Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended October 31, 2016

OR

 

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: 0-12456

 

 

AMERICAN SOFTWARE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Georgia   58-1098795

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

470 East Paces Ferry Road, N.E., Atlanta, Georgia   30305
(Address of principal executive offices)   (Zip Code)

(404) 261-4381

(Registrant’s telephone number, including area code)

None

(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 for the past 90 days.    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.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    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  ☐    No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Classes

  

Outstanding at November 30, 2016

Class A Common Stock, $.10 par value

   26,811,751 Shares

Class B Common Stock, $.10 par value

   2,432,086 Shares

 

 

 


Table of Contents

AMERICAN SOFTWARE, INC. AND SUBSIDIARIES

Form 10-Q

Quarter ended October 31, 2016

Index

 

         Page No.  
Part I—Financial Information   

Item 1.

  Financial Statements (unaudited)   
 

Condensed Consolidated Balance Sheets as of October 31, 2016 and April  30, 2016

     3   
 

Condensed Consolidated Statements of Operations for the Three and Six Months ended October 31, 2016 and 2015

     4   
 

Condensed Consolidated Statements of Cash Flows for the Six Months ended October 31, 2016 and 2015

     5   
 

Notes to Condensed Consolidated Financial Statements – unaudited

     6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      16   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      29   

Item 4.

  Controls and Procedures      30   
Part II—Other Information   

Item 1.

  Legal Proceedings      30   

Item 1A.

  Risk Factors      30   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      30   

Item 3.

  Defaults Upon Senior Securities      31   

Item 4.

  Mine Safety Disclosures      31   

Item 5.

  Other Information      31   

Item 6.

  Exhibits      31   

 

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Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

American Software, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (unaudited)

(in thousands, except share data)

 

     October 31,
2016
    April 30,
2016
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 48,169      $ 49,004   

Investments

     20,268        20,957   

Trade accounts receivable, less allowance for doubtful accounts of $180 at October 31, 2016 and $178 at April 30, 2016:

    

Billed

     11,996        17,104   

Unbilled

     3,369        3,444   

Prepaid expenses and other current assets

     5,053        3,586   
  

 

 

   

 

 

 

Total current assets

     88,855        94,095   

Investments—Noncurrent

     3,863        7,924   

Property and equipment, net of accumulated depreciation of $32,909 at October 31, 2016 and $32,437 at April 30, 2016

     3,303        3,396   

Capitalized software, net of accumulated amortization of $18,153 at October 31, 2016 and $16,173 at April 30, 2016

     8,766        9,140   

Goodwill

     19,549        18,749   

Other intangibles, net of accumulated amortization of $5,192 at October 31, 2016 and $4,747 at April 30, 2016

     4,432        1,858   

Other assets

     1,394        1,562   
  

 

 

   

 

 

 

Total assets

   $ 130,162      $ 136,724   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 1,322      $ 1,280   

Accrued compensation and related costs

     2,557        4,349   

Dividends payable

     3,210        2,887   

Other current liabilities

     2,696        2,779   

Deferred revenue

     25,269        27,999   
  

 

 

   

 

 

 

Total current liabilities

     35,054        39,294   

Deferred income taxes

     1,057        1,319   

Long-term deferred revenue

     413        612   

Other long-term liabilities

     74        605   
  

 

 

   

 

 

 

Total liabilities

     36,598        41,830   

Shareholders’ equity:

    

Common stock:

    

Class A, $.10 par value. Authorized 50,000,000 shares: Issued 31,342,487 shares at October 31, 2016 and 30,972,947 shares at April 30, 2016

     3,134        3,097   

Class B, $.10 par value. Authorized 10,000,000 shares: Issued and outstanding 2,432,086 shares at October 31, 2016 and 2,487,086 shares at April 30, 2016; convertible into Class A shares on a one-for-one basis

     243        249   

Additional paid-in capital

     117,160        114,210   

Retained (accumulated deficit)/earnings

     (1,414     2,897   

Class A treasury stock, 4,588,632 shares at October 31, 2016 and April 30, 2016, at cost

     (25,559     (25,559
  

 

 

   

 

 

 

Total shareholders’ equity

     93,564        94,894   
  

 

 

   

 

 

 

Commitments and contingencies

    

Total liabilities and shareholders’ equity

   $ 130,162      $ 136,724   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements—unaudited.

 

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Table of Contents

American Software, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (unaudited)

(in thousands, except earnings per share data)

 

     Three Months Ended
October 31,
    Six Months Ended
October 31,
 
     2016     2015     2016     2015  

Revenues:

        

License

   $ 3,140      $ 5,563      $ 7,767      $ 10,439   

Services and other

     12,349        13,463        24,570        27,308   

Maintenance

     10,657        10,044        21,242        20,181   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     26,146        29,070        53,579        57,928   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues:

        

License

     1,606        2,002        3,429        3,929   

Services and other

     9,044        9,923        18,097        19,374   

Maintenance

     2,478        2,248        5,239        4,411   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     13,128        14,173        26,765        27,714   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     13,018        14,897        26,814        30,214   
  

 

 

   

 

 

   

 

 

   

 

 

 

Research and development

     3,169        2,416        6,269        5,165   

Sales and marketing

     5,202        5,465        10,672        10,698   

General and administrative

     3,690        3,620        7,201        7,067   

Amortization of acquisition-related intangibles

     249        68        317        136   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     12,310        11,569        24,459        23,066   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     708        3,328        2,355        7,148   

Other income (expense):

        

Interest income

     278        326        595        657   

Other, net

     (445     (193     (102     (221
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     541        3,461        2,848        7,584   

Income tax expense

     129        1,308        748        2,859   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 412      $ 2,153      $ 2,100      $ 4,725   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share (a):

        

Basic

   $ 0.01      $ 0.08      $ 0.07      $ 0.16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.01      $ 0.07      $ 0.07      $ 0.16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per common share

   $ 0.11      $ 0.10      $ 0.22      $ 0.20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in the calculation of earnings per common share:

        

Basic

     29,135        28,660        29,037        28,637   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     29,548        28,941        29,398        28,910   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Basic per share amounts are the same for Class A and Class B shares. Diluted per share amounts for Class A shares are shown above. Diluted earnings per share for Class B shares under the two-class method are $0.01 and $0.08 for the three months ended October 31, 2016 and 2015, and $0.07 and $0.16 for the six months ended October 31, 2016 and 2015, respectively. See Note D to the Condensed Consolidated Financial Statements.

See accompanying notes to condensed consolidated financial statements—unaudited.

 

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American Software, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)

(in thousands)

 

     Six Months Ended
October 31,
 
     2016     2015  

Cash flows from operating activities:

    

Net earnings

   $ 2,100      $ 4,725   

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

    

Depreciation and amortization

     3,043        2,818   

Stock-based compensation expense

     778        808   

Net (loss)/gain on investments

     (394     539   

Deferred income taxes

     (262     (238

Other, net

     —          7   

Changes in operating assets and liabilities, net of effects of acquisition:

    

Purchases of trading securities

     (2,509     (6,850

Proceeds from maturities and sales of trading securities

     7,654        6,435   

Accounts receivable, net

     5,692        1,308   

Prepaid expenses and other assets

     (1,231     (668

Accounts payable and other liabilities

     (2,277     (516

Deferred revenue

     (2,959     (4,006
  

 

 

   

 

 

 

Net cash provided by operating activities

     9,635        4,362   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capitalized computer software development costs

     (1,606     (1,990

Purchases of property and equipment, net of disposals

     (329     (241

Purchase of business, net of cash acquired

     (4,441     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (6,376     (2,231
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Repurchase of common stock

     —          (70

Excess tax benefits from stock based compensation

     —          21   

Proceeds from exercise of stock options

     2,203        709   

Payment for accrued acquisition consideration

     (200     (200

Dividends paid

     (6,097     (5,724
  

 

 

   

 

 

 

Net cash used in financing activities

     (4,094     (5,264
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (835     (3,133

Cash and cash equivalents at beginning of period

     49,004        44,655   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 48,169      $ 41,522   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements—unaudited.

 

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AMERICAN SOFTWARE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements—Unaudited

October 31, 2016

A. Basis of Presentation and Principles of Consolidation

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of our management, these condensed consolidated financial statements contain all normal recurring adjustments considered necessary for a fair presentation of the Company’s financial position at October 31, 2016, the results of operations for the three and six months ended October 31, 2016 and 2015 and cash flows for the six months ended October 31, 2016 and 2015. The Company’s results for the three and six months ended October 31, 2016 are not necessarily indicative of the results expected for the full year. You should read these statements in conjunction with our audited consolidated financial statements and management’s discussion and analysis and results of operations included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2016.

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1 in the Notes to the Consolidated Financial Statements for the fiscal year ended April 30, 2016 describes the significant accounting policies that we have used in preparing our financial statements. On an ongoing basis, we evaluate our estimates, including but not limited to those related to revenue/vendor specific objective evidence (“VSOE”), capitalized software costs, goodwill, intangible assets, stock-based compensation, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results could differ materially from these estimates under different assumptions or conditions.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of American Software, Inc. and its wholly-owned subsidiaries (“American Software” or the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

B. Revenue Recognition

We recognize revenue in accordance with the Software Revenue Recognition Topic of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification.

License. We recognize license revenue in connection with license agreements for standard proprietary software upon delivery of the software, provided we consider collection to be probable, the fee is fixed or determinable, there is evidence of an arrangement, and VSOE exists with respect to any undelivered elements of the arrangement. For multiple-element arrangements, we recognize revenue under the residual method, whereby (1) the total fair value of the undelivered elements, as indicated by VSOE, is deferred and subsequently recognized and (2) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. We record revenues from sales of third-party products in accordance with Principal Agent Considerations within the Revenue Recognition Topic of the FASB’s Accounting Standards Codification. Furthermore, we evaluate sales through our indirect channel on a case-by-case basis to determine whether the transaction should be recorded gross or net, including but not limited to assessing whether or not we: (1) act as principal in the transaction, (2) take title to the products, (3) have risks and rewards of ownership, such as the risk of loss for collection, delivery, or returns, and (4) act as an agent or broker with compensation on a commission or fee basis. Accordingly, in most cases we record our sales through the Demand Management, Inc. (“DMI”) channel on a gross basis.

Maintenance. Revenue derived from maintenance contracts primarily includes telephone consulting, product updates, and releases of new versions of products previously purchased by the customer, as well as error reporting and correction services. Maintenance contracts are typically sold for a separate fee with initial contractual periods ranging from one to three years with renewal for additional periods thereafter. Maintenance fees are generally billed annually in advance. We recognize maintenance revenue ratably over the term of the maintenance agreement. In situations where we bundle all or a portion of the maintenance fee with the license fee, VSOE for maintenance is determined based on prices when sold separately.

 

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Services. Revenue derived from services primarily includes consulting, implementation, and training. We primarily bill fees under time and materials arrangements and recognize them as we perform the services. In accordance with the other presentation matters within the Revenue Recognition Topic of the FASB’s Accounting Standards Codification, we recognize amounts received for reimbursement of travel and other out-of-pocket expenses incurred as revenue in the condensed consolidated statements of operations under services and other. These amounts totaled approximately $534,000 and $1.2 million for the three and six months ended October 31, 2016, respectively, and $666,000 and $1.2 million for the three and six months ended October 31, 2015, respectively.

Software-as-a-Service (SaaS) revenues include fees for the right to use the software for a limited period of time in a hosted environment by the Company or by a third party and the customer accesses and uses the software on an as-needed basis over the Internet or via a dedicated line; however, the customer has no ability to take delivery of the software. The underlying arrangements typically include a single fee for the service that is billed monthly, quarterly or annually. Software-as-a-Service (SaaS) revenues are recognized ratably over the subscription (which rolls into Services Revenue) over the committed services period once the services commence.

Indirect Channel Revenue. We recognize revenues for sales made through indirect channels principally when the distributor makes the sale to an end-user, the license fee is fixed or determinable, the license fee is nonrefundable, and the sale meets all other conditions for revenue recognition.

Deferred Revenue. Deferred revenue represents advance payments or billings for software licenses, services, and maintenance billed in advance of the time revenue is recognized.

Sales Taxes. We account for sales taxes collected from customers on a net basis.

Unbilled Accounts Receivable. The unbilled receivable balance consists of amounts generated from license fee and services revenues. At October 31, 2016 and April 30, 2016, unbilled license fees were approximately $613,000 and $1.5 million, respectively, and unbilled services revenues were approximately $2.8 million and $1.9 million, respectively. Unbilled license fee accounts receivable represents revenue that has been recognized, but under the terms of the license agreement, which include specified payment terms that are considered normal and customary, certain payments have not yet been invoiced to the customers. Unbilled services revenues primarily occur due to the timing of the respective billings, which occur subsequent to the end of each reporting period.

C. Declaration of Dividend Payable

On August 18, 2016, our Board of Directors declared a quarterly cash dividend of $0.11 per share of our Class A and Class B Common Stock. The cash dividend is payable on December 2, 2016 to Class A and Class B shareholders of record at the close of business on November 11, 2016.

D. Earnings Per Common Share

We have two classes of common stock, of which Class B Common Shares are convertible into Class A Common Shares at any time, on a one-for-one basis. Under our Articles of Incorporation, if we declare dividends, holders of Class A Common Shares shall receive a $0.05 dividend per share prior to the Class B Common Shares receiving any dividend and holders of Class A Common Shares shall receive a dividend at least equal to Class B Common Shares dividends on a per share basis. As a result, we have computed the earnings per share in accordance with Earnings Per Share within the Presentation Topic of the FASB’s Accounting Standards Codification, which requires companies that have multiple classes of equity securities to use the “two-class” method in computing earnings per share.

For our basic earnings per share calculation, we use the “two-class” method. Basic earnings per share are calculated by dividing net earnings attributable to each class of common stock by the weighted average number of shares outstanding. All undistributed earnings are allocated evenly between Class A and B Common Shares in the earnings per share calculation to the extent that earnings equal or exceed $0.05 per share. This allocation is based on management’s judgment after considering the dividend rights of the two classes of common stock, the control of the Class B shareholders and the convertibility rights of the Class B Common shares to Class A Common shares.

The calculation of diluted earnings per share is similar to the calculation of basic earnings per share, except that the calculation includes the dilutive effect of the assumed exercise of options issuable under our stock incentive plans. For our diluted earnings per share calculation for Class A Common Shares, we use the “if-converted” method. This calculation assumes that all Class B Common Shares are converted into Class A Common Shares (if antidilutive) and, as a result, assumes there are no holders of Class B Common Shares to participate in undistributed earnings.

 

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For our diluted earnings per share calculation for Class B Common Shares, we use the “two-class” method. This calculation does not assume that all Class B Common Shares are converted into Class A Common Shares. In addition, this method assumes the dilutive effect if Class A stock options were converted to Class A Common Shares and the undistributed earnings are allocated evenly to both Class A and B Common Shares including Class A Common Shares issued pursuant to those converted stock options. This allocation is based on management’s judgment after considering the dividend rights of the two classes of common stock, the control of the Class B shareholders and the convertibility rights of the Class B Common Shares into Class A Common Shares.

The following tables set forth the computation of basic earnings per common share and diluted earnings per common share (in thousands except for per share amounts):

Basic earnings per common share:

 

     Three Months Ended
October 31, 2016
     Six Months Ended
October 31, 2016
 
     Class A      Class B      Class A      Class B  

Distributed earnings

   $ 0.11       $ 0.11       $ 0.21       $ 0.21   

Undistributed earnings

     (0.10      (0.10      (0.14      (0.14
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0.01       $ 0.01       $ 0.07       $ 0.07   
  

 

 

    

 

 

    

 

 

    

 

 

 

Distributed earnings

   $ 2,943       $ 268       $ 5,609       $ 511   

Undistributed earnings

     (2,565      (234      (3,680      (340
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 378       $ 34       $ 1,929       $ 171   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average common shares outstanding

     26,703         2,432         26,580         2,457   

 

     Three Months Ended
October 31, 2015
     Six Months Ended
October 31, 2015
 
     Class A      Class B      Class A      Class B  

Distributed earnings

   $ 0.10       $ 0.10       $ 0.20       $ 0.20   

Undistributed earnings

     (0.02      (0.02      (0.04      (0.04
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0.08       $ 0.08       $ 0.16       $ 0.16   
  

 

 

    

 

 

    

 

 

    

 

 

 

Distributed earnings

   $ 2,610       $ 259       $ 5,215       $ 517   

Undistributed earnings

     (651      (65      (916      (91
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,959       $ 194       $ 4,299       $ 426   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average common shares outstanding

     26,073         2,587         26,050         2,587   

 

Diluted EPS for Class A Common Shares Using the If-Converted Method

Three Months Ended October 31, 2016

 

     Undistributed
& Distributed
Earnings to
Class A
Common
     Class A
Common
Shares
     EPS*  

Per Basic

   $ 378         26,703       $ 0.01   

Common Stock Equivalents

     —           413         —    
  

 

 

    

 

 

    

 

 

 
     378         27,116         0.01   

Class B Conversion

     34         2,432         —    
  

 

 

    

 

 

    

 

 

 

Diluted EPS for Class A Common Shares

   $ 412         29,548       $ 0.01   
  

 

 

    

 

 

    

 

 

 

 

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Six Months Ended October 31, 2016

 

     Undistributed
& Distributed
Earnings to
Class A
Common
     Class A
Common
Shares
     EPS*  

Per Basic

   $ 1,929         26,580       $ 0.07   

Common Stock Equivalents

     —           362         —    
  

 

 

    

 

 

    

 

 

 
     1,929         26,942         0.07   

Class B Conversion

     171         2,457         —    
  

 

 

    

 

 

    

 

 

 

Diluted EPS for Class A Common Shares

   $ 2,100         29,399       $ 0.07   
  

 

 

    

 

 

    

 

 

 

 

Three Months Ended October 31, 2015

 

     Undistributed
& Distributed
Earnings to
Class A
Common
     Class A
Common
Shares
     EPS  

Per Basic

   $ 1,959         26,073       $ 0.08   

Common Stock Equivalents

     —           281         —    
  

 

 

    

 

 

    

 

 

 
     1,959         26,354         0.07   

Class B Conversion

     194         2,587         —    
  

 

 

    

 

 

    

 

 

 

Diluted EPS for Class A Common Shares

   $ 2,153         28,941       $ 0.07   
  

 

 

    

 

 

    

 

 

 

Six Months Ended October 31, 2015

 

     Undistributed
& Distributed
Earnings to
Class A
Common
     Class A
Common
Shares
     EPS  

Per Basic

   $ 4,299         26,050       $ 0.16   

Common Stock Equivalents

     —          273         —    
  

 

 

    

 

 

    

 

 

 
     4,299         26,323         0.16   

Class B Conversion

     426         2,587         —    
  

 

 

    

 

 

    

 

 

 

Diluted EPS for Class A Common Shares

   $ 4,725         28,910       $ 0.16   
  

 

 

    

 

 

    

 

 

 

 

 

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Diluted EPS for Class B Common Shares Using the Two-Class Method

Three Months Ended October 31, 2016

 

     Undistributed
& Distributed
Earnings to
Class B
Common
     Class B
Common
Shares
     EPS*  

Per Basic

   $ 34         2,432       $ 0.01   

Reallocation of undistributed earnings to Class A Common Shares from Class B Common Shares

     4         —          —    
  

 

 

    

 

 

    

 

 

 

Diluted EPS for Class B Common Shares

   $ 38         2,432       $ 0.01   
  

 

 

    

 

 

    

 

 

 

Six Months Ended October 31, 2016

 

     Undistributed
& Distributed
Earnings to
Class B
Common
     Class B
Common
Shares
     EPS*  

Per Basic

   $ 171         2,457       $ 0.07   

Reallocation of undistributed earnings to Class B Common Shares from Class A Common Shares

     5         —          —    
  

 

 

    

 

 

    

 

 

 

Diluted EPS for Class B Common Shares

   $ 176         2,457       $ 0.07   
  

 

 

    

 

 

    

 

 

 

 

Three Months Ended October 31, 2015

 

     Undistributed
& Distributed
Earnings to
Class B
Common
     Class B
Common
Shares
     EPS  

Per Basic

   $ 194         2,587       $ 0.08   

Reallocation of undistributed earnings to Class A Common Shares from Class B Common Shares

     1         —          —    
  

 

 

    

 

 

    

 

 

 

Diluted EPS for Class B Common Shares

   $ 195         2,587       $ 0.08   
  

 

 

    

 

 

    

 

 

 

Six Months Ended October 31, 2015

 

     Undistributed
& Distributed
Earnings to
Class B
Common
     Class B
Common
Shares
     EPS  

Per Basic

   $ 426         2,587       $ 0.16   

Reallocation of undistributed earnings to Class A shares from Class B shares

     —           —          —    
  

 

 

    

 

 

    

 

 

 

Diluted EPS for Class B

   $ 426         2,587       $ 0.16   
  

 

 

    

 

 

    

 

 

 

 

* Amounts adjusted for rounding

For the three and six months ended October 31, 2016, we excluded options to purchase 345,891 and 302,628 Class A Common Shares, respectively, and for the three and six months ended October 31, 2015, we excluded options to purchase 1,534,533 and 1,221,956 Class A Common Shares, respectively, from the computation of diluted earnings per Class A Common Shares. We excluded these option share amounts because the exercise prices of those options were greater than the average market price of the Class A Common Shares during the applicable period. As of October 31, 2016, we had a total of 3,517,317 options outstanding and, as of October 31, 2015, we had a total of 3,659,371 options outstanding.

 

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E. Acquisitions

We account for business combinations using the acquisition method of accounting and accordingly, the identifiable assets acquired and liabilities assumed are recorded based upon management’s estimates of current fair values as of the acquisition date. The estimation process includes analyses based on income and market approaches. Goodwill represents the excess purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. The goodwill generated is due in part to the synergies that are not included in the fair value of identifiable intangible assets. Goodwill recorded in an acquisition is assigned to applicable reporting units based on expected revenues. Identifiable intangible assets with finite lives are amortized over their useful lives. Amortization of current technology is recorded in cost of revenues-license and amortization of all other intangible assets is recorded in amortization of acquisition-related intangibles. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs, are expensed in general and administrative expenses in the periods in which such costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.

Effective August 23, 2016, the Company acquired certain assets of AdapChain, Inc., a privately-held Pennsylvania corporation and a provider of high-quality modular integration technology (“ACI”), pursuant to the terms of an asset purchase agreement, dated as of August 23, 2016 (the “Purchase Agreement”). This acquisition will expand and complement the products and services offered by Logility.

Under the terms of the Purchase Agreement, the Company acquired the assets for a purchase price of $4,000,000 in cash plus a post-closing working capital adjustment of $385,000 and $102,000 in purchase price adjustments related to the fair value of deferred revenue. Additional consideration is payable at the end of each three month period in the 36-month period following the Closing Date (such 36-month period being the “Earnout Period”) from the license fee revenues contracted for and recorded as revenue in accordance with GAAP by either AdapChain or the Company from the sale of AdapChain software during such three month period, up to a maximum aggregate amount of $2.0 million over the Earnout Period. This additional consideration will be accounted for as post-combination services and, therefore, will be expensed as incurred, since one of the previous shareholders of AdapChain must remain employed by the Company in order to receive these earnout payments. The Company incurred acquisition costs of approximately $139,400 during the three and six months ended October 31, 2016. The operating results of ACI are not material for pro forma disclosure. We preliminarily allocated $800,000 of the total purchase price to goodwill, which has been assigned to the Supply Chain Management segment and is deductible for income tax purposes.

The following preliminary allocation of the total purchase price reflects the fair value of the assets acquired and liabilities assumed as of August 23, 2016 (in thousands):

 

            Useful Life  

Cash

   $ 46      

Accounts receivable, net

     510      

Other current assets

     66      

Property and equipment, net

     16      

Goodwill

     800      

Non-compete

     100         1-3 years   

Trade name

     200         3 years   

Current technology

     2,900         3 years   
  

 

 

    

Total Assets Acquired

     4,638      

Current liabilities

     (135   

Long-term liabilities

     (16   
  

 

 

    

Total liabilities assumed

     (151   
  

 

 

    

Net assets acquired

   $ 4,487      
  

 

 

    

Non-compete agreements, trade names and current technology are being amortized on a straight-line basis over the remaining estimated economic life of the assets, including the period being reported. The fair value of deferred revenues in a business combination is considered to be an assumed liability (which must arise from a legal performance obligation) and, accordingly, is estimated based on the direct cost of fulfilling the obligation plus a normal profit margin, which approximates fair value. Also, in practice, the normal profit margin is limited to the profit margin on the costs to provide the product or service (that is, the fulfillment effort).

 

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Table of Contents

F. Stock-Based Compensation

During the six months ended October 31, 2016 and 2015, we granted options for 342,000 and 1,063,000 shares of common stock, respectively. We recorded stock option compensation cost of approximately $389,000 and $410,000 and related income tax benefits of approximately $145,000 and $151,000 during the three months ended October 31, 2016 and 2015, respectively. We recorded stock option compensation cost of approximately $778,000 and $808,000 and related income tax benefits of approximately $285,000 and $297,000 during the six months ended October 31, 2016 and 2015, respectively. We recorded stock-based compensation expense on a straight-line basis over the vesting period directly to additional paid-in-capital.

The Company adopted ASU No. 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting, in fiscal 2016. Under the new guidance, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital. Instead, all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement, and additional paid-in capital pools will be eliminated. The guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity.

Prior to the adoption of ASU No. 2016-09, cash flows resulting from the tax benefits generated by tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) were classified as financing cash flows. During the six months ended October 31, 2015, we realized excess tax benefits of approximately $21,000 which are included as a component of cash flows from financing activities in the accompanying 2015 consolidated statements of cash flows.

During the six months ended October 31, 2016 and 2015, we issued 314,000 and 112,848 shares of common stock, respectively, resulting from the exercise of stock options. The total intrinsic value of options exercised during the six months ended October 31, 2016 and 2015 based on market value at the exercise dates was approximately $293,000 and $321,000, respectively. As of October 31, 2016, unrecognized compensation cost related to unvested stock option awards approximated $3.0 million, which we expect to recognize over a weighted average period of 1.66 years.

G. Fair Value of Financial Instruments

We measure our investments based on a fair value hierarchy disclosure framework that prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value. A number of factors affect market price observability, including the type of asset or liability and its characteristics. This hierarchy prioritizes the inputs into three broad levels as follows:

 

    Level 1—Quoted prices in active markets for identical instruments.

 

    Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

    Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

The following is a general description of the valuation methodologies we use for financial assets and liabilities measured at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Cash Equivalents—Cash equivalents include investments in government obligation based money-market funds, other money market instruments and interest-bearing deposits with initial terms of three months or less. The fair value of cash equivalents approximates its carrying value due to the short-term nature of these instruments.

Marketable Securities—Marketable securities utilizing Level 1 inputs include active exchange-traded equity securities and equity index funds, and most U.S. Government debt securities, as these securities all have quoted prices in active markets. Marketable securities utilizing Level 2 inputs include municipal bonds. We value these securities using market-corroborated pricing or other models that use observable inputs such as yield curves.

 

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Table of Contents

The following tables present our assets and liabilities that we measured at fair value on a recurring basis as of October 31, 2016 and April 30, 2016, respectively, and indicates the fair value hierarchy of the valuation techniques we used to determine such fair value (in thousands):

 

     October 31, 2016  
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Balance  

Cash equivalents

   $ 45,434       $ —         $ —         $ 45,434   

Marketable securities

     7,404         16,707         —           24,111   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 52,838       $ 16,707       $ —         $ 69,545   
  

 

 

    

 

 

    

 

 

    

 

 

 
     April 30, 2016  
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Balance  

Cash equivalents

   $ 45,977       $ —         $ —         $ 45,977   

Marketable securities

     7,374         21,487         —           28,861   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 53,351       $ 21,487       $ —         $ 74,838   
  

 

 

    

 

 

    

 

 

    

 

 

 

In addition to cash equivalents and marketable securities classified as trading securities, we also have an equity method investment valued at approximately $20,000 as of October 31, 2016 and April 30, 2016, that is not recorded at fair value and, thus, is not included in the tables above.

H. Stock Repurchases

On August 19, 2002, our Board of Directors approved a resolution authorizing the repurchase of up to an additional 2.0 million shares of our Class A common stock. We have made and will make these repurchases through open market purchases at prevailing market prices. The timing of any repurchase will depend upon market conditions, the market price of our common stock and management’s assessment of our liquidity and cash flow needs. Under this repurchase plan, through October 31, 2016, we have repurchased 1,053,679 shares of common stock at a cost of approximately $6.2 million. As of October 31, 2016, under all repurchase plans previously authorized, including this most recent plan, we have repurchased a total of 4,588,632 shares of common stock at a cost of approximately $25.6 million.

I. Comprehensive Income

We have not included condensed consolidated statements of comprehensive income in the accompanying unaudited condensed consolidated financial statements since comprehensive income and net earnings presented in the accompanying condensed consolidated statements of operations would be substantially the same.

J. Industry Segments

We provide our software solutions through three major business segments, which are further broken down into a total of four major product and service groups. The three business segments are (1) Enterprise Resource Planning (“ERP”), (2) Supply Chain Management (“SCM”), and (3) Information Technology (“IT”) Consulting.

The ERP segment consists of (i) American Software ERP, which provides purchasing and materials management, customer order processing, financial, e-commerce and traditional manufacturing solutions, and (ii) New Generation Computing (“NGC”), which provides industry-specific business software to both retailers and manufacturers in the apparel, sewn products and furniture industries. The SCM segment, which consists of Logility, a wholly-owned subsidiary, as well as its subsidiary, Demand Management, Inc. (“DMI”), provides collaborative supply chain solutions to streamline and optimize the forecasting, inventory, production, supply, allocation, distribution and management of products between trading partners. The IT Consulting segment consists of The Proven Method, Inc., an IT staffing and consulting services firm. We also provide support for our software products, such as software enhancements, documentation, updates, customer education, consulting, systems integration services, maintenance and support services.

Our chief operating decision maker is the President and Chief Executive Officer (“CEO”). While the CEO is apprised of a variety of financial metrics and information, we manage our business primarily on a segment basis, with the CEO evaluating performance based upon segment operating profit or loss that includes an allocation of common expenses, but excludes certain unallocated expenses.

 

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In the following table, we have broken down the intersegment transactions applicable to the three and six months ended October 31, 2016 and 2015:

 

     Three Months Ended
October 31,
     Six Months Ended
October 31,
 
     2016      2015      2016      2015  

Revenues:

           

Enterprise Resource Planning

   $ 2,757       $ 3,059       $ 5,765       $ 6,584   

Collaborative Supply Chain Management

     18,125         19,267         37,536         37,840   

IT Consulting

     5,264         6,744         10,278         13,504   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 26,146       $ 29,070       $ 53,579       $ 57,928   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss) before intersegment eliminations:

           

Enterprise Resource Planning

   $ (1,614    $ (1,383    $ (3,029    $ (2,345

Collaborative Supply Chain Management

     2,164         4,198         5,016         8,391   

IT Consulting

     158         513         368         1,102   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 708       $ 3,328       $ 2,355       $ 7,148   
  

 

 

    

 

 

    

 

 

    

 

 

 

Intersegment eliminations:

           

Enterprise Resource Planning

   $ (880    $ (706    $ (1,759    $ (1,435

Collaborative Supply Chain Management

     897         675         1,792         1,375   

IT Consulting

     (17      31         (33      60   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ —        $ —         $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss) after intersegment eliminations:

           

Enterprise Resource Planning

   $ (2,495    $ (2,089    $ (4,788    $ (3,780

Collaborative Supply Chain Management

     3,061         4,873         6,808         9,766   

IT Consulting

     142         544         335         1,162   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 708       $ 3,328       $ 2,355       $ 7,148   
  

 

 

    

 

 

    

 

 

    

 

 

 

Capital expenditures:

           

Enterprise Resource Planning

   $ 121       $ 136       $ 166       $ 144   

Collaborative Supply Chain Management

     65         40         163         97   

IT Consulting

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 186       $ 176       $ 329       $ 241   
  

 

 

    

 

 

    

 

 

    

 

 

 

Capitalized software:

           

Enterprise Resource Planning*

   $ —         $ —        $ —         $ —    

Collaborative Supply Chain Management

     969         1,173         1,606         1,990   

IT Consulting

     —           —          —           —    
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 969       $ 1,173       $ 1,606       $ 1,990   
  

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation and amortization:

           

Enterprise Resource Planning

   $ 183       $ 149       $ 326       $ 299   

Collaborative Supply Chain Management

     1,453         1,256         2,713         2,514   

IT Consulting

     2         2         4         5   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,638       $ 1,407       $ 3,043       $ 2,818   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) before income taxes:

           

Enterprise Resource Planning*

   $ (1,743    $ (1,208    $ (2,471    $ (1,786

Collaborative Supply Chain Management

     2,126         4,156         4,951         8,268   

IT Consulting

     158         513         368         1,102   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 541       $ 3,461       $ 2,848       $ 7,584   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* includes certain unallocated expenses.

 

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Table of Contents

Major Customer

No one customer accounted for more than 10% of total revenues for the three and six months ended October 31, 2016 and 2015.

K. Contingencies

We more often than not indemnify our customers against damages and costs resulting from claims of patent, copyright or trademark infringement associated with use of our products. We have historically not been required to make any payments under such indemnifications. However, we continue to monitor the conditions that are subject to the indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses under the indemnifications when those losses are estimable. In addition, we warrant to our customers that our products operate substantially in accordance with the software products’ specifications. Historically, we have incurred no costs related to software product warranties and we do not expect to incur such costs in the future, and as such we have made no accruals for software product warranty costs. Additionally, we are involved in various claims arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our financial position or results of operations.

L. Subsequent Event

On November 15, 2016, our Board of Directors declared a quarterly cash dividend of $0.11 per share of our Class A and Class B Common Stock. The cash dividend is payable on February 24, 2017 to Class A and Class B shareholders of record at the close of business on February 10, 2017.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This report on Form 10-Q contains forward-looking statements relating to our future financial performance, business strategy, financing plans and other future events that involve uncertainties and risks. You can identify these statements by forward-looking words such as “anticipate,” “intend,” “plan,” “continue,” “could,” “grow,” “may,” “potential,” “predict,” “strive” “will,” “seek,” “estimate,” “believe,” “expect,” and similar expressions that convey uncertainty of future events or outcomes. Any forward-looking statements we make herein are pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning future:

 

    results of operations;

 

    liquidity, cash flow and capital expenditures;

 

    demand for and pricing of our products and services;

 

    viability and effectiveness of strategic alliances;

 

    industry conditions and market conditions;

 

    acquisition activities and the effect of completed acquisitions; and

 

    general economic conditions.

Although we believe that the goals, plans, expectations, and prospects that our forward-looking statements reflect are reasonable in view of the information currently available to us, those statements are not guarantees of performance. There are many factors that could cause our actual results to differ materially from those anticipated by forward-looking statements made herein. These factors include, but are not limited to, continuing U.S. and global economic uncertainty, the timing and degree of business recovery, unpredictability and the irregular pattern of future revenues, dependence on particular market segments or customers, competitive pressures, delays, product liability and warranty claims and other risks associated with new product development, undetected software errors, market acceptance of our products, technological complexity, the challenges and risks associated with integration of acquired product lines, companies and services, as well as a number of other risk factors that could affect our future performance. All forward-looking statements included in this Form 10-Q are based upon information available to us as of the filing date of this Form 10-Q. We undertake no obligation to update any of these forward-looking statements for any reason. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these statements. We discuss certain factors in greater detail in “Business Overview” below. The terms “fiscal 2017” and “fiscal 2016” refer to our fiscal years ending April 30, 2017 and 2016, respectively.

ECONOMIC OVERVIEW

Corporate capital spending trends and commitments are the primary determinants of the size of the market for business software. Corporate capital spending is, in turn, a function of general economic conditions in the U.S. and abroad and in particular may be affected by conditions in global credit markets.

On October 4, 2016, the International Monetary Fund (“IMF”) provided an update to the World Economic Outlook (“WEO”) for the 2016 and 2017 world economic growth forecast. The update noted that, Global growth is projected to slow to 3.1 percent in 2016 before recovering to 3.4 percent in 2017. The forecast, revised down by 0.1 percentage point for 2016 and 2017 relative to April, reflects a more subdued outlook for advanced economies following the June U.K. vote in favor of leaving the European Union (Brexit) and weaker-than-expected growth in the United States. These developments have put further downward pressure on global interest rates, as monetary policy is now expected to remain accommodative for longer.

While the first half of fiscal 2017 was a difficult selling environment for the company due to the slow growth and political uncertainty from the Brexit vote and the US elections, for the remainder of fiscal 2017, we expect the global economy to improve when compared to the prior year, which could result in an improved selling environment. Overall information technology spending continues to be relatively weak as a result of the current global economic environment when compared to the period prior to the last recession. We believe information technology spending will incrementally improve over the long term as increased global competition forces companies to improve productivity by upgrading their technology systems. Although this improvement could slow or regress at any time, due in part to concerns in global capital markets and general economic conditions, we believe that our organizational and financial structure will enable us to take advantage of any sustained economic rebound. Customers continue to take long periods to evaluate discretionary software purchases.

 

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Table of Contents

We believe weak economic conditions may be driving some businesses to focus on achieving more process and efficiency enhancements in their operations and to invest in solutions that improve operating margins, rather than make large infrastructure-type technology purchases. If this trend continues, we believe it may tend to favor solutions such as our Logility supply chain solutions, which are designed to provide a more rapid return on investment and are targeted at some of the largest profit drivers in a customer’s business. While the recent slow growth economic environment has had a particularly adverse impact on the weaker companies in our target markets, we believe a large percentage of our customers are seeking to make investments to strengthen their operations, and some are taking advantage of current economic conditions to gain market share.

BUSINESS OVERVIEW

American Software was incorporated as a Georgia corporation in 1970. We develop, market and support a portfolio of software and services that deliver enterprise management and collaborative supply chain solutions to the global marketplace. We have designed our software and services to bring business value to enterprises by supporting their operations over intranets, extranets, client/servers or the Internet. References to “the Company,” “our products,” “our software,” “our services” and similar references include the appropriate business unit actually providing the product or service.

We provide our software solutions through three major business segments, which are further broken down into a total of four major product and service groups. The three business segments are (1) Enterprise Resource Planning (“ERP”), (2) Supply Chain Management (“SCM”) and (3) Information Technology (“IT”) Consulting. The ERP segment consists of (i) American Software ERP, which provides purchasing and materials management, customer order processing, financial, e-commerce and traditional manufacturing solutions, and (ii) New Generation Computing (“NGC”), which provides industry-specific business software to both retailers and manufacturers in the apparel, sewn products and furniture industries. The SCM segment, which consists of Logility, a wholly-owned subsidiary, as well as its subsidiary, Demand Management, Inc. (“DMI”), provides collaborative supply chain solutions to streamline and optimize the forecasting, inventory, production, supply, allocation, distribution and management of products between trading partners. The IT Consulting segment consists of The Proven Method, an IT staffing and consulting services firm. We also provide support for our software products, such as software enhancements, documentation, updated, customer education, consulting, systems integration services, maintenance and support services.

We derive revenues primarily from three sources: software licenses, services and maintenance. We generally determine software license fees based on the number of modules, servers, users and/or sites licensed, which are typically recognized up-front in accordance with SOP 97-2. Services and other revenues consist primarily of fees from software implementation, training, consulting, customization services, SaaS, hosting and managed services, which are typically recognized as incurred or ratably over the respective contractual term of the agreement. We primarily bill under time and materials arrangements and recognize revenues as we perform services. We typically enter into maintenance agreements for a one- to three-year term at the time of the initial product license. We generally bill maintenance fees annually in advance and then recognize the resulting revenues ratably over the term of the maintenance agreement. Deferred revenues represent advance payments or billings for software licenses, services and maintenance billed in advance of the time we recognize the related revenues.

Our cost of revenue for licenses includes amortization of capitalized computer software development costs, current intangible technology assets, royalties paid to third-party software vendors, and agent commission expenses related to license revenues generated by the indirect channel, primarily from DMI. Costs for maintenance and services include the cost of personnel to conduct implementations and customer support, consulting, other personnel-related expenses, and agent commission expenses related to maintenance revenues generated by the indirect channel, primarily from DMI. We account for the development costs of software intended for sale in accordance with the Intangibles—Goodwill and Other topic of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification. We monitor the net realizable value of our capitalized software on a quarterly basis based on an estimate of future product revenues. We currently expect to fully recover the value of the capitalized software asset recorded on our consolidated balance sheet; however, if future product revenues are less than management’s current expectations, we may incur a write-down of capitalized software costs.

Our selling expenses generally include the salary and commissions paid to our sales professionals, along with marketing, promotional, travel and associated costs. Our general and administrative expenses generally include the salary and benefits paid to executive, corporate and support personnel, as well as facilities-related costs, utilities, communications expenses, and various professional fees.

We currently view the following factors as the primary opportunities and risks associated with our business:

 

    Dependence on Capital Spending Patterns. There is risk associated with our dependence on the capital spending patterns of U.S. and international businesses, which in turn are functions of economic trends and conditions over which we have no control.

 

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    Acquisition Opportunities. There are opportunities for selective acquisitions or investments to provide opportunities to expand our sales distribution channels and/or broaden our product offering by providing additional solutions for our target markets.

 

    Acquisition Risks. There are risks associated with acquisitions of complementary companies, products and technologies, including the risks that we will not achieve the financial and strategic goals that we contemplate at the time of the transaction. More specifically, in any acquisition we will face risks and challenges associated with the uncertain value of the acquired business or assets, the difficulty of assimilating operations and personnel, integrating acquired technologies and products and maintaining the loyalty of the customers of the acquired business.

 

    Competitive Technologies. There is a risk that our competitors may develop technologies that are substantially equivalent or superior to our technology.

 

    Competition in General. There are risks inherent in the market for business application software and related services, which has been and continues to be intensely competitive; for example, some of our competitors may become more aggressive with their prices and/or payment terms, which may adversely affect our profit margins.

A discussion of a number of additional risk factors associated with our business is included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2016, which risk factors have been supplemented by the risk factors appearing in Item 1A of Part II of this report on Form 10-Q.

Recent Accounting Pronouncements

In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers – Deferral of Effective Date, which defers the implementation of ASU 2014-09, Revenue from Contracts with Customers, for one year from the initial effective date. The initial effective date of ASU No. 2014-09 was for annual reporting periods beginning after December 15, 2016, and early adoption was not permitted. ASU No. 2015-14 extends the effective date to 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 16, 2016, including interim reporting periods within that reporting period. The Company is evaluating the effect that these standards will have on its consolidated financial statements and related disclosures.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, to simplify the presentation of the deferred income taxes. The ASU requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The guidance does not change the existing requirement that only permits offsetting within a tax-paying component of an entity. This guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, but may be adopted earlier, and applied either prospectively or retrospectively. The Company adopted this guidance in the fourth quarter of fiscal 2016, reporting on a prospective basis for the annual period ended April 30, 2016.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is evaluating the impact of the adoption of this update on our consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting, to improve the accounting for employee share-based payments. Under the new guidance, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital. Instead, all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement, and additional paid-in capital pools will be eliminated. The guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. It also makes several changes to the accounting for forfeitures and employee tax withholding on share-based compensation. This guidance is effective for annual periods beginning after December 16, 2016, and interim periods within those annual periods, but may be adopted earlier. The Company adopted this guidance in the fourth quarter of fiscal 2016 for the annual period ended April 30, 2016.

 

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COMPARISON OF RESULTS OF OPERATIONS

Three-Month Comparisons. The following table sets forth certain revenue and expense items as a percentage of total revenues and the percentage changes in those items for the three months ended October 31, 2016 and 2015:

 

     Three Months Ended October 31,  
     Percentage of Total
Revenues
    Pct. Change in
Dollars
 
     2016     2015     2016 vs. 2015  

Revenues:

      

License

     12     19     (44 )% 

Services and other

     47        46        (8

Maintenance

     41        35        6   
  

 

 

   

 

 

   

Total revenues

     100        100        (10
  

 

 

   

 

 

   

Cost of revenues:

      

License

     6        7        (20

Services and other

     35        34        (9

Maintenance

     9        8        10   
  

 

 

   

 

 

   

Total cost of revenues

     50        49        (7
  

 

 

   

 

 

   

Gross margin

     50        51        (13
  

 

 

   

 

 

   

Research and development

     12        8        31   

Sales and marketing

     20        19        (5

General and administrative

     14        12        1   

Amortization of acquisition-related intangibles

     1        0        266   
  

 

 

   

 

 

   

Total operating expenses

     47        39        6   
  

 

 

   

 

 

   

Operating income

     3        12        (79
  

 

 

   

 

 

   

Other income:

      

Interest income

     1        0        (15

Other, net

     (2     0        nm   
  

 

 

   

 

 

   

Earnings before income taxes

     2        12        (84

Income tax expense

     0        5        (90
  

 

 

   

 

 

   

Net earnings

     2     7     (81 )% 
  

 

 

   

 

 

   

 

nm—not meaningful

Six-Month Comparisons. The following table sets forth certain revenue and expense items as a percentage of total revenues and the percentage changes in those items for the six months ended October 31, 2016 and 2015:

 

     Six Months Ended October 31,  
     Percentage of Total
Revenues
    Pct. Change in
Dollars
 
     2016     2015     2016 vs. 2015  

Revenues:

      

License

     14     18     (26 )% 

Services and other

     46        47        (10

Maintenance

     40        35        5   
  

 

 

   

 

 

   

Total revenues

     100        100        (8
  

 

 

   

 

 

   

Cost of revenues:

      

License

     6        7        (13

Services and other

     34        33        (7

 

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     Six Months Ended October 31,  
     Percentage of Total
Revenues
    Pct. Change in
Dollars
 
     2016     2015     2016 vs. 2015  

Maintenance

     10        8        19   
  

 

 

   

 

 

   

Total cost of revenues

     50        48        (3
  

 

 

   

 

 

   

Gross margin

     50        52        (11
  

 

 

   

 

 

   

Research and development

     12        9        21   

Sales and marketing

     20        18        0   

General and administrative

     13        12        2   

Amortization of acquisition-related intangibles

     1        0        133   
  

 

 

   

 

 

   

Total operating expenses

     46        39        6   
  

 

 

   

 

 

   

Operating income

     4        13        (67
  

 

 

   

 

 

   

Other income:

      

Interest income

     1        1        (9

Other, net

     0        0        0   
  

 

 

   

 

 

   

Earnings before income taxes

     5        14        (62

Income tax expense

     1        5        (74
  

 

 

   

 

 

   

Net earnings

     4     9     (56 )% 
  

 

 

   

 

 

   

 

nm—not meaningful

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2016 AND 2015

REVENUES

 

     Three Months Ended October 31,  
            % of Total Revenue  
     2016      2015      % Change     2016     2015  
     (in thousands)                            

License

   $ 3,140       $ 5,563         (44 )%      12     19

Services and other

     12,349         13,463         (8     47        46   

Maintenance

     10,657         10,044         6        41        35   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

   $ 26,146       $ 29,070         (10 )%      100     100
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

     Six Months Ended October 31,  
            % of Total Revenue  
     2016      2015      % Change     2016     2015  
     (in thousands)                            

License

   $ 7,767       $ 10,439         (26 )%      14     18

Services and other

     24,570         27,308         (10     46        47   

Maintenance

     21,242         20,181         5        40        35   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

   $ 53,579       $ 57,928         (8 )%      100     100
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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The 10% decrease in revenues over the three months ended October 31, 2016 was attributable primarily to a 44% decrease in license fee revenues and, to a lesser extent, an 8% decrease in services and other revenues. This was partially offset by a 6% increase in maintenance revenues for the three months ended October 31, 2016 when compared to the same period last year. The decrease in license fee revenues was attributable to a delay in closing several license fee agreements during the quarter in all three business units. We believe this delay was primarily due to economic uncertainty related to the U.S. elections and lower overall business information technology spending. The primary reason for the decrease in services and other revenues in the three months ended October 31, 2016 was a decrease in our IT consulting services due to decreased demand for IT temporary staff.

Due to intense competition in our industry, we do discount license fees from our published list price. Numerous factors contribute to the amount of the discounts provided, such as previous customer purchases, the number of customer sites utilizing the software, the number of modules purchased and the number of users, as well as the overall size of the contract. While all these factors may affect the discount amount of a particular contract, the overall percentage discount has not materially changed in the recent reported fiscal periods.

The change in our revenues from period to period is primarily due to the volume of products and related services sold in any period and the amount of products or modules purchased with each sale.

International revenues represented approximately 17% and 16% of total revenues in the three months ended October 31, 2016 and 2015, respectively. Our revenues, in particular our international revenues, may fluctuate substantially from period to period primarily because we derive most of our license fee revenues from a relatively small number of customers in a given period.

License Revenues

 

                                      
     Three Months Ended October 31,  
     2016      2015      % Change  
     (in thousands)         

Enterprise Resource Planning

   $ 178       $ 596         (70 )% 

Supply Chain Management

     2,962         4,967         (40
  

 

 

    

 

 

    

Total license revenues

   $ 3,140       $ 5,563         (44 )% 
  

 

 

    

 

 

    

 

                                      
     Six Months Ended October 31,  
     2016      2015      % Change  
     (in thousands)         

Enterprise Resource Planning

   $ 713       $ 1,641         (57 )% 

Supply Chain Management

     7,054         8,798         (20
  

 

 

    

 

 

    

Total license revenues

   $ 7,767       $ 10,439         (26 )% 
  

 

 

    

 

 

    

For the three and six months ended October 31, 2016, license fee revenues decreased 44% and 26%, respectively, when compared to the same periods in the prior year. In the three and six months ended October 31, 2016, license fee revenues from our SCM business unit decreased 40% and 20%, respectively, when compared to the corresponding periods in the prior year. We believe that the decrease in the first half of fiscal 2017 was due primarily to the economic uncertainty related to the US elections and lower overall business information technology spending. Our SCM business unit constituted 94% and 89% of total license fee revenues for the three months ended October 31, 2016 and 2015, respectively. Our SCM business unit constituted 91% and 84% of total license fee revenues for the six months ended October 31, 2016 and 2015, respectively. Our ERP business unit license fee revenues decreased by 70% and 57% for the three and six months ended October 31, 2016 when compared to the same periods in the prior year, primarily due to decreased license fee sales to the apparel and retail industries from uncertainty in the economy.

The direct sales channel provided approximately 79% and 81% of license fee revenues for the three and six months ended October 31, 2016, compared to approximately 77% and 73% in the comparable periods last year. The increase in the proportion of sales by our direct sales channel was due to a larger decrease in license fee revenue from Logility’s indirect sales channel. For the three months ended October 31, 2016 and 2015, our margins after commissions on direct sales were approximately 82% and 87%, respectively. For the six months ended October 31, 2016 and 2015, our margins after commissions on direct sales were approximately 87% for both periods. The margins increased in the current period due to the mix of sales commission rates based on each individual salespersons’ quotas and related achievement. For the three months ended October 31, 2016 and 2015, our margins after commissions

 

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on indirect sales were approximately 45% and 45%, respectively. For the six months ended October 31, 2016 and 2015, our margins after commissions on indirect sales were approximately 36% and 51%, respectively. The indirect channel margins for the current quarter are flat when compared to the same period in the prior year due to the mix of value-added reseller (“VAR”) commission rates. These margin calculations include only commission expense for comparative purposes and do not include other costs of license fees such as amortization of capitalized software.

Services and Other Revenues

 

     Three Months Ended October 31,  
     2016      2015      % Change  
     (in thousands)         

Enterprise Resource Planning

   $ 1,205       $ 1,158         4

Supply Chain Management

     5,880         5,561         6   

IT Consulting

     5,264         6,744         (22
  

 

 

    

 

 

    

Total services and other revenues

   $ 12,349       $ 13,463         (8 )% 
  

 

 

    

 

 

    

 

     Six Months Ended October 31,  
     2016      2015      % Change  
     (in thousands)         

Enterprise Resource Planning

   $ 2,299       $ 2,364         (3 )% 

Supply Chain Management

     11,993         11,440         5   

IT Consulting

     10,278         13,504         (24
  

 

 

    

 

 

    

Total services and other revenues

   $ 24,570       $ 27,308         (10 )% 
  

 

 

    

 

 

    

For the three and six months ended October 31, 2016, services revenue decreased by 8% and 10%, respectively, primarily due to decreased services revenues from our IT consulting business unit. For the three and six months ended October 31, 2016, services and other revenues from our ERP segment increased by 4% and decreased by 3%, respectively, when compared to the same periods in the prior year due to the timing of project work particularly at NGC. For the three and six months ended October 31, 2016, a 6% and 5% increase, respectively, at our SCM business unit was due to services revenue related to our Logility Cloud Services area and an increase in utilization from project implementation services from higher license fees in prior periods. For the three and six months ended October 31, 2016, our IT Consulting segment’s revenues decreased 22% and 24%, respectively, when compared to the same periods in the prior year due to the completion in the first half of fiscal 2016 of an IT project from one of our larger customers. We have observed that there is a tendency for services and other revenues, other than from IT Consulting, to lag changes in license revenues by one to three quarters, as new licenses in one quarter often involve implementation and consulting services in subsequent quarters, for which we recognize revenues only as we perform those services.

For the three months ended October 31, 2016, Cloud Services Annual Contract Value (“ACV”) increased approximately 42% to $4.4 million compared to $3.1 million in the same period of the prior year. ACV is comprised of software-as-a-service (“SAAS”) of $2.3 million compared to approximately $1.5 million during the same period last year and other cloud services ACV of $2.1 million compared to $1.6 million during the same period last year. ACV is a forward-looking operating measure used by management to better understand cloud services (SaaS and other related cloud services) revenue trends within our business, as it reflects our current estimate of revenue to be generated under existing client contracts in the forward 12-month period.

 

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Table of Contents

Maintenance Revenues

 

     Three Months Ended October 31,  
     2016      2015      % Change  
     (in thousands)         

Enterprise Resource Planning

   $ 1,376       $ 1,305         5

Supply Chain Management

     9,281         8,739         6   
  

 

 

    

 

 

    

Total maintenance revenues

   $ 10,657       $ 10,044         6
  

 

 

    

 

 

    

 

     Six Months Ended October 31,  
     2016      2015      % Change  
     (in thousands)         

Enterprise Resource Planning

   $ 2,728       $ 2,579         6

Supply Chain Management

     18,514         17,602         5   
  

 

 

    

 

 

    

Total maintenance revenues

   $ 21,242       $ 20,181         5
  

 

 

    

 

 

    

For the three and six months ended October 31, 2016, maintenance revenues increased 6% and 5%, respectively, when compared to the same periods in the prior year, due primarily to increased license fees in recent periods. Logility accounted for 87% of total maintenance revenues for the three and six months ended October 31, 2016 and 2015. Typically, our maintenance revenues have had a direct relationship to current and historic license fee revenues, since new licenses are the potential source of new maintenance customers.

GROSS MARGIN

The following table provides both dollar amounts (in thousands) and percentage measures of gross margin:

 

     Three months ended October 31,     Six months ended October 31,  
     2016            2015            2016            2015         

Gross margin on license fees

   $ 1,534         49   $ 3,561         64   $ 4,338         56   $ 6,510         62

Gross margin on services and other

     3,305         27        3,540         26        6,473         26        7,934         29   

Gross margin on maintenance

     8,179         77        7,796         78        16,003         75        15,770         78   
  

 

 

      

 

 

      

 

 

      

 

 

    

Total gross margin

   $ 13,018         50   $ 14,897         51   $ 26,814         50   $ 30,214         52
  

 

 

      

 

 

      

 

 

      

 

 

    

For the three and six months ended October 31, 2016, our total gross margin percentage decreased slightly when compared to the same periods in the prior year primarily due to a lower license fee margin from lower license fees in the first half of fiscal 2017.

Gross Margin on License Fees

License fee gross margin percentage for the three and six months ended October 31, 2016 decreased when compared to the same periods in the prior year due to lower license fees. License fee gross margin percentage tends to be directly related to the level of license fee revenues due to the relatively fixed cost of computer software amortization expense, amortization of acquired software and the sales mix between our direct and indirect channels.

Gross Margin on Services and Other

For the three and six months ended October 31, 2016, the gross margin percentage on services and other revenue increased slightly by one percentage point when compared to the same period in the prior year primarily due to an improvement in our services margin at our ERP business unit. For the six months ended October 31, 2016, the gross margin percentage on services and other revenue decreased three percentage points when compared to the same period in the prior year primarily due to increased costs related to our Logility Cloud Services area. Services and other gross margin is directly related to the level of services and other revenues. The primary component of cost of services and other revenues is services staffing, which is relatively inelastic in the short term.

Gross Margin on Maintenance

Maintenance gross margin percentage for the three and six months ended October 31, 2016 and 2015 were essentially the same range of 75% to 78%. Maintenance gross margin normally is directly related to the level of maintenance revenues. The primary component of cost of maintenance revenue is maintenance staffing, which is relatively inelastic in the short term.

 

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Table of Contents

EXPENSES

 

     Three Months Ended October 31,     Six Months Ended October 31,  
     2016     2015      % of Revenues     2016      2015      % of Revenues  
          2016     2015           2016     2015  
     (in thousands)                  (in thousands)               

Research and development

   $ 3,169      $ 2,416         12     8   $ 6,269       $ 5,165         12     9

Sales and marketing

   $ 5,202      $ 5,465         20     19   $ 10,672       $ 10,698         20     18

General and administrative

   $ 3,690      $ 3,620         14     12   $ 7,201       $ 7,067         13     12

Amortization of acquisition-related intangible assets

   $ 249      $ 68         1     0   $ 317       $ 136         1     0

Other income, net

   $ (167   $ 133         (1 )%      1   $ 493       $ 436         1     1

Income tax expense

   $ 129      $ 1,308         0     4   $ 748       $ 2,859         1     5

Research and Development

Gross product research and development costs include all non-capitalized and capitalized software development costs. A breakdown of the research and development costs is as follows:

 

     Three Months Ended
(in thousands)
 
     October 31,
2016
    Percent
Change
    October 31,
2015
 

Total capitalized computer software development costs

   $ 969        (17 %)    $ 1,173   

Percentage of gross product research and development costs

     23       33

Total research and development expense

     3,169        31     2,416   
  

 

 

     

 

 

 

Percentage of total revenues

     12       8

Total research and development expense and capitalized computer software development costs

   $ 4,138        15   $ 3,589   
  

 

 

     

 

 

 

Percentage of total revenues

     16       12

Total amortization of capitalized computer software development costs *

   $ 990        1   $ 979   

 

     Six Months Ended
(in thousands)
 
     October 31,
2016
    Percent
Change
    October 31,
2015
 

Total capitalized computer software development costs

   $ 1,606        (19 )%    $ 1,990   

Percentage of gross product research and development costs

     20       28

Total research and development expense

     6,269        21     5,165   
  

 

 

     

 

 

 

Percentage of total revenues

     12       9

Total research and development expense and capitalized computer software development costs

   $ 7,875        10   $ 7,155   
  

 

 

     

 

 

 

Percentage of total revenues

     15       12

Total amortization of capitalized computer software development costs *

   $ 1,980        1   $ 1,952   

 

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Table of Contents

 

* Included in cost of license fees

For the three and six months ended October 31, 2016, gross product research and development costs increased 15% and 10%, respectively when compared to the same periods in the previous year due increased headcount and related expenses. Capitalized software development costs decreased 17% and 19%, respectively, for the three and six months ended October 31, 2016 when compared to the same period last year due to timing of capitalizable project work. We expect capitalized product development costs to decrease for the remainder of fiscal 2017 as compared to the first half of 2017, and we expect capitalized software amortization expense to be relatively stable in coming quarters. Costs included in gross product development are salaries of product development personnel, hardware lease expense, computer software expense, telephone expense and rent.

Sales and Marketing

For the three and six months ended October 31, 2016, sales and marketing expenses were in the range of 18% to 20% of revenues. The percentage changes were primarily due an increased headcount and sales commissions as a result of higher license fees. We generally include commissions on indirect sales in cost of sales.

General and Administrative

For the three and six months ended October 31, 2016, general and administrative expenses remained flat when compared to the same periods a year ago.

At October 31, 2016, the total number of employees was 437 compared to 417 at October 31, 2015.

Operating Income/(Loss)

 

     Three Months Ended October 31,     Six Months Ended October 31,  
     2016     2015     % Change     2016     2015     % Change  
     (in thousands)           (in thousands)        

Enterprise Resource Planning*

   $ (1,614   $ (1,383     (17 )%    $ (3,029   $ (2,345     (29 )% 

Collaborative Supply Chain Management

     2,164        4,198        (48     5,016        8,391        (40

IT Consulting

     158        513        (69     368        1,102        (67
  

 

 

   

 

 

     

 

 

   

 

 

   

Total Operating Income

   $ 708      $ 3,328        (79 )%    $ 2,355      $ 7,148        (67 )% 
  

 

 

   

 

 

     

 

 

   

 

 

   

 

* includes certain unallocated expenses.

Our ERP segment operating loss increased 17% and 29% in the three and six months ended October 31, 2016, respectively, compared to the same period in the prior year primarily due to lower revenues.

Our SCM segment’s operating income decreased by 48% and 40% for the three and six months ended October 31, 2016, respectively, compared to same period last year primarily due to lower revenues and increased headcount and related costs.

Our IT Consulting segment operating income decreased 69% and 67% for the three and six months ended October 31, 2016, respectively, when compared to the prior year due to lower revenues.

Other Income

Other income is comprised of net interest and dividend income, rental income net of related depreciation expenses, exchange rate gains and losses, and realized and unrealized gains and losses from investments.

For the three months ended October 31, 2016, the decrease in other income was due primarily to a higher unrealized loss on investments and lower interest income when compared to the same period last year. This decrease was partially offset by: 1) lower exchange rate losses of approximately $72,000 for the three months ended October 31, 2016 when compared to $82,000 the same period last year and 2) higher rental income when compared to the same period last year.

 

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For the six months ended October 31, 2016, the increase in other income was due primarily to a lower unrealized loss on investments when compared to the same period last year. This increase was partially offset by: 1) lower interest income of $595,000 for the six months ended October 31, 2016 when compared to $657,000 for the same period in the prior year and 2) higher rental income when compared to the same period last year and 3) higher exchange rate losses of approximately $180,000 for the six months ended October 31, 2016 when compared to $185,000 the same period last year.

We recorded losses of approximately $610,000 and $394,000 for the three and six months ended October 31, 2016, respectively, from our trading securities portfolio. We recorded losses of approximately $353,000 and $539,000 the three and six months ended October 31, 2015, respectively, from our trading securities portfolio.

For the three and six months ended October 31, 2016, our investments generated an annualized yield of approximately 1.55% and 1.63%, respectively, compared to approximately 1.83% and 1.80% for the three and six months ended October 31, 2015, respectively.

Income Taxes

We recognize deferred tax assets and liabilities based on the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases. We measure deferred tax assets and liabilities using statutory tax rates in effect in the year in which we expect the differences to reverse. We establish a deferred tax asset for the expected future benefit of net operating loss and credit carry-forwards. Under the Income Tax Topic of the FASB Accounting Standards Codification, we cannot recognize a deferred tax asset for the future benefit of our net operating losses, tax credits and temporary differences unless we can establish that it is “more likely than not” that the deferred tax asset would be realized. During the three months ended October 31, 2016, our effective tax rate was 23.8% compared to our effective tax rate of 37.8% in the three months ended October 31, 2015. This was lower than the same period last year because the research and development tax credit was not extended until the third quarter of fiscal 2016, and because of the tax benefit from stock option exercises in the current quarter. During the six months ended October 31, 2016, our effective rate was 26.3% compared to our effective rate of 37.7% in the six months ended October 31, 2015.

Operating Pattern

We experience an irregular pattern of quarterly operating results, caused primarily by fluctuations in both the number and size of software license contracts received and delivered from quarter to quarter and our ability to recognize revenues in that quarter in accordance with our revenue recognition policies. We expect this pattern to continue.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

Sources and Uses of Cash

We have historically funded, and continue to fund, our operations and capital expenditures primarily with cash generated from operating activities. The changes in net cash that our operating activities provide generally reflect the changes in net earnings and non-cash operating items plus the effect of changes in operating assets and liabilities, such as investment trading securities, trade accounts receivable, trade accounts payable, accrued expenses and deferred revenue. We have no debt obligations or off-balance sheet financing arrangements, and therefore, we used no cash for debt service purposes.

The following table shows information about our cash flows and liquidity positions during the six months ended October 31, 2016 and 2015. You should read this table and the discussion that follows in conjunction with our condensed consolidated statements of cash flows contained in “Item 1. Financial Statements” in Part I of this report and in our Annual Report on Form 10-K for the fiscal year ended April 30, 2016.

 

     Six Months Ended
October 31,
(in thousands)
 
     2016      2015  

Net cash provided by operating activities

   $ 9,635       $ 4,362   

Net cash used in investing activities

     (6,376      (2,231

Net cash used in financing activities

     (4,094      (5,264
  

 

 

    

 

 

 

Net change in cash and cash equivalents

   $ (835    $ (3,133
  

 

 

    

 

 

 

 

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For the six months ended October 31, 2016, the net cash provided by operating activities increased when compared to the same period last year was due primarily to: 1) an increase in comparative decrease in customer accounts receivables caused by the timing of closing customer sales and related collections, 2) a decrease in purchases of trading securities, 3) higher proceeds from the maturity and sales of trading securities, 4) a decrease in the comparative decrease in deferred revenues due to timing of revenue recognition, 5) an increase in depreciation and amortization, and 6) lower excess tax benefit from stock-based compensation. This increase was partially offset by: 1) a decrease in net earnings, 2) an increase in the relative decrease in accounts payable and other accruals due to timing of payments, 3) a loss on investments compared to a gain the same period last year, 4) an increase in the comparative increase in prepaid expenses when compared to the same period in the prior year due to the timing of purchases, 5) a decrease in stock-based compensation expense, 6) an increase in deferred income tax and 7) lower tax benefit from stock options exercised.

The increase in cash used in investing activities when compared to the same period in the prior year was due primarily to the acquisition of Adapchain, Inc. during the quarter ended October 31, 2016 and an increase in purchases of property and equipment. That increase was partially offset by lower capitalized computer software development costs.

The decrease in cash used in financing activities compared to the prior year was due primarily to an increase in proceeds from exercise of stock options and a decrease in the repurchase of common stock. This was partially offset by an increase in dividends paid and a decrease in excess tax benefits from stock-based compensation.

The following table shows net changes in total cash, cash equivalents, and investments, which is one measure management uses to view net total cash generated by our activities:

 

     As of October 31,
(in thousands)
 
     2016      2015  

Cash and cash equivalents

   $ 48,169       $ 41,522   

Short and long-term investments

     24,131         30,615   
  

 

 

    

 

 

 

Total cash and short and long-term investments

   $ 72,300       $ 72,137   
  

 

 

    

 

 

 

Net (decrease) increase in total cash and investments (six months ended October 31)

   $ (5,585    $ (3,258

Our total activities used less cash and investments during the six months ended October 31, 2016, when compared to the prior year period, due primarily to the decline in operating results and changes in operating assets and liabilities as noted above.

Days Sales Outstanding in accounts receivable were 54 days as of October 31, 2016, compared to 57 days as of October 31, 2015. This decrease is primarily due to timing of cash collections. Our current ratio on October 31, 2016 was 2.5 to 1 and on October 31, 2015 was 2.4 to 1.

Our business in recent periods has generated substantial positive cash flow from operations, excluding purchases and proceeds of sale of trading securities. For this reason, and because we had $72.3 million in cash and investments with no debt as of October 31, 2016, we believe that our sources of liquidity and capital resources will be sufficient to satisfy our presently anticipated requirements during at least the next twelve months for working capital, capital expenditures and other corporate needs. However, at some future date we may need to seek additional sources of capital to meet our requirements. If such need arises, we may be required to raise additional funds through equity or debt financing. We do not currently have a bank line of credit. We can provide no assurance that bank lines of credit or other financing will be available on terms acceptable to us. If available, such financing may result in dilution to our shareholders or higher interest expense.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We have based the following discussion and analysis of financial condition and results of operations on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1 in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended April 30, 2016, describes the significant accounting policies that we have used in preparing our financial statements. On an ongoing basis, we evaluate our estimates, including, but not limited to those related to vendor specific objective evidence (“VSOE”), capitalized software costs, goodwill, intangible asset impairment, stock-based compensation, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results could differ materially from these estimates under different assumptions or conditions.

 

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We believe the critical accounting policies listed below affect significant judgments and estimates used in the preparation of the financial statements.

Revenue Recognition. We recognize revenue in accordance with the Software Revenue Recognition Topic of the FASB’s Accounting Standards Codification. We recognize license revenues in connection with license agreements for standard proprietary software upon delivery of the software, provided we deem collection to be probable, the fee is fixed or determinable, there is evidence of an arrangement, and VSOE exists with respect to any undelivered elements of the arrangement. We generally bill maintenance fees annually in advance and recognize the resulting revenues ratably over the term of the maintenance agreement. We derive revenues from services which primarily include consulting, implementation, and training. We bill for these services primarily under time and materials arrangements and recognize fees as we perform the services. Deferred revenues represent advance payments or billings for software licenses, services, and maintenance billed in advance of the time we recognize revenues. We record revenues from sales of third-party products in accordance with Principal Agent Considerations within the Revenue Recognition Topic of the FASB’s Accounting Standards Codification. Furthermore, we evaluate sales through our indirect channel on a case-by-case basis to determine whether the transaction should be recorded gross or net, including but not limited to assessing whether or not we 1) act as principal in the transaction, 2) take title to the products, 3) have risks and rewards of ownership, such as the risk of loss for collection, delivery, or returns, and 4) act as an agent or broker with compensation on a commission or fee basis. Accordingly, our sales through the DMI channel are typically recorded on a gross basis.

Generally, our software products do not require significant modification or customization. Installation of the products is routine and is not essential to their functionality. Our sales frequently include maintenance contracts and professional services with the sale of our software licenses. We have established VSOE for our maintenance contracts and professional services. We determine fair value based upon the prices we charge to customers when we sell these elements separately. We defer maintenance revenues, including those sold with the initial license fee, based on VSOE, and recognize the revenue ratably over the maintenance contract period. We recognize consulting and training service revenues, including those sold with license fees, as we perform the services based on their established VSOE. We determine the amount of revenue we allocate to the licenses sold with services or maintenance using the “residual method” of accounting. Under the residual method, we allocate the total value of the arrangement first to the undelivered elements based on their VSOE and allocate the remainder to license fees.

Valuation of Long-Lived and Intangible Assets. In accordance with the Intangibles-Goodwill and Other Topic of the FASB’s Accounting Standards Codification, we do not amortize goodwill and other intangible assets with indefinite lives. Our goodwill is subject to annual impairment tests, which require us to estimate the fair value of our business compared to the carrying value. The impairment reviews require an analysis of future projections and assumptions about our operating performance. Should such review indicate the assets are impaired, we would record an expense for the impaired assets.

In accordance with the Property, Plant, and Equipment Topic of the FASB’s Accounting Standards Codification, long-lived assets, such as property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability would be measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, we recognize an impairment charge in the amount by which the carrying amount of the asset exceeds the fair value of the asset. The determination of estimated future cash flows, however, requires management to make estimates. Future events and changes in circumstances may require us to record a significant impairment charge in the period in which such events or changes occur. Impairment testing requires considerable analysis and judgment in determining results. If other assumptions and estimates were used in our evaluations, the results could differ significantly.

Annual tests or other future events could cause us to conclude that impairment indicators exist and that our goodwill is impaired. For example, if we had reason to believe that our recorded goodwill and intangible assets had become impaired due to decreases in the fair market value of the underlying business, we would have to take a charge to income for that portion of goodwill or intangible assets that we believed was impaired. Any resulting impairment loss could have a material adverse impact on our financial position and results of operations. At October 31, 2016, our goodwill balance was $19.5 million and our intangible assets with definite lives balance was approximately $4.4 million, net of accumulated amortization.

 

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Valuation of Capitalized Software Assets. We capitalize certain computer software development costs in accordance with the Intangibles-Goodwill and Other Topic of the FASB’s Accounting Standards Codification. Costs incurred internally to create a computer software product or to develop an enhancement to an existing product are charged to expense when incurred as research and development expense until technological feasibility for the respective product is established. Thereafter, we capitalize all software development costs and report those costs at the lower of unamortized cost or net realizable value. Capitalization ceases when the product or enhancement is available for general release to customers. We make ongoing evaluations of the recoverability of our capitalized software projects by comparing the amount capitalized for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, we write off the amount by which the unamortized software development costs exceed net realizable value. We amortize capitalized computer software development costs ratably based on the projected revenues associated with the related software or on a straight-line basis over three years, whichever method results in a higher level of amortization. Amortization of capitalized computer software development costs is included in the cost of license revenues in the condensed consolidated statements of operations.

Stock-Based Compensation. We estimate the value of options granted on the date of grant using the Black-Scholes option pricing model. Management’s judgments and assumptions related to volatility, the expected term and the forfeiture rate are made in connection with the calculation of stock compensation expense. We periodically review all assumptions used in our stock option pricing model. Changes in these assumptions could have a significant impact on the amount of stock compensation expense.

Income Taxes. We provide for the effect of income taxes on our financial position and results of operations in accordance with the Income Tax Topic of the FASB’s Accounting Standards Codification. Under this accounting guidance, income tax expense is recognized for the amount of income taxes payable or refundable for the current year and for the change in net deferred tax assets or liabilities resulting from events that are recorded for financial reporting purposes in a different reporting period than recorded in the tax return. Management must make significant assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities and any valuation allowance to be recorded against our net deferred tax asset. Our judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws, allowable deductions, and projected tax credits. Changes in tax law or our interpretation of tax laws could significantly impact the amounts provided for income taxes in our financial position and results of operations. Our assumptions, judgments and estimates relative to the value of our deferred tax assets take into account our expectations of the amount and category of future taxable income. Actual operating results and the underlying amount and category of income in future years, which could significantly increase tax expense, could render inaccurate our current assumptions, judgments and estimates of recoverable net deferred taxes.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency In the three and six months ended October 31, 2016, we generated approximately 17% and 17%, respectively, of our revenues outside the United States. We typically make international sales through our foreign branches or our Logility branch and denominate those sales typically in U.S. dollars, British pounds sterling or euros. However, expenses incurred in connection with these sales are typically denominated in the local currencies. We recorded an exchange rate losses of approximately $72,000 and $180,000 for the three and six months ended October 31, 2016, respectively, compared to exchange rate losses of approximately $82,000 and $175,000 for the three months and six months ended October 31, 2015, respectively. We estimate that a 10% movement in foreign currency rates would have had the effect of creating up to a $234,000 exchange gain or loss for the three months ended October 31, 2016. We have not engaged in any hedging activities.

Interest Rates and Other Market Risks. We have no debt, and therefore limit our discussion of interest rate risk to risk associated with our investment profile. We manage our interest rate risk by maintaining an investment portfolio of trading investments with high credit quality and relatively short average maturities. These instruments include, but are not limited to, money-market instruments, bank time deposits, and taxable and tax-advantaged variable rate and fixed rate obligations of corporations, municipalities, and national, state, and local government agencies, in accordance with an investment policy approved by our Board of Directors. These instruments are denominated in U.S. Dollars. The fair market value of these instruments as of October 31, 2016 was approximately $74.0 million compared to $69.6 million as of October 31, 2015.

We also hold cash balances in accounts with commercial banks in the United States and foreign countries. These cash balances represent operating balances only and are invested in short-term time deposits of the local bank. Such operating cash balances held at banks outside the United States are denominated in the local currency and are minor.

Many of our investments carry a degree of interest rate risk. When interest rates fall, our income from investments in variable-rate securities declines. When interest rates rise, the fair market value of our investments in fixed-rate securities declines. In addition, our investments in equity securities are subject to stock market volatility. Due in part to these factors, our future investment income may fall short of expectations or we may suffer losses in principal if forced to sell securities, which have seen a decline in market value due to changes in interest rates. We attempt to mitigate risk by holding fixed-rate securities to maturity, but, if our liquidity needs force us to sell fixed-rate securities prior to maturity, we may experience a loss of principal.

 

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Inflation. Although we cannot accurately determine the amounts attributable thereto, we have been affected by inflation through increased costs of employee compensation and other operational expenses. To the extent permitted by the marketplace for our products and services, we attempt to recover increases in costs by periodically increasing prices.

 

Item 4. Controls and Procedures

Management’s Report on Internal Control Over Financial Reporting

Our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specifies in the SEC rules and forms. Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our chief executive office and chief financial officer, to allow timely decisions regarding required disclosure.

Our chief executive officer and chief financial officer, with the assistance of our Disclosure Committee, have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. We perform this evaluation on a quarterly basis so that the conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates 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

We are not currently involved in legal proceedings requiring disclosure under this item.

 

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended April 30, 2016 and our subsequently files periodic reports. There have been no material changes to the risk factors as previously disclosed in such Annual Report on Form 10-K and our subsequently files periodic reports.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(a) Not applicable

 

(b) Not applicable

 

(c) The following table summarizes repurchases of our stock in the three months ended October 31, 2016:

 

Fiscal Period

   Total
Number
of Shares
Purchased
     Average
Price
Paid
Per Share
     Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
     Maximum
Number of
Shares that
May Yet Be
Purchased
Under the Plans
or Programs*
 

August 1, 2016 through August 31, 2016

     —        $ —          —          966,656   

September 1, 2016 through September 30, 2016

     —        $ —          —          966,656   

October 1, 2016 through October 31, 2016

     —        $ —          —          966,656   
  

 

 

    

 

 

    

 

 

    

Total Fiscal 2017 Second Quarter

     —        $ —          —          966,656   
  

 

 

    

 

 

    

 

 

    

 

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* Our Board of Directors approved the above share purchase authority on August 19, 2002, when the Board approved a resolution authorizing us to repurchase up to 2.0 million shares of Class A common stock. This action was announced on August 22, 2002. The authorization has no expiration date.

 

Item 3. Defaults Upon Senior Securities

Not applicable.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

Exhibit 3.1    Amended and Restated Articles of Incorporation, and amendments thereto (1)
Exhibit 3.2    Amended and Restated By-Laws dated May 18, 2009 (2)
Exhibits 31.1-31.2.    Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32.1.    Section 906 Certifications
Exhibit 101.INS    XBRL Instance Document.
Exhibit 101.SCH    XBRL Taxonomy Extension Schema Document.
Exhibit 101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.
Exhibit 101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.
Exhibit 101.LAB    XBRL Taxonomy Extension Label Linkbase Document.
Exhibit 101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.

 

(1) Incorporated by reference herein. Filed by the Company as an exhibit to its Quarterly Report filed on Form 10-Q for the quarter ended October 31, 1990.
(2) Incorporated by reference herein. Filed by the Company as an exhibit to its Quarterly Report filed on Form 10-Q for the quarter ended January 31, 2010.

 

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SIGNATURES

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 thereunto duly authorized.

 

    AMERICAN SOFTWARE, INC.
Date: December 8, 2016     By:  

/s/ J. Michael Edenfield

      J. Michael Edenfield
      President, Chief Executive Officer, Director and Chief Operating Officer
Date: December 8, 2016     By:  

/s/ Vincent C. Klinges

      Vincent C. Klinges
      Chief Financial Officer
Date: December 8, 2016     By:  

/s/ Bryan L. Sell

      Bryan L. Sell
      Controller and Principal Accounting Officer

 

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