715bfa49691f436

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended January 31, 2014

 

 

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

 

For the transition period from                                      to                                          

 

Commission file number 000-19608

ARI Network Services, Inc.

(Exact name of registrant as specified in its charter)

 

WISCONSIN       39-1388360

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

 

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

(Address of principal executive offices)

(414) 973-4300

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YESüNO

 

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

YESüNO

 

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

 

Large accelerated filerAccelerated filer

Non-accelerated filerSmaller reporting companyü

(Do not check if a smaller reporting

reporting company)

 

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

YESNOü

 

As of March 9, 2014 there were  13,369,867 shares of the registrant’s common stock outstanding.

 


 

 

ARI Network Services, Inc.

 

FORM 10-Q

FOR THE THREE MONTHS ENDED JANUARY 31, 2014

INDEX

 

 

 

 

 

 

TABLE OF CONTENTS

 

 

 

 

 

PART I

FINANCIAL INFORMATION

Page

 

 

 

 

 

 

Item 1

 

Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of January 31, 2014 (unaudited) and July 31, 2013

3

 

 

 

 

 

 

 

 

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

5

 

 

 

January 31, 2014 and 2013

 

 

 

 

 

 

 

 

 

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

5

 

 

 

months ended January 31, 2014 and 2013

 

 

 

 

 

 

 

 

 

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

6

 

 

 

January 31, 2014 and 2013

 

 

 

 

 

 

 

 

 

Notes to the Unaudited Consolidated Financial Statements

7

 

 

 

 

 

 

Item 2

 

Management's Discussion and Analysis of Financial Condition and Results

25

 

 

 

of Operations

 

 

 

 

 

 

 

Item 3

 

Quantitative and Qualitative Disclosures about Market Risk

38

 

 

 

 

 

 

Item 4

 

Controls and Procedures

38

 

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1

 

Legal Proceedings

38

 

 

 

 

 

 

Item 1A

 

Risk Factors

38

 

 

 

 

 

 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

38

 

 

 

 

 

 

Item 3

 

Defaults upon Senior Securities

39

 

 

 

 

 

 

Item 4

 

Mine Safety Disclosures

39

 

 

 

 

 

 

Item 5

 

Other Information

39

 

 

 

 

 

 

Item 6

 

Exhibits

39

 

 

 

 

 

 

 

 

Signatures

40

 

 

 

Page 2


 

 

Item  1. Financial Statements    

 

 

 

 

 

 

 

 

 

 

 

 

ARI Network Services, Inc.

 

 

Consolidated Balance Sheets

 

 

(Dollars in Thousands, Except per Share Data)

 

 

 

 

 

 

 

(Unaudited)

 

(Audited)

 

 

 

January 31

 

July 31

 

 

 

 

2014

 

2013

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

581 

 

$

2,195 

 

 

Trade receivables, less allowance for doubtful accounts of $377

 

 

 

 

 

 

 

 

and $220 at January 31, 2014 and July 31, 2013, respectively

 

 

1,691 

 

 

945 

 

 

Work in process

 

 

180 

 

 

154 

 

 

Prepaid expenses and other

 

 

1,033 

 

 

934 

 

 

Deferred income taxes

 

 

2,912 

 

 

2,938 

 

 

Total current assets

 

 

6,397 

 

 

7,166 

 

 

Equipment and leasehold improvements:

 

 

 

 

 

 

 

 

Computer equipment and software for internal use

 

 

2,848 

 

 

2,641 

 

 

Leasehold improvements

 

 

612 

 

 

609 

 

 

Furniture and equipment

 

 

2,903 

 

 

2,561 

 

 

 

 

 

6,363 

 

 

5,811 

 

 

Less accumulated depreciation and amortization

 

 

(4,301)

 

 

(3,948)

 

 

Net equipment and leasehold improvements

 

 

2,062 

 

 

1,863 

 

 

Capitalized software product costs:

 

 

 

 

 

 

 

 

Amounts capitalized for software product costs

 

 

21,891 

 

 

20,814 

 

 

Less accumulated amortization

 

 

(17,566)

 

 

(16,604)

 

 

Net capitalized software product costs

 

 

4,325 

 

 

4,210 

 

 

Deferred income taxes

 

 

3,621 

 

 

3,451 

 

 

Other long term assets

 

 

95 

 

 

141 

 

 

Other intangible assets

 

 

3,901 

 

 

4,099 

 

 

Goodwill

 

 

12,326 

 

 

12,198 

 

 

Total assets

 

$

32,727 

 

$

33,128 

 

 

 

 

 

Page 3


 

 

 

 

 

 

 

 

 

 

 

 

 

 

ARI Network Services, Inc.

 

 

Consolidated Balance Sheets

 

 

(Dollars in Thousands, Except per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

(Audited)

 

 

 

January 31

 

July 31

 

 

 

 

2014

 

2013

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Current borrowings on line of credit

 

$

400 

 

$

 -

 

 

Current portion of long-term debt

 

 

562 

 

 

450 

 

 

Current portion of earn-out payable

 

 

286 

 

 

303 

 

 

Accounts payable

 

 

866 

 

 

710 

 

 

Deferred revenue

 

 

7,523 

 

 

8,571 

 

 

Accrued payroll and related liabilities

 

 

1,365 

 

 

1,434 

 

 

Accrued sales, use and income taxes

 

 

134 

 

 

147 

 

 

Other accrued liabilities

 

 

614 

 

 

316 

 

 

Current portion of capital lease obligations

 

 

30 

 

 

24 

 

 

Total current liabilities

 

 

11,780 

 

 

11,955 

 

 

Long-term debt

 

 

3,714 

 

 

4,050 

 

 

Common stock warrants at fair value

 

 

286 

 

 

254 

 

 

Long-term portion of earn-out payable

 

 

169 

 

 

418 

 

 

Capital lease obligations

 

 

158 

 

 

169 

 

 

Other long term liabilities

 

 

223 

 

 

233 

 

 

Total non-current liabilities

 

 

4,550 

 

 

5,124 

 

 

Total liabilities

 

 

16,330 

 

 

17,079 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Cumulative preferred stock, par value $.001 per share, 1,000,000 shares authorized; 0 shares issued and outstanding at January 31, 2014 and July 31, 2013, respectively

 

 

 -

 

 

 -

 

 

Junior preferred stock, par value $.001 per share, 100,000 shares authorized; 0 shares issued and outstanding at January 31, 2014 and July 31, 2013, respectively

 

 

 -

 

 

 -

 

 

Common stock, par value $.001 per share, 25,000,000 shares authorized; 13,367,992 and 12,976,588 shares issued and outstanding at January 31, 2014 and July 31, 2013, respectively

 

 

13 

 

 

13 

 

 

Additional paid-in capital

 

 

105,607 

 

 

104,816 

 

 

Accumulated deficit

 

 

(89,198)

 

 

(88,762)

 

 

Other accumulated comprehensive loss

 

 

(25)

 

 

(18)

 

 

Total shareholders' equity

 

 

16,397 

 

 

16,049 

 

 

Total liabilities and shareholders' equity

 

$

32,727 

 

$

33,128 

 

 

 

 

See accompanying notes

Page 4


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ARI Network Services, Inc.

 

 

Consolidated Statements of Operations

 

 

(Dollars in Thousands, Except per Share Data)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended January 31

 

Six months ended January 31

 

 

 

2014

 

2013

 

2014

 

2013

 

 

Net revenue

$

8,135 

 

$

7,478 

 

$

16,295 

 

$

13,420 

 

 

Cost of revenue

 

1,686 

 

 

1,721 

 

 

3,246 

 

 

3,129 

 

 

Gross profit

 

6,449 

 

 

5,757 

 

 

13,049 

 

 

10,291 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

2,442 

 

 

1,913 

 

 

4,899 

 

 

3,135 

 

 

Customer operations and support

 

1,780 

 

 

1,515 

 

 

3,391 

 

 

2,561 

 

 

Software development and technical support (net

 

 

 

 

 

 

 

 

 

 

 

 

 

of capitalized software product costs)

 

781 

 

 

710 

 

 

1,337 

 

 

1,323 

 

 

General and administrative

 

1,713 

 

 

1,846 

 

 

3,201 

 

 

2,917 

 

 

Depreciation and amortization (exclusive of amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

of software product costs included in cost of revenue)

 

339 

 

 

339 

 

 

660 

 

 

619 

 

 

Net operating expenses

 

7,055 

 

 

6,323 

 

 

13,488 

 

 

10,554 

 

 

Operating loss

 

(606)

 

 

(566)

 

 

(439)

 

 

(263)

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(78)

 

 

(269)

 

 

(148)

 

 

(337)

 

 

Loss on change in fair value of stock warrants

 

(10)

 

 

 -

 

 

(32)

 

 

 -

 

 

Gain on change in fair value of earn-out  payable

 

 -

 

 

 -

 

 

26 

 

 

 -

 

 

Other income, net

 

 

 

 

 

15 

 

 

 

 

Total other expense

 

(81)

 

 

(265)

 

 

(139)

 

 

(329)

 

 

Loss before provision for income tax

 

(687)

 

 

(831)

 

 

(578)

 

 

(592)

 

 

Income tax benefit

 

226 

 

 

835 

 

 

142 

 

 

709 

 

 

Net income (loss)

$

(461)

 

$

 

$

(436)

 

$

117 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.03)

 

$

0.00 

 

$

(0.03)

 

$

0.01 

 

 

Diluted

$

(0.03)

 

$

0.00 

 

$

(0.03)

 

$

0.01 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income

 

 

(Dollars in Thousands)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended January 31

 

Six months ended January 31

 

 

 

2014

 

2013

 

2014

 

2013

 

 

Net income (loss)

$

(461)

 

$

 

$

(436)

 

$

117 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(2)

 

 

(16)

 

 

(7)

 

 

(26)

 

 

Total other comprehensive loss

 

(2)

 

 

(16)

 

 

(7)

 

 

(26)

 

 

Comprehensive income (loss)

$

(463)

 

$

(12)

 

$

(443)

 

$

91 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes

Page 5


 

 

 

 

 

 

 

 

 

 

 

 

 

ARI Network Services, Inc.

 

 

Consolidated Statements of Cash Flows

 

 

(Dollars in Thousands)

 

 

(Unaudited)

 

 

 

 

 

 

 

Six months ended January 31

 

 

 

 

2014

 

2013

 

 

Operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(436)

 

$

117 

 

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Amortization of software products

 

 

962 

 

 

860 

 

 

Amortization of discount related to present value of earnout

 

 

(8)

 

 

(16)

 

 

Amortization of bank loan fees

 

 

65 

 

 

165 

 

 

Depreciation and other amortization

 

 

656 

 

 

619 

 

 

Loss on change in fair value of stock warrants

 

 

32 

 

 

 -

 

 

Provision for bad debt allowance

 

 

92 

 

 

50 

 

 

Deferred income taxes

 

 

(144)

 

 

(766)

 

 

Stock based compensation related to stock options and restricted stock

 

 

161 

 

 

334 

 

 

Net change in assets and liabilities:

 

 

 

 

 

 

 

 

Trade receivables

 

 

(835)

 

 

(83)

 

 

Work in process

 

 

(26)

 

 

(57)

 

 

Prepaid expenses and other

 

 

218 

 

 

260 

 

 

Other long term assets

 

 

(5)

 

 

(178)

 

 

Accounts payable

 

 

156 

 

 

681 

 

 

Deferred revenue

 

 

(1,048)

 

 

(710)

 

 

Accrued payroll and related liabilities

 

 

(62)

 

 

31 

 

 

Accrued sales, use and income taxes

 

 

(13)

 

 

(92)

 

 

Other accrued liabilities

 

 

288 

 

 

124 

 

 

Net cash provided by operating activities

 

$

27 

 

$

1,377 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Purchase of equipment, software and leasehold improvements

 

 

(523)

 

 

(435)

 

 

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

 

 

37 

 

 

102 

 

 

Cash paid related to earn-out

 

 

(250)

 

 

 -

 

 

Cash paid for assets related to acquisition

 

 

(200)

 

 

(2,478)

 

 

Software developed for internal use

 

 

(29)

 

 

 -

 

 

Software development costs capitalized

 

 

(984)

 

 

(818)

 

 

Net cash used in investing activities

 

$

(1,949)

 

$

(3,629)

 

 

Financing activities:

 

 

 

 

 

 

 

 

Net borrowings under line of credit

 

 

400 

 

 

180 

 

 

Payments on long-term debt

 

 

(224)

 

 

(501)

 

 

Borrowings under long-term debt

 

 

 -

 

 

1,500 

 

 

Payments of capital lease obligations

 

 

(5)

 

 

(84)

 

 

Proceeds from issuance of common stock

 

 

141 

 

 

 

 

Net cash provided by financing activities

 

$

312 

 

$

1,104 

 

 

Effect of foreign currency exchange rate changes on cash

 

 

(4)

 

 

(12)

 

 

Net change in cash and cash equivalents

 

 

(1,614)

 

 

(1,160)

 

 

Cash and cash equivalents at beginning of period

 

 

2,195 

 

 

1,350 

 

 

Cash and cash equivalents at end of period

 

$

581 

 

$

190 

 

 

Cash paid for interest

 

$

150 

 

$

270 

 

 

Cash paid for income taxes

 

$

70 

 

$

29 

 

 

 

 

 

 

 

 

 

 

 

Noncash investing and financing activities

 

 

 

 

 

 

 

 

Issuance of common stock in connection with acquisitions

 

$

164 

 

$

101 

 

 

Debt issued in connection with acquisitions

 

 

 -

 

 

3,000 

 

 

Accrued liabilities assumed in connection with acquisitions

 

 

 -

 

 

4,728 

 

 

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

 

 

 -

 

 

623 

 

 

Issuance of common stock related to payment of director compensation

 

 

234 

 

 

140 

 

 

Issuance of common stock related to payment of employee compensation

 

 

91 

 

 

108 

 

 

Contingent liabilities incurred in connection with acquisition

 

 

 -

 

 

749 

 

See accompanying notes

Page 6


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

 

 

 

1. Description of the Business and Significant Accounting Policies

 

Description of the Business

 

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

 

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

 

Basis of Presentation

 

These consolidated financial statements include the financial statements of ARI and its wholly-owned subsidiary, ARI Europe B.V.  We eliminated all significant intercompany balances and transactions in consolidation.  Certain reclassifications were made to amounts previously reported in our financial statements in order to conform to the current presentation related to certain shared corporate overhead expenses which were reclassified between sales and marketing, customer operations and support, software development and technical support and general and administrative expenses. This had no impact on gross profit, total operating expenses or net income. All adjustments that, in the opinion of management, are necessary for a fair presentation for the periods presented have been reflected as required by Regulation S-X, Rule 10-01.

 

Significant Accounting Policies

 

Our accounting policies are fully described in the footnotes to our Consolidated Financial Statements for the fiscal year ended July 31, 2013, which appear in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 29, 2013.  There were no changes to our accounting policies during the six months ended January 31, 2014.

 

Revenue Recognition

 

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

 

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

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

Page 7


 

 

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

 

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

 

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

 

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

 

Trade Receivables, Credit Policy and Allowance for Doubtful Accounts

 

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

 

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

 

Capitalized and Purchased Software Product Costs

 

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

 

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

 

Fair Value Assets and Liabilities

 

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

 

Common Stock Warrants

 

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

Page 8


 

 

related to the change in fair value of common stock warrants of $10,000 and $32,000 for the three and six months ended January 31, 2014.    

 

Legal Provisions

 

ARI may be periodically involved in legal proceedings arising from contracts, patents or other matters in the normal course of business. We reserve for any material estimated losses if the outcome is probable and can be reasonably estimated.   We had no legal provisions for the three and six months ended January 31, 2014 and 2013, respectively.

 

Deferred Loan Fees and Debt Discounts

 

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

 

Deferred Income Taxes

 

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

 

2. Basic and Diluted Net Income per Share

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended January 31

 

Six months ended

January 31

 

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(461)

 

$

 

$

(436)

 

$

117 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

13,184 

 

 

8,528 

 

 

13,154 

 

 

8,325 

 

 

Effect of dilutive stock options and warrants

 

 

 -

 

 

231 

 

 

 -

 

 

173 

 

 

Diluted weighted-average common shares outstanding

 

 

13,184 

 

 

8,759 

 

 

13,154 

 

 

8,498 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.03)

 

$

0.00 

 

$

(0.03)

 

$

0.01 

 

 

Diluted

 

$

(0.03)

 

$

0.00 

 

$

(0.03)

 

$

0.01 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

1,462 

 

 

280 

 

 

1,462 

 

 

735 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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3. Stock-based Compensation Plans

 Stock Option Plans

 

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

 

As recognizing stock-based compensation expense is based on awards ultimately expected to vest, the amount of recognized expense has been reduced for estimated forfeitures based on the Company’s historical experience. Total stock compensation expense recognized by the Company was approximately $12,000 and $48,000 for the three and six month periods ended January 31, 2014, respectively, and $48,000 and $85,000 for the same periods last year.  There was approximately $326,000 and $232,000 of total unrecognized compensation costs related to non-vested options granted under the Company’s stock option plans as of January 31, 2014 and 2013, respectively.  There were no capitalized stock-based compensation costs at January 31, 2014 or July 31, 2013

 

The fair value of each option granted was estimated in the period of issuance using the assumptions in the following table for the three and six months ended January 31, 2014 and 2013:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended January 31

 

Six months ended January 31

 

 

 

2014

 

2013

 

2014

 

2013

 

 

Expected life (years)

10 years

 

 

10 years

 

 

10 years

 

 

10 years

 

 

Risk-free interest rate

 

2.8 

%

 

 

1.7 

%

 

 

2.8 

%

 

 

1.7 

%

 

 

Expected volatility

 

73.4 

%

 

 

130.6 

%

 

 

73.4 

%

 

 

130.5 

%

 

 

Expected forfeiture rate

 

28.7 

%

 

 

11.7 

%

 

 

16.8 

%

 

 

13.5 

%

 

 

Expected dividend yield

 

 -

%

 

 

 -

%

 

 

 -

%

 

 

 -

%

 

 

Weighted-average estimated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     fair value of options granted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   during the year

$

2.56 

 

 

$

1.29 

 

 

$

2.56 

 

 

$

1.25 

 

 

 

Cash received from the exercise

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    of stock options

$

125,000 

 

 

$

1,000 

 

 

$

141,000 

 

 

$

9,000 

 

 

 

 

2000 Stock Option Plan

 

The Company’s 2000 Stock Option Plan (the “2000 Plan”) had 1,950,000 shares of common stock authorized for issuance.  Each incentive stock option that was granted under the 2000 Plan is exercisable for a period of not more than 10 years from the date of grant (five years in the case of a participant who is a 10% shareholder of the Company, unless the stock options are nonqualified), or such shorter period as determined by the Compensation Committee, and shall lapse upon the expiration of said period, or earlier upon termination of the participant’s employment with the Company. The 2000 Plan expired on December 13, 2010, at which time it was terminated except for outstanding options.  As a result, no new options may be granted under the 2000 Plan. 

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Changes in option shares under the 2000 Plan during the three and six months ended January 31, 2014 and 2013 were as follows:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of
Options

 

Wtd. Avg.
Exercise
Price

 

Wtd. Avg.
Remaining
Contractual
Period
(Years)

 

Aggregate
Instrinsic
Value

 

 

Outstanding at 10/31/12

 

1,002,461 

 

$

1.40 

 

4.97 

 

$

114,006 

 

 

Granted

 

 -

 

 

n/a

 

n/a

 

 

n/a

 

 

Exercised

 

(2,000)

 

 

0.35 

 

n/a

 

 

2,908 

 

 

Forfeited

 

(2,500)

 

 

0.73 

 

n/a

 

 

n/a

 

 

Outstanding at 1/31/13

 

997,961 

 

$

1.41 

 

4.72 

 

$

459,617 

 

 

Exercisable at 1/31/13

 

922,374 

 

$

1.47 

 

4.72 

 

$

375,251 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at 10/31/13

 

963,661 

 

$

1.43 

 

3.93 

 

$

1,773,485 

 

 

Granted

 

 -

 

 

n/a

 

n/a

 

 

n/a

 

 

Exercised

 

(127,500)

 

 

0.74 

 

n/a

 

 

338,468 

 

 

Forfeited

 

(14,087)

 

 

0.70 

 

n/a

 

 

n/a

 

 

Outstanding at 1/31/14

 

822,074 

 

$

1.55 

 

3.21 

 

$

1,514,709 

 

 

Exercisable at 1/31/14

 

820,700 

 

$

1.55 

 

3.20 

 

$

1,510,836 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of
Options

 

Wtd. Avg.
Exercise
Price

 

Wtd. Avg.
Remaining
Contractual
Period
(Years)

 

Aggregate
Instrinsic
Value

 

 

Outstanding at 7/31/12

 

1,099,769 

 

$

1.41 

 

5.06 

 

$

105,849 

 

 

Granted