page

 

 

 

 

 

 

Item 1

 

Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of April 30, 2013 (unaudited) and July 31, 2012

3

 

 

 

 

 

 

 

 

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

5

 

 

 

April 30, 2013 and 2012

 

 

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive  Income (Loss) (unaudited) for the three and

5

 

 

 

nine months ended April 30, 2013 and 2012

 

 

 

 

 

 

 

 

 

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

6

 

 

 

April 30, 2013 and 2012

 

 

 

 

 

 

 

 

 

Notes to the Unaudited Consolidated Financial Statements

8

 

 

 

 

 

 

Item 2

 

Management's Discussion and Analysis of Financial Condition and Results

27

 

 

 

of Operations

 

 

 

 

 

 

 

Item 3

 

Quantitative and Qualitative Disclosures about Market Risk

42

 

 

 

 

 

 

Item 4

 

Controls and Procedures

42

 

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1

 

Legal Proceedings

42

 

 

 

 

 

 

Item 1A

 

Risk Factors

42

 

 

 

 

 

 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

42

 

 

 

 

 

 

Item 3

 

Defaults upon Senior Securities

43

 

 

 

 

 

 

Item 4

 

Mine Safety Disclosures

43

 

 

 

 

 

 

Item 5

 

Other Information

43

 

 

 

 

 

 

Item 6

 

Exhibits

43

 

 

 

 

 

 

 

 

Signatures

44

 

 

Page 2


 

 

Item  1. Financial Statements    

 

 

 

 

 

 

 

 

 

 

 

 

ARI Network Services, Inc.

 

 

Consolidated Balance Sheets

 

 

(Dollars in Thousands, Except per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

April 30

 

July 31

 

 

 

 

2013

 

2012

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,164 

 

$

1,350 

 

 

Trade receivables, less allowance for doubtful accounts of $271

 

 

 

 

 

 

 

 

and $215 at April 30, 2013 and July 31, 2012, respectively

 

 

1,440 

 

 

1,187 

 

 

Work in process

 

 

158 

 

 

151 

 

 

Prepaid expenses and other

 

 

924 

 

 

766 

 

 

Deferred income taxes

 

 

3,112 

 

 

2,686 

 

 

Total current assets

 

 

6,798 

 

 

6,140 

 

 

Equipment and leasehold improvements:

 

 

 

 

 

 

 

 

Computer equipment and software for internal use

 

 

2,280 

 

 

2,592 

 

 

Leasehold improvements

 

 

609 

 

 

584 

 

 

Furniture and equipment

 

 

2,476 

 

 

1,989 

 

 

 

 

 

5,365 

 

 

5,165 

 

 

Less accumulated depreciation and amortization

 

 

3,797 

 

 

3,214 

 

 

Net equipment and leasehold improvements

 

 

1,568 

 

 

1,951 

 

 

Capitalized software product costs:

 

 

 

 

 

 

 

 

Amounts capitalized for software product costs

 

 

20,842 

 

 

18,247 

 

 

Less accumulated amortization

 

 

16,610 

 

 

15,298 

 

 

Net capitalized software product costs

 

 

4,232 

 

 

2,949 

 

 

Deferred income taxes

 

 

3,554 

 

 

2,443 

 

 

Other long term assets

 

 

143 

 

 

148 

 

 

Other intangible assets

 

 

4,249 

 

 

1,439 

 

 

Goodwill

 

 

12,239 

 

 

5,439 

 

 

Total assets

 

$

32,783 

 

$

20,509 

 

 

 

 

 

Page 3


 

 

 

 

 

 

 

 

 

 

 

 

 

 

ARI Network Services, Inc.

 

 

Consolidated Balance Sheets

 

 

(Dollars in Thousands, Except per Share Data)

 

 

 

 

(Unaudited)

 

 

 

 

 

April 30

 

July 31

 

 

 

 

2013

 

2012

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Current borrowings on line of credit

 

$

750 

 

$

 -

 

 

Current portion of long-term debt

 

 

338 

 

 

1,084 

 

 

Current portion of contingent liabilities

 

 

363 

 

 

 -

 

 

Accounts payable

 

 

792 

 

 

725 

 

 

Deferred revenue

 

 

9,228 

 

 

4,926 

 

 

Accrued payroll and related liabilities

 

 

1,321 

 

 

758 

 

 

Accrued sales, use and income taxes

 

 

117 

 

 

216 

 

 

Other accrued liabilities

 

 

625 

 

 

214 

 

 

Current portion of capital lease obligations

 

 

 -

 

 

150 

 

 

Total current liabilities

 

 

13,534 

 

 

8,073 

 

 

Long-term debt

 

 

4,162 

 

 

2,888 

 

 

Long-term portion of contingent liabilities

 

 

499 

 

 

 -

 

 

Capital lease obligations

 

 

 -

 

 

58 

 

 

Other long term liabilities

 

 

238 

 

 

274 

 

 

Total non-current liabilities

 

 

4,899 

 

 

3,220 

 

 

Total liabilities

 

 

18,433 

 

 

11,293 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Cumulative preferred stock, par value $.001 per share, 1,000,000 shares authorized; 0 shares issued and outstanding at April 30, 2013 and July 31, 2012, respectively

 

 

 -

 

 

 -

 

 

Junior preferred stock, par value $.001 per share, 100,000 shares authorized; 0 shares issued and outstanding at April 30, 2013 and July 31, 2012, respectively

 

 

 -

 

 

 -

 

 

Common stock, par value $.001 per share, 25,000,000 shares authorized; 12,055,921 and 8,037,750 shares issued and outstanding at April 30, 2013 and July 31, 2012, respectively

 

 

12 

 

 

 

 

Additional paid-in capital

 

 

102,817 

 

 

97,218 

 

 

Accumulated deficit

 

 

(88,463)

 

 

(88,009)

 

 

Other accumulated comprehensive loss

 

 

(16)

 

 

(1)

 

 

Total shareholders' equity

 

 

14,350 

 

 

9,216 

 

 

Total liabilities and shareholders' equity

 

$

32,783 

 

$

20,509 

 

 

 

 

See accompanying notes

Page 4


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ARI Network Services, Inc.

 

 

Consolidated Statements of Income

 

 

(Dollars in Thousands, Except per Share Data)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended April 30

 

Nine months ended April 30

 

 

 

2013

 

2012

 

2013

 

2012

 

 

Net revenue

$

8,228 

 

$

5,712 

 

$

21,648 

 

$

16,623 

 

 

Cost of revenue

 

1,885 

 

 

1,378 

 

 

5,014 

 

 

3,765 

 

 

Gross profit

 

6,343 

 

 

4,334 

 

 

16,634 

 

 

12,858 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

2,154 

 

 

1,121 

 

 

4,944 

 

 

3,272 

 

 

Customer operations and support

 

1,496 

 

 

800 

 

 

3,974 

 

 

2,496 

 

 

Software development and technical support (net

 

 

 

 

 

 

 

 

 

 

 

 

 

of capitalized software product costs)

 

641 

 

 

467 

 

 

1,890 

 

 

1,345 

 

 

General and administrative

 

1,791 

 

 

1,304 

 

 

5,209 

 

 

3,630 

 

 

Depreciation and amortization (exclusive of amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

of software product costs included in cost of revenue)

 

334 

 

 

315 

 

 

953 

 

 

1,122 

 

 

Loss on impairment of long-lived assets

 

420 

 

 

 -

 

 

420 

 

 

 -

 

 

Net operating expenses

 

6,836 

 

 

4,007 

 

 

17,390 

 

 

11,865 

 

 

Operating income (loss)

 

(493)

 

 

327 

 

 

(756)

 

 

993 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(197)

 

 

(40)

 

 

(534)

 

 

(161)

 

 

Loss on debt extinguishment

 

(682)

 

 

 -

 

 

(682)

 

 

 -

 

 

Gain on sale of a component of the business

 

64 

 

 

 -

 

 

64 

 

 

 -

 

 

Other, net

 

(1)

 

 

79 

 

 

 

 

96 

 

 

Total other income (expense)

 

(816)

 

 

39 

 

 

(1,145)

 

 

(65)

 

 

Income (loss) before provision for income tax

 

(1,309)

 

 

366 

 

 

(1,901)

 

 

928 

 

 

Income tax benefit (expense)

 

738 

 

 

(156)

 

 

1,447 

 

 

(385)

 

 

Net income (loss)

$

(571)

 

$

210 

 

$

(454)

 

$

543 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.05)

 

$

0.03 

 

$

(0.05)

 

$

0.07 

 

 

Diluted

$

(0.05)

 

$

0.03 

 

$

(0.05)

 

$

0.07 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss)

 

 

(Dollars in Thousands, Except per Share Data)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended April 30

 

Nine months ended April 30

 

 

 

2013

 

2012

 

2013

 

2012

 

 

Net income (loss)

$

(571)

 

$

210 

 

$

(454)

 

$

543 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(10)

 

 

(3)

 

 

(15)

 

 

20 

 

 

Total other comprehensive income (loss)

 

(10)

 

 

(3)

 

 

(15)

 

 

20 

 

 

Comprehensive Income (loss)

$

(581)

 

$

207 

 

$

(469)

 

$

563 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page 5


 

 

 

See accompanying notes

 

 

 

 

 

 

 

 

 

 

 

 

 

ARI Network Services, Inc.

 

 

Consolidated Statements of Cash Flows

 

 

(Dollars in Thousands)

 

 

(Unaudited)

 

 

 

 

Nine months ended April 30

 

 

 

 

2013

 

2012

 

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

(454)

 

$

543 

 

 

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

 

 

 -

 

 

 -

 

 

Amortization of software products

 

 

1,312 

 

 

1,039 

 

 

Amortization of discount related to present value of earnout

 

 

(21)

 

 

(35)

 

 

Amortization of bank loan fees

 

 

265 

 

 

 -

 

 

Stock based interest expense

 

 

38 

 

 

 -

 

 

Depreciation and other amortization

 

 

953 

 

 

1,122 

 

 

Loss on impairment of long-lived assets

 

 

420 

 

 

 -

 

 

Gain on disposal of a component of the business

 

 

(64)

 

 

(70)

 

 

Loss on debt extinguishment

 

 

682 

 

 

 -

 

 

Provision for bad debt allowance

 

 

106 

 

 

44 

 

 

Deferred income taxes

 

 

(1,537)

 

 

348 

 

 

Stock based compensation related to stock options and bonuses

 

 

304 

 

 

110 

 

 

Stock issued as contribution to 401(k) plan

 

 

 -

 

 

55 

 

 

Net change in assets and liabilities:

 

 

 

 

 

 

 

 

Trade receivables

 

 

(310)

 

 

(261)

 

 

Work in process

 

 

(7)

 

 

(14)

 

 

Prepaid expenses and other

 

 

(72)

 

 

(32)

 

 

Other long term assets

 

 

(207)

 

 

40 

 

 

Accounts payable

 

 

66 

 

 

86 

 

 

Deferred revenue

 

 

(426)

 

 

(238)

 

 

Accrued payroll and related liabilities

 

 

600 

 

 

(666)

 

 

Accrued sales, use and income taxes

 

 

(99)

 

 

(39)

 

 

Accrued vendor specific liabilities

 

 

 -

 

 

 -

 

 

Other accrued liabilities

 

 

(45)

 

 

81 

 

 

Net cash provided by operating activities

 

$

1,504 

 

$

2,113 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Purchase of equipment, software and leasehold improvements

 

 

(493)

 

 

(479)

 

 

Cash received from disposition of a component of the business

 

 

147 

 

 

179 

 

 

Cash paid for net assets related to acquisitions

 

 

(2,479)

 

 

 -

 

 

Software developed for internal use

 

 

(9)

 

 

(157)

 

 

Software development costs capitalized

 

 

(1,279)

 

 

(1,205)

 

 

Net cash used in investing activities

 

$

(4,113)

 

$

(1,662)

 

 

Financing activities:

 

 

 

 

 

 

 

 

Borrowings (repayments) under line of credit

 

 

750 

 

 

(245)

 

 

Payments on long-term debt

 

 

(8,172)

 

 

(778)

 

 

Borrowings under long-term debt

 

 

6,000 

 

 

 -

 

 

Payments of capital lease obligations

 

 

(208)

 

 

(107)

 

 

Payment of  stock issuance fees

 

 

(451)

 

 

 -

 

 

Proceeds from issuance of common stock

 

 

4,511 

 

 

20 

 

 

Net cash provided by (used in) financing activities

 

$

2,430 

 

$

(1,110)

 

 

Effect of foreign currency exchange rate changes on cash

 

 

(7)

 

 

11 

 

 

Net change in cash and cash equivalents

 

 

(186)

 

 

(648)

 

 

Cash and cash equivalents at beginning of period

 

 

1,350 

 

 

1,134 

 

 

Cash and cash equivalents at end of period

 

$

1,164 

 

$

486 

 

 

Cash paid for interest

 

$

544 

 

 

186 

 

 

Cash paid for income taxes

 

$

50 

 

 

84 

 

 

 

 

 

 

 

 

 

 

 

Noncash investing and financing activities

 

 

 

 

 

 

 

 

Accrued earn-out receivable related to disposition of a component of the business

 

$

 -

 

 

43 

 

 

Issuance of common stock in connection with acquisitions

 

 

101 

 

$

 -

 

 

Debt issued in connection with acquisitions

 

 

3,000 

 

 

 -

 

 

Accrued liabilities assumed in connection with acquisitions

 

 

4,728 

 

 

 -

 

 

Issuance of common stock in connection with debt retirement

 

 

300 

 

 

 -

 

 

Issuance of common stock warrants in connection with a securities purchase agreement

 

 

2,333 

 

 

 -

 

 

Issuance of common stock in connection with debt issuance and loan fees

 

 

585 

 

 

 -

 

 

Issuance of common stock related to payment of director compensation

 

 

176 

 

 

 -

 

 

Issuance of common stock related to payment of executive compensation

 

 

199 

 

 

12 

 

 

Contingent liabilities incurred in connection with acquisition

 

 

749 

 

 

 -

 

 

 

 

 

 

 

 

 

 

Page 6


 

 

See accompanying notes

 

Page 7


 

 

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”) provides technology-enabled services that help our customers effectively and efficiently sell more whole goods, parts, garments and accessories (“PG&A”).  Our customer base of more than 22,000 dealers, 195 distributors, and 140 manufacturers utilizes ARI’s products and services to drive and manage leads, efficiently service consumers at the parts counter, and enable eCommerce sales of PG&A.  ARI’s solutions are aimed at markets with complex equipment requiring service and sold through an independent dealer channel including the outdoor power, powersports, marine, RV, automotive wheel and tire, and white goods markets. 

 

Most of our solutions leverage our library of electronic content that we have published and aggregated into a large content management system, which contains data related to more than 10 million active parts across more than 469,000 models; more than 500,000 active accessories; SKUs across more than 73,000 active products; more than 300 actively updated whole goods brands; and holds full model data and images for more than 175,000 active models.

 

We market our products primarily through software-as-a-service (“SaaS”) and data-as-a-service (“DaaS”) business models that typically contain both an annual auto-renewing subscription component as well as a variable usage-based revenue component. It is the nature of our products, along with the content and the continual management and updating of the content, which allows us to sell the majority of our products and services in a recurring revenue model.            Today, more than 90% of our revenues are recurring. 

 

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 subsidiaries.  We eliminated all significant intercompany balances and transactions in consolidation.  Any other adjustments deemed necessary by management for a fair presentation of all periods presented have been reflected as required by Regulation S-X, Rule 8-03, in the normal course of business.

 

Significant Accounting Policies

 

Our accounting policies are fully described in the footnotes to our Consolidated Financial Statements for the fiscal year ended July 31, 2012, which appear in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 29, 2012.  There were no changes to our accounting policies during the nine months ended April 30, 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 period of the contract.

Page 8


 

 

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. 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 pursuant to contract accounting using the percentage-of-completion method with progress-to-completion measured based upon labor hours incurred.  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.

 

Impairment of Long-Lived Assets

 

In accordance with GAAP, long-lived assets, including capitalized software product costs, property and equipment, and amortized intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets.  The Company recorded  a loss on impairment of long-lived assets of $420,000 in fiscal 2013 related to amounts previously capitalized as part of an ERP implementation, a portion of which the Company did not use and is seeking an alternative solution.  There were no impairments of long-lived assets in fiscal 2012.

 

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 computed using the straight-line method over the estimated economic life of the product which currently runs from three to five years. Amortization starts when the product is available for general release to customers.  All other software development and support expenditures are charged to expense in the period incurred.

 

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 or nine months ended April 30, 2013 and 2012.

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Deferred Loan Fees and Debt Discounts

 

Fees associated with securing debt are capitalized and included in 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.

 

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). 

 

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 April 30

 

Nine months ended April 30

 

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(571)

 

$

210 

 

$

(454)

 

$

543 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

10,548 

 

 

8,020 

 

 

9,055 

 

 

7,984 

 

 

Effect of dilutive stock options and warrants

 

 

752 

 

 

237 

 

 

408 

 

 

45 

 

 

Diluted weighted-average common shares outstanding

 

 

11,300 

 

 

8,257 

 

 

9,463 

 

 

8,029 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.05)

 

$

0.03 

 

$

(0.05)

 

$

0.07 

 

 

Diluted

 

$

(0.05)

 

$

0.03 

 

$

(0.05)

 

$

0.07 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

55 

 

 

328 

 

 

1,258 

 

 

881 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 $42,000 and $67,000 for the three month periods ended April 30, 2013 and 2012, respectively, and $127,000 and $110,000 for the nine month periods ended April 30, 2013 and 2012, respectively.  There was approximately $194,000 and $283,000 of total unrecognized compensation costs related to non-vested options

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granted under the Company’s stock option plans as of April 30, 2013 and 2012, respectively.  There were no capitalized stock-based compensation costs at April 30, 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 and nine month periods ended April 30, 2013 and 2012, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended April 30

 

Nine months ended April 30

 

 

 

2013

 

2012

 

2013

 

2012

 

 

Expected life (years)

 

n/a

 

 

 

10 years

 

 

10 years

 

 

10 years

 

 

Risk-free interest rate

 

n/a

 

 

 

2.0 

%

 

 

1.7 

%

 

 

2.1 

%

 

 

Expected volatility

 

n/a

 

 

 

126.8 

%

 

 

130.5 

%

 

 

124.5 

%

 

 

Expected forfeiture rate

 

n/a

 

 

 

36.9 

%

 

 

14.5 

%

 

 

22.9 

%

 

 

Expected dividend yield

 

n/a

 

 

 

 -

%

 

 

 -

%

 

 

 -

%

 

 

Weighted-average estimated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   fair value of options granted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

during the year

 

n/a

 

 

$

1.45 

 

 

$

1.25 

 

 

$

1.07 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 ten 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 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 and nine months ended April 30, 2013 and 2012 are as follows:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of
Options

 

Wtd. Avg.
Exercise
Price

 

Wtd. Avg.
Remaining
Contractual
Period
(Years)

 

Aggregate
Instrinsic
Value

 

 

Outstanding at 1/31/12

 

1,157,269 

 

$

1.38 

 

5.59 

 

$

298,444 

 

 

Granted

 

 -

 

 

n/a

 

n/a

 

 

n/a

 

 

Exercised

 

(17,100)

 

 

0.83 

 

n/a

 

 

n/a

 

 

Forfeited

 

(22,000)

 

 

0.86 

 

n/a

 

 

n/a

 

 

Outstanding at 4/30/12

 

1,118,169 

 

$

1.40 

 

5.31 

 

$

304,174 

 

 

Exercisable at 4/30/12

 

957,702 

 

$

1.51 

 

4.84 

 

$

175,101 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at 1/31/13

 

997,961 

 

$

1.41 

 

4.72 

 

$

459,617 

 

 

Granted

 

 -

 

 

n/a

 

n/a

 

 

n/a

 

 

Exercised

 

(3,800)

 

 

0.15 

 

n/a

 

 

n/a

 

 

Forfeited

 

(687)

 

 

0.92 

 

n/a

 

 

n/a

 

 

Outstanding at 4/30/13

 

993,474 

 

$

1.41 

 

4.49 

 

$

1,074,015 

 

 

Exercisable at 4/30/13

 

918,074 

 

$

1.47 

 

4.49 

 

$

937,800 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of
Options

 

Wtd. Avg.
Exercise
Price

 

Wtd. Avg.
Remaining
Contractual
Period
(Years)

 

Aggregate
Instrinsic
Value

 

 

Outstanding at 7/31/11

 

1,236,333 

 

$

1.36 

 

6.10