20161031

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549



FORM 10-Q



(Mark One)



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



For the quarterly period ended October 31, 2016



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



For the transition period from                                      to                                          

 

Commission file number 000-19608

ARI Network Services, Inc.

(Exact name of registrant as specified in its charter)





 

 

WISCONSIN

 

39-1388360

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)



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

(Address of principal executive offices)

(414) 973-4300

(Registrant's telephone number, including area code)



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

YES        NO  



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

YES        NO  



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





 

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller reporting company

 

(Do not check if a smaller reporting company)

 

 

 

 

 



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

YES        NO  



As of December  8, 2016, there were  17,460,032  shares of the registrant’s common stock outstanding.




 

 

ARI Network Services, Inc.



FORM 10-Q

FOR THE THREE MONTHS ENDED OCTOBER 31, 2016

INDEX



 

 





 

Page



 

 

PART I             FINANCIAL INFORMATION

Item 1

Consolidated Financial Statements

Item 2

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

17 

Item 3

Quantitative and Qualitative Disclosures about Market Risk

27 

Item 4

Controls and Procedures

27 

PART II           OTHER INFORMATION

Item 1

Legal Proceedings

28 

Item 1A

Risk Factors

28 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

28 

Item 3

Defaults upon Senior Securities

28 

Item 4

Mine Safety Disclosures

28 

Item 5

Other Information

28 

Item 6

Exhibits

28 

Signatures

 

29 



 







2


 

 

PART I.   FINANCIAL INFORMATION

Item 1.   Consolidated Financial Statements

3


 

 



 

 

 

 

 

 



 

 

 

 

 

 

ARI Network Services, Inc.

Consolidated Balance Sheets

(Dollars in Thousands, Except per Share Data)



 

 

 

 

 

 



 

(Unaudited)

 

(Audited)



October 31

 

July 31



 

2016

 

2016

ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,617 

 

$

5,118 

Trade receivables, less allowance for doubtful accounts of $175

 

 

 

 

 

 

  and $211 at October 31, 2016 and July 31, 2016, respectively

 

 

1,817 

 

 

1,942 

Work in process

 

 

73 

 

 

132 

Prepaid expenses and other

 

 

682 

 

 

781 

Deferred income taxes

 

 

2,892 

 

 

3,182 

Total current assets

 

 

11,081 

 

 

11,155 

Equipment and leasehold improvements:

 

 

 

 

 

 

Computer equipment and software for internal use

 

 

3,579 

 

 

3,575 

Leasehold improvements

 

 

639 

 

 

639 

Furniture and equipment

 

 

2,591 

 

 

2,544 

          Total equipment and leasehold improvements

 

 

6,809 

 

 

6,758 

Less accumulated depreciation and amortization

 

 

(4,437)

 

 

(4,237)

Net equipment and leasehold improvements

 

 

2,372 

 

 

2,521 

Capitalized software product costs:

 

 

 

 

 

 

Amounts capitalized for software product costs

 

 

25,384 

 

 

24,774 

Less accumulated amortization

 

 

(20,265)

 

 

(19,743)

Net capitalized software product costs

 

 

5,119 

 

 

5,031 

Deferred income taxes

 

 

1,123 

 

 

1,112 

Other intangible assets

 

 

7,518 

 

 

7,890 

Goodwill

 

 

21,634 

 

 

21,634 

Total non-current assets

 

 

37,766 

 

 

38,188 

Total assets

 

$

48,847 

 

$

49,343 



LIABILITIES

 

 

 

 

 

 

Current portion of long-term debt

 

$

2,510 

 

$

2,417 

Current portion of contingent liabilities

 

 

273 

 

 

331 

Accounts payable

 

 

785 

 

 

718 

Deferred revenue

 

 

5,818 

 

 

6,763 

Accrued payroll and related liabilities

 

 

2,327 

 

 

1,817 

Accrued sales, use and income taxes

 

 

252 

 

 

297 

Other accrued liabilities

 

 

707 

 

 

677 

Current portion of capital lease obligations

 

 

50 

 

 

50 

Total current liabilities

 

 

12,722 

 

 

13,070 

Long-term debt

 

 

6,031 

 

 

6,658 

Long-term portion of contingent liabilities

 

 

 —

 

 

60 

Capital lease obligations

 

 

51 

 

 

63 

Other long-term liabilities

 

 

155 

 

 

166 

Total non-current liabilities

 

 

6,237 

 

 

6,947 

Total liabilities

 

 

18,959 

 

 

20,017 



 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Cumulative preferred stock, par value $.001 per share, 1,000,000 shares authorized; 0 shares issued and outstanding at October 31, 2016 and July 31, 2016, respectively

 

 

 —

 

 

 —

Junior preferred stock, par value $.001 per share, 100,000 shares authorized; 0 shares issued and outstanding at October 31, 2016 and July 31, 2016, respectively

 

 

 —

 

 

 —

Common stock, par value $.001 per share, 25,000,000 shares authorized; 17,445,532 and 17,310,763 shares issued and outstanding at October 31, 2016 and July 31, 2016, respectively

 

 

17 

 

 

17 

Additional paid-in capital

 

 

115,571 

 

 

115,364 

Accumulated deficit

 

 

(85,694)

 

 

(86,050)

Other accumulated comprehensive income

 

 

(6)

 

 

(5)

Total shareholders' equity

 

 

29,888 

 

 

29,326 

Total liabilities and shareholders' equity

 

$

48,847 

 

$

49,343 



See accompanying notes

4


 

 



















 

 

 

 

 

 

ARI Network Services, Inc.

Consolidated Statements of Operations

(Dollars in Thousands, Except per Share Data)

(Unaudited)



 

 



 

Three months ended October 31



 

2016

 

2015

Net revenue

 

$

12,272 

 

$

11,737 

Cost of revenue

 

 

2,289 

 

 

2,069 

Gross profit

 

 

9,983 

 

 

9,668 

Operating expenses:

 

 

 

 

 

 

Sales and marketing

 

 

2,687 

 

 

2,765 

Customer operations and support

 

 

2,755 

 

 

2,446 

Software development and technical support (net of capitalized software product costs)

 

 

1,256 

 

 

1,255 

General and administrative

 

 

1,942 

 

 

1,785 

Depreciation and amortization (exclusive of amortization of software product costs included in cost of revenue)

 

 

575 

 

 

609 

Net operating expenses

 

 

9,215 

 

 

8,860 

Operating income

 

 

768 

 

 

808 

Other income (expense):

 

 

 

 

 

 

Interest expense

 

 

(108)

 

 

(112)

Other, net

 

 

 

 

(8)

Total other income (expense)

 

 

(107)

 

 

(120)

Income before provision for income tax

 

 

661 

 

 

688 

Income tax expense

 

 

(305)

 

 

(299)

Net income

 

$

356 

 

$

389 



 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

Basic

 

 

17,424 

 

 

17,152 

Diluted

 

 

17,929 

 

 

17,604 



 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

Basic

 

$

0.02 

 

$

0.02 

Diluted

 

$

0.02 

 

$

0.02 



 

 

 

 

 

 

See accompanying notes



 

 

 

 

 

 

Consolidated Statements of Comprehensive Income

(Dollars in Thousands)

(Unaudited)



 

Three months ended October 31



 

2016

 

2015

Net income

 

$

356 

 

$

389 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(1)

 

 

(2)

Total other comprehensive income (loss)

 

 

(1)

 

 

(2)

Comprehensive income

 

$

355 

 

$

387 



 

 

 

 

 

 



                             See accompanying notes





5


 

 

ARI Network Services, Inc.

Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)





 

 

 

 

 

 

 

 



 

 

Three months ended October 31

 



 

 

2016

 

2015

 



Operating activities:

 

 

 

 

 

 

 



Net income

 

$

356 

 

$

389 

 



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

 

 

 

 

 

 

 



Amortization of software products

 

 

522 

 

 

496 

 



Amortization of deferred loan fees and imputed interest expense

 

 

10 

 

 

 



Depreciation and other amortization

 

 

575 

 

 

610 

 



Gain on change in fair value of earn-out receivable and payable

 

 

 -

 

 

 



Provision for bad debt allowance

 

 

(6)

 

 

25 

 



Deferred income taxes

 

 

279 

 

 

293 

 



Stock based compensation

 

 

149 

 

 

115 

 



Net change in assets and liabilities:

 

 

 

 

 

 

 



Trade receivables

 

 

131 

 

 

(102)

 



Work in process, prepaid expenses and other

 

 

135 

 

 

115 

 



Accounts payable

 

 

67 

 

 

71 

 



Deferred revenue

 

 

(945)

 

 

(700)

 



Accrued payroll and related liabilities

 

 

519 

 

 

435 

 



Accrued taxes and other accrued liabilities

 

 

(26)

 

 

(25)

 



Net cash provided by operating activities

 

$

1,766 

 

$

1,735 

 



Investing activities:

 

 

 

 

 

 

 



Purchase of equipment, software and leasehold improvements

 

 

(51)

 

 

(167)

 



Cash paid for contingent liabilities related to acquisitions

 

 

(121)

 

 

(125)

 



Software development costs capitalized

 

 

(610)

 

 

(373)

 



Net cash used in investing activities

 

$

(782)

 

$

(665)

 



Financing activities:

 

 

 

 

 

 

 



Payments on long-term debt

 

$

(541)

 

$

(151)

 



Payments of capital lease obligations

 

 

(12)

 

 

(65)

 



Proceeds from exercise of common stock options and warrants

 

 

72 

 

 

43 

 



Net cash used in financing activities

 

$

(481)

 

$

(173)

 



Effect of foreign currency exchange rate changes on cash

 

 

(4)

 

 

(2)

 



Net change in cash and cash equivalents

 

 

499 

 

 

895 

 



Cash and cash equivalents at beginning of period

 

 

5,118 

 

 

2,284 

 



Cash and cash equivalents at end of period

 

$

5,617 

 

$

3,179 

 



Cash paid for interest

 

$

103 

 

$

113 

 



Cash paid for income taxes

 

$

123 

 

$

13 

 



 

 

 

 

 

 

 

 



See accompanying notes







6


 

 

ARI Network Services, Inc. 

Notes to 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”), data-as-a-service (“DaaS”) and other 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 whole goods inventory and PG&A for customers in the automotive tire and wheel aftermarket (“ATW”), automotive aftermarket parts and service (“AAPS”), powersports, outdoor power equipment (“OPE”), marine, home medical equipment (“HME”), recreational vehicles (“RV”) and appliance industries. Our innovative products are powered by a proprietary library of enriched original equipment and aftermarket content from over 1,800 manufacturers. More than 23,500 equipment dealers, distributors and 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 Cypress, California; Floyds Knobs, Indiana; Des Moines, Iowa; Duluth, Minnesota; Wexford, Pennsylvania; Cookeville, Tennessee; Salt Lake City, Utah; Leiden, The Netherlands; and Gurgaon, India. 

Basis of Presentation

These consolidated financial statements include the consolidated financial statements of ARI and its wholly-owned subsidiaries, ARI Europe B.V. and ARI Network Services Pvt. Ltd. and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). We eliminated all significant intercompany balances and transactions in consolidation. All other adjustments that, in the opinion of management, are necessary for a fair presentation of the periods presented have been reflected as required by Regulation S-X, Rule 10-01.

Fiscal Year

Our fiscal year ends on July 31. References to fiscal 2017, for example, refer to the fiscal year ending July 31, 2017, and references to fiscal 2016 refer to the fiscal year ended July 31, 2016.  

Revenue Recognition

Revenues from subscription fees for use of our software, access to our catalog content, and software maintenance and support fees are all recognized ratably over the contractual term of the arrangement. The Company has customer contracts with multiple services or elements, which may be delivered at different times. The Company accounts for delivered elements in accordance with the selling price when arrangements include multiple product components or other elements and vendor-specific objective evidence exists for the value of all undelivered elements. Revenue on undelivered elements is recognized when the elements are delivered. 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. 

For software license arrangements that do not require significant modification or customization of the underlying software, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable.

7


 

 

Revenues for professional services to customize complex features and functionality in a product’s base software code or develop complex interfaces within a customer’s environment are recognized as the services are performed if they are determined to have standalone value to the customer or if all of the following conditions are met (i) the customer has a contractual right to take possession of the software; (ii) the customer will not incur significant penalty if it exercises this right; and (iii) it is feasible for the customer to either run the software on its own hardware or contract with another unrelated party to host the software. When the current estimates of total contract revenue for professional services and the total related costs indicate a loss, a provision for the entire loss on the contract is made in the period the amount is determined. Professional service revenues for set-up and integration of hosted websites, or other services considered essential to the functionality of other elements of the arrangement, are amortized over the term of the contract.

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

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

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

No single customer accounted for 10% or more of ARI’s revenue during the three months ended October 31, 2016 or 2015.  

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 consolidated 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 Company capitalizes software enhancements on an on-going basis and all other software development and support expenditures are charged to expense in the period incurred.

The annual amortization of software products is computed using the straight-line method over the estimated economic life of the product, which currently ranges from 2 to 14 years. Amortization starts when the product is available for general release to customers. 

Deferred Loan Fees and Debt Discounts

Fees associated with securing debt are capitalized and shown as contra-debt, reducing the carrying amount of long-term debt on the consolidated balance sheet. Deferred loan fees and debt discounts are amortized to interest expense over the life of the debt using the effective interest method.

8


 

 

Deferred Income Taxes

The tax effect of the temporary differences between the book and tax bases of assets and liabilities and the estimated tax benefit from tax net operating losses is reported as deferred tax assets and liabilities in the consolidated balance sheets. 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. 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 income tax expense in the consolidated statements of operations.    

Legal Provisions

ARI may periodically be 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 reasonably estimable, in accordance with GAAP. We had no legal provisions during the three months ended October 31, 2016 or 2015 and management believes that the results of any outstanding litigation will not have a material impact on the Company’s financial condition or results of operations.   

Supplemental Cash Flow Information

The following table shows cash flow information related to non-cash investing and financing activities (in thousands):





 

 

 

 

 

 

 

 



 

 

Three months ended October 31

 



 

 

2016

 

2015

 



Non-cash investing and financing activities

 

 

 

 

 

 

 



Issuance of common stock related to payment of contingent liabilities

 

$

 -

 

$

60 

 



Cashless exercise of common stock warrants

 

 

 -

 

 

46 

 



Current assets acquired in connection with acquisitions

 

 

 -

 

 

32 

 



Accrued liabilities assumed in connection with acquisitions

 

 

 -

 

 

53 

 



Contingent liabilities incurred in connection with acquisition

 

 

 -

 

 

(62)

 



 

 

 

 

 

 

 

 

 

2. Basic and Diluted Net Income per Common Share 

 

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

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





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

Three months ended October 31

 



 

 

2016

 

2015

 



 

 

 

 

 

 

 

 



Net income

 

$

356 

 

$

389 

 



 

 

 

 

 

 

 

 



Weighted-average common shares outstanding

 

 

17,424 

 

 

17,152 

 



Effect of dilutive stock options and warrants

 

 

505 

 

 

452 

 



Diluted weighted-average common shares outstanding

 

 

17,929 

 

 

17,604 

 



 

 

 

 

 

 

 

 



Net income per share

 

 

 

 

 

 

 



Basic

 

$

0.02 

 

$

0.02 

 



Diluted

 

$

0.02 

 

$

0.02 

 



 

 

 

 

 

 

 

 



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

 

 

 -

 

 

 -

 



 

 

 

 

 

 

 

 

 



9


 

 

3. Debt 



Silicon Valley Bank

On April 26, 2013, the Company entered into a Loan and Security Agreement (the “Agreement”) with Silicon Valley Bank (“SVB”), pursuant to which SVB extended to the Company credit facilities consisting of a $3,000,000 revolving credit facility with a maturity date of April 26, 2015 and a $4,500,000 term loan with a maturity date of April 26, 2018

On September 30, 2014, in connection with the Company’s acquisition of Tire Company Solutions, LLC (“TCS”), the Company entered into the First Loan Modification Agreement (the “Modification Agreement”) with SVB, which contained substantial amendments to the terms of the Agreement.

The Modification Agreement included credit facilities consisting of a $3,000,000 revolving credit facility with a maturity date of November 30, 2016 and a $6,050,000 term loan with a maturity date of September 30, 2019.  



On November 1, 2016, in connection with the Company’s acquisition of Auction123123, Inc. (“Auction123”), the Company entered into the Second Loan Modification Agreement with SVB.  See Note 8, Subsequent Events for details relating to the acquisition of Auction123and the SVB Second Loan Modification Agreement.



The term loan and any loans made under the SVB revolving credit facility accrue interest at a per annum rate equal to the Prime Rate plus the Applicable Margin for Prime Rate Loans set forth in the chart below based on the Total Leverage Ratio, as defined in the Modification Agreement. The Company had $0 outstanding on the revolving credit facility and the effective interest rate was 4.00% at October 31, 2016, based upon a prime rate of 3.50%.





 

 



Applicable Margin

Total Leverage Ratio

for Prime Rate Loans



 

 

>= 2.50 to 1.0:

1.50 

%

> 1.75 to 1.00 but <2.50 to 1.00:

1.00 

%

<= 1.75 to 1.00:

0.50 

%



Principal in respect of any loans made under the revolving facility was required to be paid in its entirety on or before November 30, 2016. Principal in respect of the term loan was required to be paid in quarterly installments on the first day of each fiscal quarter of the Company as follows: $151,250 commenced on November 1, 2014 through August 1, 2016; $226,875 commencing on November 1, 2016 through August 1, 2017; and $302,500 commencing on November 1, 2017 through August 1, 2019. All remaining principal in respect of the term loan was due and payable on September 30, 2019. The Company is permitted to prepay all of, but not less than all of, the outstanding principal amount of the term loan upon notice to SVB and, in certain circumstances, the payment of a prepayment penalty of up to $61,000.  Following July 31, 2015, the Modification Agreement required the Company to make additional payments in the amount of 25% of excess cash flow, as defined in the agreement, until the Company’s Total Leverage Ratio is less than 2.00 to 1.00.

The Modification Agreement contained covenants that restrict, among other things and subject to certain conditions, the ability of the Company to permit a change of control, incur debt, create liens on its assets, make certain investments, enter into merger or acquisition transactions and make distributions to its shareholders. Financial covenants include the maintenance of a minimum Total Leverage Ratio equal to or less than 3.00 to 1.00 and the maintenance of a Fixed Charge Coverage Ratio (as defined in the Modification Agreement) equal to or greater than 1.25 to 1.00. The Total Leverage Ratio was 1.04 and the Fixed Charge Ratio was 1.90 for the twelve months ended October 31, 2016.  The Modification Agreement also contained customary events of default that, if triggered, could result in an acceleration of the Company’s obligations under the Modification Agreement. All SVB loans are secured by a first priority security interest in substantially all assets of the Company.

TCS Promissory Notes

In connection with the acquisition of TCS, on September 30, 2014, the Company issued two promissory notes (the “TCS Notes”) in the aggregate principal amount of $3,000,000 to the former owners of TCS. In February 2015, the principal amount of the TCS Notes was reduced by approximately $67,000 as a result of post-closing adjustments to the valuation of the net assets acquired, pursuant to the terms of the asset purchase agreement. The TCS Notes initially accrue interest on the outstanding unpaid principal balance at a rate per annum equal to 5.0%; however, if any amount payable under a TCS Note is not paid when due, such overdue amount will bear interest at the default rate of 7.5% from the date of such non-payment until such amount is paid in full. Accrued interest on the TCS Notes is due and payable quarterly commencing on December 29, 2014 and continuing on each 90th calendar day thereafter, until September 30, 2018, at which time all accrued interest and outstanding principal balance will be due and payable in full. The first four payments due and payable under the TCS Notes were interest-only payments, and payments of principal and interest

10


 

 

commenced on December 29, 2015. The payments are subject to acceleration upon certain Events of Default, as defined in the TCS Notes. 

DCi Promissory Note

In connection with the acquisition of Direct Communications Inc. (“DCi”), on July 13, 2015, the Company issued a promissory note (the “DCi Note”) in the aggregate principal amount of $2,000,000 to the former owners of DCi. The principal amount of the DCi Note was reduced by approximately $64,000 as a result of post-closing adjustments to the estimated valuation of the net assets acquired, pursuant to the terms of the asset purchase agreement. The DCi Note initially accrues interest on the outstanding unpaid principal balance at a rate per annum equal to 4.0%. Accrued interest on the DCi Note is due and payable quarterly commencing on October 13, 2015 and continuing on each 90th calendar day thereafter, until July 13, 2019, at which time all accrued interest and outstanding principal balance will be due and payable in full. The first four payments due and payable under the DCi Note were interest only payments, and payments of principal and interest commenced on October 13, 2016. The payments are subject to acceleration upon certain Events of Default, as defined in the DCi Note. 



The following table sets forth certain information related to the Company’s long-term debt as of October 31, 2016 and July 31, 2016 (in thousands): 

 



 

 

 

 

 

 



October 31

 

July 31

 



2016

 

2016

 

Notes payable principal

$

8,626 

 

$

9,168 

 

Less debt issuance costs

 

(85)

 

 

(93)

 

Less current maturities

 

(2,510)

 

 

(2,417)

 

Notes payable - non-current

$

6,031 

 

$

6,658 

 



 

 

 

 

 

 



Minimum principal payments due on the SVB Term Note, the TCS Notes and the DCi Note as of October 31, 2016 were as follows for the fiscal years ending (in thousands):  



 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal year ending July 31:

SVB Term Note

 

TCS Notes

 

 

DCi Notes

 

 

Total Notes Payable

 

 

2017

$

681 

 

$

728 

 

$

467 

 

$

1,876 

 

 

2018

 

1,134 

 

 

1,014 

 

 

645 

 

 

2,793 

 

 

2019

 

1,210 

 

 

261 

 

 

671 

 

 

2,142 

 

 

2020

 

1,815 

 

 

 —

 

 

 —

 

 

1,815 

 

 



$

4,840 

 

$

2,003 

 

$

1,783 

 

$

8,626 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 













4. Contingent Liabilities 



Consideration for the April 2015 TASCO acquisition included a $138,000 (as adjusted) holdback which was paid in April 2016.     

Consideration for the September 2014 TCS acquisition includes a contingent earn-out purchase price, originally contingent upon the attainment of specific revenue goals. The fair value of the earn-out was originally estimated at $711,000.  On March 7, 2016, the TCS Asset Purchase Agreement was amended in relation to the contingent earn-out, whereas four quarterly payments of $120,905 commenced on December 31, 2015, followed by four quarterly payments of $70,000, commencing December 31, 2016. Payments for the quarter ended October 31, 2015 included the final earn-out payment related to the Ready2Ride acquisition, composed of $125,000 and 15,000 shares of common stock.

The following table shows changes in the holdback and earn-out payable related to the TCS and TASCO acquisitions (in thousands):



 

 

 

 

 



Three months ended October 31



2016

 

2015

Beginning balance

$

391 

 

$

1,116 

Adjustments

 

 -

 

 

(62)

Payments

 

(121)

 

 

(186)

Imputed interest recognized

 

 

 

Gain on change in fair value of earn-out

 

 -

 

 

Ending balance

$

273 

 

$

884 

    Less current portion

$

(273)

 

$

(639)

Ending balance, long-term

$

 

$

245 



 

 

 

 

 

11


 

 





12


 

 

The following table shows the remaining estimated payments of contingent liabilities related to the TCS acquisition at October 31, 2016, (in thousands):



 

 

 

 

 

 



2017

$

210 

 

 

 



2018

 

70 

 

 

 



Total estimated payments

 

280 

 

 

 



Less imputed interest

 

(7)

 

 

 



Present value of contingent liabilities

$

273 

 

 

 



 

 

 

 

 

 

















5. Other Intangible Assets



Amortizable intangible assets include customer relationships and other intangibles including trade names and non-compete agreements. Amortizable intangible assets are composed of the following at October 31, 2016 and 2015 (in thousands): 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

Three months ended October 31, 2015

Wtd. avg.

 



 

 

Cost

 

Accumulated

 

Net

remaining

 



Customer relationships

 

Basis

 

Amortization

 

Value

life

 



Beginning balance

 

$

11,947 

 

$

(4,418)

 

$

7,529 

 

 



Activity

 

 

 -

 

 

(285)

 

 

(285)

 

 



Ending balance

 

$

11,947 

 

$

(4,703)

 

$

7,244 

11.84

 



 

 

 

 

 

 

 

 

 

 

 

 



Other intangibles

 

 

 

 

 

 

 

 

 

 

 



Beginning balance

 

$

3,203 

 

$

(616)

 

$

2,587 

 

 



Activity

 

 

 -

 

 

(112)

 

 

(112)

 

 



Ending balance

 

$

3,203 

 

$

(728)

 

$

2,475 

3.09

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



Total intangibles

 

 

 

 

 

 

 

 

 

 

 



Beginning balance

 

$

15,150 

 

$

(5,034)

 

$

10,116 

 

 



Activity

 

 

 -

 

 

(397)

 

 

(397)

 

 



Ending balance

 

$

15,150 

 

$

(5,431)

 

$

9,719 

11.13

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

Three months ended October 31, 2016

Wtd. avg.

 



 

 

Cost

 

Accumulated

 

Net

remaining

 



Customer relationships

 

Basis

 

Amortization

 

Value

life

 



Beginning balance

 

$

11,727 

 

$

(5,558)

 

$

6,169 

 

 



Activity

 

 

 -

 

 

(263)

 

 

(263)

 

 



Ending balance

 

$

11,727 

 

$

(5,821)

 

$

5,906 

11.70

 



 

 

 

 

 

 

 

 

 

 

 

 



Other intangibles

 

 

 

 

 

 

 

 

 

 

 



Beginning balance

 

$

2,739 

 

$

(1,018)

 

$

1,721 

 

 



Activity

 

 

 -

 

 

(109)

 

 

(109)

 

 



Ending balance

 

$

2,739 

 

$

(1,127)

 

$

1,612 

8.37

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



Total intangibles

 

 

 

 

 

 

 

 

 

 

 



Beginning balance

 

$

14,466 

 

$

(6,576)

 

$

7,890 

 

 



Activity

 

 

 -

 

 

(372)

 

 

(372)

 

 



Ending balance

 

$

14,466 

 

$

(6,948)

 

$

7,518 

10.98

 



 

 

 

 

 

 

 

 

 

 

 

 

















6Stock-based Compensation Plans 



The Company uses the Black-Scholes model to value stock options granted. Volatility is calculated as managements estimate of future volatility over the expected term of the option 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.  

Stock options granted to employees under the Company’s stock option plan typically vest 25% on the first anniversary of the grant and 25% on the one-year anniversary of each of the three following years. Stock options granted to non-employee directors under the Company’s stock option plan typically vest 50% on the first anniversary of the grant and 50% on the next one-year anniversary. The Company recognizes stock option expense over the vesting period for each vesting tranche.

13


 

 

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. The Company recognized a benefit for stock option compensation $5,000 in the first quarter of fiscal 2017 due to forfeitures, and expense of $24,000 for the quarter ended October 31, 2015. There was approximately $22,000 and $112,000 of total unrecognized compensation costs related to non-vested options granted under the Company’s stock option plans as of October 31,  2016 and 2015, respectively. Total unrecognized compensation cost will be adjusted for any future changes in estimated and actual forfeitures. There were no capitalized stock-based compensation costs during the periods presented.   

The following table shows the weighted average assumptions used to estimate the fair value of options granted:  



 

 

 

 

 

 

 



 

 

Three months ended October 31,

 

 



 

 

2016

 

 



Expected life (years)

 

 

n/a

 

 

 



Risk-free interest rate

 

 

n/a

 

 

 



Expected volatility

 

 

n/a

 

 

 



Expected forfeiture rate

 

 

11.1 

%

 

 



Expected dividend yield

 

 

-

 

 

 



Weighted-average estimated fair value per

 

 

 

 

 

 



     share of options granted during the year

 

 

n/a

 

 

 



Cash received from the exercise

 

 

 

 

 

 



    of stock options

 

$

5,000 

 

 

 

 

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 ten years from the date of grant (five years in the case of a participant who is a 10% shareholder of the Company, unless the stock options are nonqualified), or such shorter period as determined by the Compensation Committee, and shall lapse upon the expiration of said period, or earlier upon termination of the participant’s employment with the Company. The 2000 Plan expired on December 13, 2010, at which time it was terminated except for outstanding options. While options previously granted under the 2000 Plan will continue to be effective through the remainder of their terms or until exercised, no new options may be granted under the 2000 Plan. 

Changes in option shares under the 2000 Plan during the three months ended October 31, 2016 were as follows: 





 

 

 

 

 

 

 

 

 

 



 

Number of
Options

 

Wtd. Avg.

Exercise

Price

 

Wtd. Avg.
Remaining
Contractual
Period
(Years)

 

Aggregate
Intrinsic
Value

Outstanding at 7/31/2016

 

384,750 

 

$

1.46 

 

1.89 

 

$

1,408,027 

Granted

 

 -

 

 

n/a

 

n/a

 

 

n/a

Exercised

 

 -

 

 

n/a

 

n/a

 

 

n/a

Forfeited

 

 -

 

 

n/a

 

n/a

 

 

n/a

Outstanding at 10/31/2016

 

384,750 

 

$

1.46 

 

1.64 

 

$

1,350,314 

Exercisable at 10/31/2016

 

384,750 

 

$

1.46 

 

1.64 

 

$

1,350,314 



 

 

 

 

 

 

 

 

 

 



The range of exercise prices for options outstanding under the 2000 Plan was $0.49 to $1.96 at October 31, 2016.



2010 Equity Incentive Plan 

The Board of Directors adopted the ARI Network Services, Inc. 2010 Equity Incentive Plan (as amended, the “2010 Plan”) on November 9, 2010. The plan was approved by the Company's shareholders in December 2010, and amendments to the 2010 Plan were approved by the Company’s shareholders in January 2014. The 2010 Plan is the successor to the Company’s 2000 Plan. There are 1,850,000 shares of Company common stock authorized for issuance under the 2010 Plan. Potential awards under the 2010 Plan include incentive stock options and non-statutory stock options, shares of restricted stock or restricted stock units, stock appreciation rights (“SARs), and shares of common stock. Up to 1,525,000 of the shares authorized for issuance under the 2010 Plan may be used for common stock, restricted stock or restricted stock unit awards.

14


 

 

The exercise price for options and SARs under the 2010 Plan cannot be less than 100% of the fair market value of the Company’s common stock on the date of grant, and the exercise prices for options and SARs cannot be repriced without shareholder approval, except to reflect changes to the capital structure of the Company as described in the 2010 Plan. The maximum term of options and SARs under the 2010 Plan is 10 years. The 2010 Plan does not have liberal share counting provisions (such as provisions that would permit shares withheld for payment of taxes or the exercise price of stock options to be re-granted under the plan).

Changes in option shares under the 2010 Plan during the three months ended October 31, 2016 were as follows:





 

 

 

 

 

 

 

 

 

 



 

Number of
Options

 

Wtd. Avg.

Exercise

Price

 

Wtd. Avg.
Remaining
Contractual
Period
(Years)

 

Aggregate
Intrinsic
Value

Outstanding at 7/31/2016

 

357,626 

 

$

2.52 

 

6.95 

 

$

930,816 

Granted

 

 -

 

 

n/a

 

n/a

 

 

n/a

Exercised

 

(1,250)

 

 

3.61 

 

n/a

 

 

n/a

Forfeited

 

(13,750)

 

 

3.31 

 

n/a

 

 

n/a

Outstanding at 10/31/2016

 

342,626 

 

$

2.48 

 

6.25 

 

$

852,672 

Exercisable at 10/31/2016

 

292,626 

 

$

2.34 

 

6.25 

 

$

768,884 



 

 

 

 

 

 

 

 

 

 



The range of exercise prices for options outstanding under the 2010 Plan was $0.59 to $3.54 at October 31, 2016.

Changes in the 2010 Plan's non-vested option shares included in the outstanding shares above during the three months ended October 31, 2016 were as follows:



 

 

 

 

 

 

 

 

 

 



 

Number of
Options

 

Wtd. Avg.
Exercise Price

 

 

 

 

 

Non-vested at 7/31/2016

 

70,000 

 

$

3.29 

 

 

 

 

 

Granted

 

 -

 

 

n/a

 

 

 

 

 

Vested

 

(6,250)

 

 

3.20 

 

 

 

 

 

Forfeited

 

(13,750)

 

 

3.31 

 

 

 

 

 

Non-vested at 10/31/2016

 

50,000 

 

$

3.29 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

The weighted average remaining vesting period was 0.96 years at October 31, 2016.



Employee Stock Purchase Plan 

The Company’s 2000 Employee Stock Purchase Plan, as amended, (“ESPP”) has 575,000 shares of common stock reserved for issuance, of which 300,280 and 263,974 of the shares have been issued as of October 31,  2016 and 2015, respectively. All employees with at least six months of service are eligible to participate. Shares may be purchased at the end of a specified period at the lower of 85% of the market value at the beginning or end of the specified period through accumulation of payroll deductions, not to exceed 5,000 shares per employee per year. The Company expensed $13,000 and $20,000 during the three months ended October 31, 2016, and 2015 related to the ESPP discount.

Restricted Stock

Up to 1,525,000 of the shares authorized for issuance under the 2010 Plan may be granted in the form of shares of common stock, restricted stock or restricted stock units. The Company grants restricted stock to its directors as an annual retainer, and from time to time to directors, officers or employees as incentive compensation or as discretionary compensation in place of cash. 

The Compensation Committee adopted the Long-Term Executive Bonus Plan (“LTEB”) for eligible executive officers of the Company beginning in fiscal 2013.

In March 2015, the Compensation Committee issued 550,000 shares of restricted stock under the LTEB, which will vest according to the following schedule:

·

30% when the volume weighted average price of the Company’s common stock for the previous 30-day trading period (the “30-day VWAP”) equals or exceeds $6.00

·

20% when the 30-day VWAP equals or exceeds $7.00

·

20% when the 30-day VWAP equals or exceeds $8.00

·

30% when the 30-day VWAP equals or exceeds $9.00 

15


 

 

Under the plan described above, a target price must be reached within a four-year period starting on the date of grant for any restricted stock to vest. All unvested restricted stock will be forfeited when the four-year period expires. The initial value of the common stock granted under the LTEB was approximately $350,000, valued using a Monte Carlo Simulation with a 46% volatility rate and a 1.34% risk-free interest rate, and is expensed over the vesting period.

Restricted stock granted under the 2010 plan during fiscal 2017 was valued using the market price on the date of grant. The Company recognized compensation expense of $142,000 and $73,000 during the three months ended October 31,  2016 and 2015, respectively, related to all restricted stock. The remaining balance of unrecognized compensation expense related to restricted stock was $750,000 and $462,000 at October 31, 2016 and 2015, respectively.

Changes in unvested restricted shares of common stock under the 2010 Plan during the three months ended October 31,  2016 and 2015 were as follows:



 

 

 

 

 

 



 

 

 

 

 

 



 

 

Three months ended October 31

 



 

 

2016

 

2015

 



Beginning balance unvested restricted stock

 

657,912 

 

671,211 

 



Granted

 

102,720 

 

 -

 



Vested

 

(6,474)

 

(6,474)

 



Forfeited

 

(2,534)

 

(5,460)

 



Ending balance unvested restricted stock

 

751,624 

 

659,277 

 



 

 

 

 

 

 













7. Income Taxes 



The provision for income taxes for the three months ended October 31, 2016 and 2015 is composed of the following (in thousands): 



 

 

 

 

 

 

 

 

 

 

 



 

 

Three months ended October 31

 

 

 

 



 

 

2016

 

2015

 

 

 

 



Current:

 

 

 

 

 

 

 

 

 

 



Federal

 

$

 —

 

$

 —

 

 

 

 



State

 

 

(25)

 

 

(6)

 

 

 

 



Deferred, net

 

 

(280)

 

 

(293)

 

 

 

 



Income tax expense

 

$

(305)

 

$

(299)

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 







The provision for income taxes is based on taxes payable under currently enacted tax laws and an analysis of temporary differences between the book and tax bases of the Company’s assets and liabilities, including various accruals, allowances, depreciation and amortization, and does not represent current taxes due. The tax effect of these temporary differences and the estimated benefit from tax net operating losses are reported as deferred tax assets and liabilities in the consolidated balance sheets. We have unused net operating loss carry forwards ("NOLs") for federal income tax purposes, and as a result, we generally only incur alternative minimum taxes at the federal level that are currently payable.

The Company also has NOLs related to tax losses incurred by its Netherlands operation. Under tax laws in the Netherlands, NOLs are able to be carried forward for a period of nine years. The Company has determined that, consistent with prior periods, it is not likely that the net operating losses will be utilized by the Company. This conclusion was primarily based on the negative evidence of a history of losses and expired NOLs related to this entity. In the opinion of the management of the Company, there is not enough positive evidence to overcome this negative evidence. Therefore, a full valuation allowance of $437,000 and $531,000 is recorded, resulting in $0 net deferred tax assets related to the Netherlands operation at October 31, 2016 and 2015. 

The Company also has an NOL related to tax losses incurred by its India operation, which began operations in the second quarter of fiscal 2016. Under tax laws in India, NOLs are able to be carried forward for a period of eight years. The Company has determined that it is not likely that the net operating loss will be utilized by the Company primarily based on the start-up nature of this operation. Therefore, a full valuation allowance of $61,000 was recorded, resulting in $0 net deferred tax assets related to the India operation at October 31, 2016.



16


 

 

As of October 31, 2016, the Company had accumulated NOLs for federal, state and international tax purposes of approximately $2,115,000, $8,377,000 and $1,918,000, respectively.

We perform an evaluation of uncertain tax positions as a component of income tax expense on an annual basis. We determined that ARI did not have any significant risk related to income tax expense and therefore no amounts were reserved for uncertain tax positions as of October 31, 2016 or 2015. We will accrue and recognize interest and penalties related to uncertain tax positions as a component of income tax expense if it becomes necessary. Fiscal years subsequent to 2012 remain open and subject to examination by state tax jurisdictions and the United States federal tax authorities.



8.  Subsequent Events



Acquisition of Auction123, Inc.



On November 1, 2016, the Company acquired substantially all of the assets of Auction123, Inc. (“Auction123”), a leading provider of software and services to help dealers in selected vertical markets manage and feed inventory information to online marketplaces to drive more sales and leads.  Auction123 serves several vertical markets including automotive dealers, powersports, recreational vehicles and marine.  Consideration for the acquisition (the "Company Purchase Price") included, (1) a cash payment equal to $10,500,000; and (2) a contingent earn-out purchase price payable in two installments and contingent upon the attainment of specific revenue goals related to a specific customer.  The earn-out has a maximum payout of $1,500,000.  The purchase price will be adjusted based on the net asset value on the closing balance sheet being above or below the targeted amount.



The acquisition was funded from cash on hand and an increase in our term loan.  Due to the timing of the acquisition, the opening balance sheet and pro-forma information is not complete as of the date of this report.



Loan Modification



On November 1, 2016, the Company entered into the Second Loan Modification Agreement, dated November 1, 2016, by and among SVB and the Company (the "Second Modification Agreement"). The Second Modification Agreement amends the Agreements with SVB dated April 26, 2013 and September 30, 2014.



The Second Modification Agreement includes credit facilities consisting of $3,000,000 revolving credit facility with a maturity date of September 30, 2018 and a $13,000,000 term loan with a maturity date of November 1, 2021. This term loan is an amendment to the existing $6,050,000 term loan with a maturity date of September 30, 2019.



The term loan and any loans made under the SVB revolving credit facility accrue interest at a per annum rate equal to the Prime rate plus the Applicable Margin for Prime Rate Loans set forth in the chart below determined based on the Total Leverage Ratio.





 

 



Applicable Margin

Total Leverage Ratio

for Prime Rate Loans

> 2.50 to 1.0:

1.50 

%

> 1.75 to 1.00 but <=2.50 to 1.00:

1.00 

%

<= 1.75 to 1.00:

0.50 

%





Principal in respect of any loans made under the revolving facility is required to be paid in its entirety on or before September 30, 2018.  Principal in respect of the term loan is required to be paid in quarterly installments on the first day of each fiscal quarter of the Company as follows:  $325,000 commencing on February 1, 2017 through November 1, 2018; $487,500 commencing on February 1, 2019 through November 1, 2019; and $650,000 commencing on February 1, 2020 through August 1, 2021.  All remaining principal in respect of the term loan is due and payable on November 1, 2021.  The Company is permitted to prepay all of, but not less than all of, the outstanding principal amount of the term loan upon certain notice to SVB and, in certain circumstances, the payment of a prepayment penalty of up to $260,000.  Following July 31, 2018, the Second Modification agreement requires the Company to make additional payments in the amount of 50% of excess cash flow until the Company’s Total Leverage Ratio is less than 2.00 to 1.00 and 25% of excess cash flow until the Company’s Total Leverage Ratio is less than 1.25 to 1.00.

The Second Modification Agreement contains covenants that restrict, among other things and subject to certain conditions, the ability of the Company to permit a change of control, incur debt, create liens on its assets, make certain investments, enter into merger or acquisition transactions and make distributions to its shareholders. Financial covenants include the maintenance of a minimum Total Leverage Ratio equal to or less than 3.00 to 1.00 through the period ending December 31, 2017 and 2.50 to 1.00 thereafter, and the maintenance of a Fixed Charge Coverage Ratio (as defined in the Agreement) equal to or greater than 1.25 to 1.00. The Agreement also contains customary events of default that, if triggered, could result in an acceleration of the Company’s

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obligations under the Agreement.  The loans are secured by a first priority security interest in substantially all assets of the Company. 







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



The following discussion of our results of operations and financial condition should be read together with our unaudited consolidated financial statements for the three months ended October 31, 2016 and 2015, including the notes thereto, which appear elsewhere in this quarterly report on Form 10-Q. All amounts are in thousands, except per share data. This discussion, including, without limitation, the section titled “Summary of Operating Results”, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). All statements other than statements of historical facts are statements that could be deemed to be forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the markets in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “endeavors,” “strives,” “may,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, estimate, or verify, including those identified in Part I, Item 1A of our annual report on Form 10-K for the year ended July 31, 2015, and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.



Overview



ARI Network Services, Inc. offers an award-winning suite of Lead Generation and eCommerce Websites, eCatalog Solutions, Business Management Systems and Digital Marketing Services that help dealers, equipment manufacturers and distributors in select vertical markets Sell More Stuff!™ – online and in-store. Our innovative products are powered by a proprietary library of enriched electronic product content including OEM parts, aftermarket parts, garments and accessories (PG&A) and whole goods from more than 1,800 manufacturers. Business is complicated, but we believe our customers’ technology tools don’t have to be. We remove the complexity of selling and servicing new and used whole goods inventory and PG&A. More than 23,500 equipment dealers, distributors and manufacturers worldwide leverage our solutions to Sell More Stuff!™

We go to market under the “ARI Network Services, Inc.” brand name in the powersports, outdoor power equipment (OPE), marine, home medical equipment (HME), recreational vehicles (RV) and appliance industries. We service customers in the automotive tire and wheel aftermarket (ATW) under the “TCS Technologies, an ARI Company” brand name; and we service the automotive aftermarket parts and service (AAPS) market under the “DCi, an ARI Company” brand name.



Our Solutions



Our primary solutions include: (i) Lead Generation and eCommerce Websites, giving dealers and wholesalers an online presence optimized for today’s digital path to purchase and serving as a platform to drive in-bound lead generation and eCommerce sales; (ii) eCatalogs, offering access to our proprietary library of enriched electronic product content via a suite of SaaS and DaaS solutions to enable the sale of whole goods inventory and PG&A; (iii) Business Management Software designed to streamline every aspect of a dealer’s operation, drive profitability and allow them to provide better customer service; and (iv) Digital Marketing Services designed to generate leads and drive traffic both to the dealer’s website and brick-and-mortar location.



Our solutions also improve our dealers’ overall customer satisfaction through a highly efficient and accurate data lookup experience at the parts counter and a quicker response time to online inquiries, both of which serve to significantly improve a customer’s overall experience with the dealer.



Our solutions are sold through our internal sales force and are composed primarily of recurring licenses and subscriptions and, in the case of business management software, perpetual licenses and maintenance contracts. Customers typically sign annual, auto-renewing contracts. Today, more than 90% of our revenues are recurring.

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Lead Generation and eCommerce Websites



Our online solutions are tailored to each of the vertical markets we serve and are tightly integrated with our proprietary library of enriched electronic product content for major unit inventory and PG&A. Our website platform development teams continually innovate our platforms to keep up with the ever-evolving demands of our customers, online shoppers and search engines to ensure we can provide dealers with websites that perform well in search and convert online visits into leads, eCommerce sales and in-store visits. We offer a full menu of website add-ons, including a mobile inventory management application, third-party inventory integrations and business management integrations. Our lead generation tools are designed to efficiently manage and nurture leads through email campaigns, automated responses, sales team reminders and other lead generating activities, increasing conversion rates and ultimately revenues for our customers.



Lead Generation and eCommerce Websites are sold through our internal sales teams, which are aligned by vertical market. The sales process typically includes a live demo of the site and may include a free trial period (we refer to these as “test drives”). We typically charge monthly recurring subscription fees, and may charge a one-time set up fee to develop a new dealer website, as well as variable transaction fees. Our website solutions are typically sold under one-year, renewable contracts with monthly payment terms. We host and maintain more than 7,500 websites for dealers across all of our vertical markets.



eCatalog Platform Solutions



Our eCatalog solutions offer access to our proprietary library of enriched electronic product content via a suite of SaaS and DaaS solutions including dealer-facing manufacturer parts lookup portals and parts counter solutions; consumer-facing online parts lookup; and DaaS subscription access to our content library all designed to enable the sale of whole goods inventory and PG&A. Our eCatalog solutions are sold through our dedicated internal sales team. Fees charged for the use of our eCatalog products include a recurring license fee, subscription fees for subscribed catalogs and, in some cases, page view fees.



Business Management Software



Our business management software solutions are designed to streamline every aspect of a dealer’s operations to allow them to provide improved customer service. These products are sold through our dedicated internal sales team, and fees charged include perpetual one-time license or installation fees, maintenance and support fees, as well as hosting fees for our SaaS version. These solutions are currently only offered in the ATW aftermarket under the “TCS Technologies, an ARI Company” brand name.



Digital Marketing Services



ARI complements our suite of data-driven SaaS and DaaS solutions with digital marketing services that deliver the engaging experiences that today’s consumers expect, as well as meet the demands of leading search engines like Google. ARI’s Digital Marketing Services include search engine optimization, email marketing, search engine marketing (PPC), online reputation management and online directory management to help dealers drive more online leads, eCommerce sales and in-store traffic. Digital marketing services are sold through our dedicated internal sales team.



Other Solutions



We also offer a suite of complementary solutions, which include software, website customization, professional services and hosting services.



Our Growth Strategy



ARI’s goal is to become the leading provider of SaaS and DaaS solutions and complementary services that help our customers efficiently and effectively sell more major units, replacement parts, accessories and service – in other words, Sell More Stuff!™ Our continued goal is to grow revenues at a double-digit rate and to grow earnings through scalability. We intend to accomplish this goal by delivering our solutions to dealers, distributors, manufacturers, service providers and consumers in selected vertical markets where the finished goods are complex equipment requiring service and which are primarily sold and serviced through an independent dealer channel which typically carries multiple brands. We believe this strategy will drive increased value to our shareholders, employees and customers.



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We also believe that the execution of the following strategic pillars will enable us to achieve the growth and profitability needed to drive long-term sustainable value for our shareholders:



·

Drive organic growth through expanded service offerings to grow both our subscriber customer base and our average revenue per dealer;

·

Differentiate our content;

·

Enter new markets;