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AMERICAN SOFTWARE INC - Quarter Report: 2018 October (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended October 31, 2018

OR

 

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

For the transition period from                  to                 

Commission File Number: 0-12456

 

 

AMERICAN SOFTWARE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Georgia   58-1098795

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

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

(404) 261-4381

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the exchange act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

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

 

Classes

   Outstanding at December 5, 2018  

Class A Common Stock, $.10 par value

     29,135,044 Shares  

Class B Common Stock, $.10 par value

     1,821,587 Shares  

 

 

 


Table of Contents

AMERICAN SOFTWARE, INC. AND SUBSIDIARIES

Form 10-Q

Quarter ended October 31, 2018

Index

 

          Page No.  

Part I—Financial Information

  

Item 1.

  

Financial Statements (Unaudited)

  
  

Condensed Consolidated Balance Sheets as of October 31, 2018 and April 30, 2018

     3  
  

Condensed Consolidated Statements of Operations for the Three and Six Months ended October 31, 2018 and 2017

     4  
  

Condensed Consolidated Statements of Cash Flows for the Six Months ended October  31, 2018 and 2017

     5  
  

Notes to Condensed Consolidated Financial Statements – Unaudited

     6  

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      23  

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     36  

Item 4.

  

Controls and Procedures

     37  

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

     38  

Item 4.

  

Mine Safety Disclosures

     38  

Item 5.

  

Other Information

     38  

Item 6.

  

Exhibits

     38  

Signatures

        39  

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1.

Financial Statements

American Software, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except share data)

 

     October 31,
2018
    April 30,
2018
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 50,933     $ 52,794  

Investments

     29,816       26,121  

Trade accounts receivable, less allowance for doubtful accounts of $172 at October 31, 2018 and $159 at April 30, 2018:

    

Billed

     17,427       18,643  

Unbilled

     3,104       3,375  

Prepaid expenses and other current assets

     6,568       6,592  
  

 

 

   

 

 

 

Total current assets

     107,848       107,525  

Investments—noncurrent

     1,925       8,893  

Property and equipment, net of accumulated depreciation of $28,963 at October 31, 2018 and $28,644 at April 30, 2018

     3,609       3,034  

Capitalized software, net of accumulated amortization of $26,311 at October 31, 2018 and $24,113 at April 30, 2018

     9,618       9,728  

Goodwill

     25,888       25,888  

Other intangibles, net of accumulated amortization of $9,449 at October 31, 2018 and $8,255 at April 30, 2018

     3,926       5,120  

Other assets

     3,776       2,777  
  

 

 

   

 

 

 

Total assets

   $ 156,590     $ 162,965  
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 1,475     $ 1,974  

Accrued compensation and related costs

     2,829       6,310  

Dividends payable

     3,405       3,367  

Other current liabilities

     1,362       1,246  

Deferred revenue

     29,395       33,226  
  

 

 

   

 

 

 

Total current liabilities

     38,466       46,123  

Deferred income taxes

     2,929       2,615  

Long-term deferred revenue

     —         147  

Other long-term liabilities

     1,107       1,496  
  

 

 

   

 

 

 

Total liabilities

     42,502       50,381  

Shareholders’ equity:

    

Common stock:

    

Class A, $.10 par value. Authorized 50,000,000 shares: 33,721,076 and 29,132,444 shares issued and outstanding respectively at October 31, 2018 and 33,141,760 and 28,553,128 shares issued and outstanding respectively at April 30, 2018

     3,372       3,314  

Class B, $.10 par value. Authorized 10,000,000 shares: 1,821,587 shares issued and outstanding at October 31, 2018 and 2,057,390 shares issued and outstanding at April 30, 2018; convertible into Class A Common Shares on a one-for-one basis

     182       205  

Additional paid-in capital

     135,150       131,258  

Retained earnings

     943       3,366  

Class A treasury stock, 4,588,632 shares at October 31, 2018 and April 30, 2018, at cost

     (25,559     (25,559
  

 

 

   

 

 

 

Total shareholders’ equity

     114,088       112,584  
  

 

 

   

 

 

 

Commitments and contingencies

    

Total liabilities and shareholders’ equity

   $ 156,590     $ 162,965  
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements—unaudited.

 

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Table of Contents

American Software, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)

 

     Three Months Ended
October 31,
     Six Months Ended
October 31,
 
     2018     2017      2018     2017  

Revenues:

         

License

   $ 2,012     $ 2,449      $ 3,714     $ 6,464  

Subscription Fees

     3,341       2,041        6,509       3,660  

Professional Services and other

     11,056       11,008        22,064       21,431  

Maintenance

     11,624       10,839        23,145       21,667  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

     28,033       26,337        55,432       53,222  
  

 

 

   

 

 

    

 

 

   

 

 

 

Cost of revenues:

         

License

     1,760       1,651        3,474       2,966  

Subscription Fees

     1,289       903        2,356       1,749  

Professional Services and other

     8,103       7,488        16,771       14,761  

Maintenance

     2,214       2,288        4,412       4,516  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total cost of revenues

     13,366       12,331        27,013       23,992  
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross margin

     14,667       14,006        28,419       29,230  
  

 

 

   

 

 

    

 

 

   

 

 

 

Research and development

     3,332       2,643        7,007       5,151  

Sales and marketing

     5,304       4,437        10,484       9,670  

General and administrative

     4,408       3,616        8,601       7,155  

Amortization of acquisition-related intangibles

     97       68        194       391  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

     13,141       10,764        26,286       22,367  
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     1,526       3,242        2,133       6,863  

Other (expense)/income:

         

Interest income

     524       354        1,027       717  

Other, net

     (714     322        (464     558  
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings before income taxes

     1,336       3,918        2,696       8,138  

Income tax expense

     93       1,438        68       2,933  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net earnings

   $ 1,243     $ 2,480      $ 2,628     $ 5,205  
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings per common share (a):

         

Basic

   $ 0.04     $ 0.08      $ 0.09     $ 0.17  
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

   $ 0.04     $ 0.08      $ 0.08     $ 0.17  
  

 

 

   

 

 

    

 

 

   

 

 

 

Cash dividends declared per common share

   $ 0.11     $ 0.11      $ 0.22     $ 0.22  
  

 

 

   

 

 

    

 

 

   

 

 

 

Shares used in the calculation of earnings per common share:

         

Basic

     30,926       29,906        30,825       29,788  
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

     31,477       30,229        31,412       30,110  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(a)

Basic per share amounts are the same for Class A and Class B shares. Diluted per share amounts for Class A shares are shown above. Diluted earnings per share for Class B shares under the two-class method are $0.04 and $0.08 for the three months ended October 31, 2018 and 2017, and $0.09 and $0.17 for the six months ended October 31, 2018 and 2017, respectively. See Note D to the Condensed Consolidated Financial Statements.

See accompanying notes to condensed consolidated financial statements—unaudited.

 

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American Software, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

     Six Months Ended
October 31,
 
     2018     2017  

Cash flows from operating activities:

    

Net earnings

   $ 2,628     $ 5,205  

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

    

Depreciation and amortization

     3,711       2,705  

Stock-based compensation expense

     841       793  

Net loss (gain) on investments

     312       (381

Deferred income taxes

     (265     761  

Changes in operating assets and liabilities:

    

Purchases of trading securities

     (6,456     (14,057

Proceeds from maturities and sales of trading securities

     9,417       8,452  

Accounts receivable, net

     2,162       3,243  

Prepaid expenses and other assets

     242       (1,758

Accounts payable and other liabilities

     (4,333     (2,734

Deferred revenue

     (3,457     (1,709
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,802       520  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capitalized computer software development costs

     (2,088     (2,617

Purchases of property and equipment, net of disposals

     (894     (212
  

 

 

   

 

 

 

Net cash used in investing activities

     (2,982     (2,829
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from exercise of stock options

     3,086       4,079  

Dividends paid

     (6,767     (6,529
  

 

 

   

 

 

 

Net cash used in financing activities

     (3,681     (2,450
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (1,861     (4,759

Cash and cash equivalents at beginning of period

     52,794       66,001  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 50,933     $ 61,242  
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements—unaudited.

 

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Table of Contents

AMERICAN SOFTWARE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements—Unaudited

October 31, 2018

A. Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of our management, these condensed consolidated financial statements contain all normal recurring adjustments considered necessary for a fair presentation of the Company’s financial position at October 31, 2018, results of operations for the three and six months ended October 31, 2018 and 2017 and cash flows for the six months ended October 31, 2018 and 2017. The Company’s results for the three and six months ended October 31, 2018 are not necessarily indicative of the results expected for the full year. You should read these statements in conjunction with our audited consolidated financial statements and management’s discussion and analysis and results of operations included in our Annual Report on Form 10-K (the “Annual Report”) for the fiscal year ended April 30, 2018. The terms “fiscal 2019” and “fiscal 2018” refer to our fiscal years ending April 30, 2019 and 2018, respectively.

The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1 in the Notes to the Consolidated Financial Statements for the fiscal year ended April 30, 2018 contained in the Annual Report describes the significant accounting policies that we have used in preparing our consolidated financial statements. On an ongoing basis, we evaluate our estimates, including but not limited to those related to revenue/collectability, stock-based compensation, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results could differ materially from these estimates under different assumptions or conditions. The accompanying condensed consolidated balance sheet as of April 30, 2018 and the condensed consolidated statements of operations for the three and six months and cash flows for the six months ended October 31, 2017 have not been revised for the effects of Topic 606 and are therefore not comparable to the October 31, 2018 period.

Principles of Consolidation

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

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which replaces the existing revenue recognition guidance. The Company adopted the new revenue standard effective May 1, 2018 using the modified retrospective transition method. Under this method, the Company elected to apply the cumulative effect method to contracts that are not complete as of the adoption date. The Company’s total revenue impact is $1.2 million, with approximately 70% impacting the fiscal year ending April 30, 2019, which is the result of recognizing revenue for the license component of its term licenses and certain perpetual license contracts that were previously recognized over time due to the lack of vendor-specific objective evidence (VSOE) of fair value at the point-in-time at which control of the software license is transferred to the customer, rather than ratably over the term of the contract. In addition, under the new standard, the Company will capitalize a portion of sales commission expenses and recognize them ratably over the associated period of economic benefit which the Company has determined to be six years, which has an impact of $1.1 million. As a result, the cumulative impact due to the adoption of the new revenue standard on the opening consolidated balance sheet was an increase in opening retained earnings, with a corresponding increase to contract assets and a decrease in deferred revenue.

 

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Table of Contents

The following table presents the cumulative effect of adjustments, net of income tax effects, to beginning consolidated balance sheet accounts for the new accounting standard adopted by the Company on the first day of fiscal 2019:

 

     April 30,
2018
    Topic 606     May 1,
2018
 
           (in thousands)        
ASSETS       

Current assets:

      

Cash and cash equivalents

   $ 52,794     $ —     $ 52,794  

Investments

     26,121       —         26,121  

Trade accounts receivable, net

      

Billed

     18,643       —         18,643  

Unbilled

     3,375       440       3,815  

Prepaid expenses and other current assets

     6,592       126       6,718  
  

 

 

   

 

 

   

 

 

 

Total current assets

     107,525       566       108,091  

Investments—Noncurrent

     8,893       —         8,893  

Property and equipment, net

     3,034       —         3,034  

Capitalized software, net

     9,728       —         9,728  

Goodwill

     25,888       —         25,888  

Other intangibles, net

     5,120       —         5,120  

Other assets

     2,777       1,325       4,102  
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 162,965     $ 1,891     $ 164,856  
  

 

 

   

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY       

Current liabilities:

      

Accounts payable

   $ 1,974     $ —     $ 1,974  

Accrued compensation and related costs

     6,310       —         6,310  

Dividends payable

     3,367       —         3,367  

Other current liabilities

     1,246       80       1,326  

Deferred revenue

     33,226       (521     32,705  
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     46,123       (441     45,682  

Deferred income taxes

     2,615       579       3,194  

Long-term deferred revenue

     147       —         147  

Other long-term liabilities

     1,496       —         1,496  
  

 

 

   

 

 

   

 

 

 

Total liabilities

     50,381       138       50,519  

Shareholders’ equity:

      

Common stock:

      

Class A

     3,314       —         3,314  

Class B

     205       —         205  

Additional paid-in capital

     131,258       —         131,258  

Retained earnings

     3,366       1,753       5,119  

Class A treasury stock

     (25,559     —         (25,559
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     112,584       1,753       114,337  
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 162,965     $ 1,891     $ 164,856  
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table summarizes the effects of adopting Topic 606 on the Company’s condensed consolidated balance sheet as of October 31, 2018:

 

     As reported
under Topic 606
    Adjustments     Balances under
Prior GAAP
 
           (in thousands)        
ASSETS       

Current assets:

      

Cash and cash equivalents

   $ 50,933     $ —       $ 50,933  

Investments

     29,816       —         29,816  

Trade accounts receivable, net

       —      

Billed

     17,427       —         17,427  

Unbilled

     3,104       (389     2,715  

Prepaid expenses and other current assets

     6,568       (251     6,317  
  

 

 

   

 

 

   

 

 

 

Total current assets

     107,848       (640     107,208  

Investments—Noncurrent

     1,925       —         1,925  

Property and equipment, net

     3,609       —         3,609  

Capitalized software, net

     9,618       —         9,618  

Goodwill

     25,888       —         25,888  

Other intangibles, net

     3,926       —         3,926  

Other assets

     3,776       (1,191     2,585  
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 156,590     $  (1,831   $ 154,759  
  

 

 

   

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY       

Current liabilities:

      

Accounts payable

   $ 1,475     $ —       $ 1,475  

Accrued compensation and related costs

     2,829       —         2,829  

Dividends payable

     3,405       —         3,405  

Other current liabilities

     1,362       (80     1,282  

Deferred revenue

     29,395       619       30,014  
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     38,466       539       39,005  

Deferred income taxes

     2,929       (584     2,345  

Long-term deferred revenue

     —         —         —    

Other long-term liabilities

     1,107       —         1,107  
  

 

 

   

 

 

   

 

 

 

Total liabilities

     42,502       (45     42,457  

Shareholders’ equity:

      

Common stock:

      

Class A

     3,372       —         3,372  

Class B

     182       —         182  

Additional paid-in capital

     135,150       —         135,150  

Retained earnings

     943       (1,786     (843

Class A treasury stock

     (25,559     —         (25,559
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     114,088       (1,786     112,302  
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies

      

Total liabilities and shareholders’ equity

   $  156,590     $  (1,831   $  154,759  
  

 

 

   

 

 

   

 

 

 

 

8


Table of Contents

The following table summarizes the effects of adopting Topic 606 on the Company’s condensed consolidated statement of operations for the three months ended October 31, 2018:

 

     As reported
under Topic 606
     Adjustments      Balances under
Prior GAAP
 
            (in thousands, except
per share amounts)
        

Revenues:

        

License

   $ 2,012      $ 391      $ 2,403  

Subscription Fees

     3,341        2        3,343  

Professional Services and other

     11,056        46        11,102  

Maintenance

     11,624        —          11,624  
  

 

 

    

 

 

    

 

 

 

Total revenues

     28,033        439        28,472  
  

 

 

    

 

 

    

 

 

 

Cost of revenues:

        

License

     1,760        —          1,760  

Subscription Fees

     1,289        —          1,289  

Professional Services and other

     8,103        —          8,103  

Maintenance

     2,214        —          2,214  
  

 

 

    

 

 

    

 

 

 

Total cost of revenues

     13,366        —          13,366  
  

 

 

    

 

 

    

 

 

 

Gross margin

     14,667        439        15,106  
  

 

 

    

 

 

    

 

 

 

Research and development

     3,332           3,332  

Sales and marketing

     5,304        63        5,368  

General and administrative

     4,408        —          4,408  

Amortization of acquisition-related intangibles

     97        —          97  
  

 

 

    

 

 

    

 

 

 

Total operating expenses

     13,141        63        13,204  
  

 

 

    

 

 

    

 

 

 

Operating income

     1,526        376        1,902  

Other income:

        

Interest income

     524        —          524  

Other, net

     (714      —          (714
  

 

 

    

 

 

    

 

 

 

Earnings before income taxes

     1,336        376        1,712  

Income tax expense

     93        71        164  
  

 

 

    

 

 

    

 

 

 

Net earnings

   $ 1,243      $ 305      $ 1,548  
  

 

 

    

 

 

    

 

 

 

Earnings per common share:

        

Basic

   $ 0.04      $  0.01      $ 0.05  
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.04      $ 0.01      $ 0.05  
  

 

 

    

 

 

    

 

 

 

 

9


Table of Contents

The following table summarizes the effects of adopting Topic 606 on the Company’s condensed consolidated statement of operations for the six months ended October 31, 2018:

 

     As reported
under Topic 606
     Adjustments      Balances under
Prior GAAP
 
            (in thousands, except
per share amounts)
        

Revenues:

        

License

   $ 3,714      $ (55    $ 3,659  

Subscription Fees

     6,509        4        6,513  

Professional Services and other

     22,064        106        22,170  

Maintenance

     23,145        —          23,145  
  

 

 

    

 

 

    

 

 

 

Total revenues

     55,432        55        55,487  
  

 

 

    

 

 

    

 

 

 

Cost of revenues:

        

License

     3,474        —          3,474  

Subscription Fees

     2,356        —          2,356  

Professional Services and other

     16,771        —          16,771  

Maintenance

     4,412        —          4,412  
  

 

 

    

 

 

    

 

 

 

Total cost of revenues

     27,013        —          27,013  
  

 

 

    

 

 

    

 

 

 

Gross margin

     28,419        55        28,474  
  

 

 

    

 

 

    

 

 

 

Research and development

     7,007           7,007  

Sales and marketing

     10,484        93        10,577  

General and administrative

     8,601        —          8,601  

Amortization of acquisition-related intangibles

     194        —          194  
  

 

 

    

 

 

    

 

 

 

Total operating expenses

     26,286        93        26,379  
  

 

 

    

 

 

    

 

 

 

Operating income

     2,133        (38      2,095  

Other income:

        

Interest income

     1,027        —          1,027  

Other, net

     (464      —          (464
  

 

 

    

 

 

    

 

 

 

Earnings before income taxes

     2,696        (38      2,658  

Income tax expense (benefit)

     68        (5      63  
  

 

 

    

 

 

    

 

 

 

Net earnings

   $ 2,628      $ (33    $ 2,595  
  

 

 

    

 

 

    

 

 

 

Earnings per common share:

        

Basic

   $ 0.09      $ —        $ 0.09  
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.08      $ —        $ 0.08  
  

 

 

    

 

 

    

 

 

 

 

10


Table of Contents

The Company’s net cash provided by operating activities for the six months ended October 31, 2018 did not change due to the adoption of Topic 606. The following table summarizes the effects of adopting Topic 606 on the financial statement line items of the Company’s condensed consolidated statement of cash flows for the six months ended October 31, 2018:

 

     As reported
under Topic 606
     Adjustments      Balances under
Prior GAAP
 
            (in thousands)         

Net earnings (loss)

   $ 2,628      $ (33    $ 2,595  

Deferred income taxes

   $ (265    $ (5    $ (270

Changes in operating assets and liabilities:

        

Accounts receivable, net

   $ 2,162      $ (51    $ 2,111  

Prepaid expenses and other assets

   $ 242      $ (9)      $ 233  

Accounts payable and other liabilities

   $ (4,333    $ —        $ (4,333

Deferred revenue

   $ (3,457    $ 98      $ (3,359

Net cash provided by operating activities

   $ (3,023    $ —        $ (3,023

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption.

B. Revenue Recognition

We recognize revenue when we transfer control of the promised goods or services to our customers, in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We derive our revenue from software licenses; maintenance services; consulting, implementation and training services; and software-as-a-service (“SaaS”), which includes a subscription to our software as well as maintenance, hosting and managed services.

The Company determines revenue recognition through the following steps:

Step 1 – Identification of the Contract with the Customer

Step 2 – Identification of Promised Goods and Services and Evaluation of Whether the Promised Goods and Services are Distinct Performance Obligations

Step 3 – Determination of the Transaction Price

Step 4 – Allocation of the Transaction Price to Distinct Performance Obligations

Step 5 – Attribution of Revenue for Each Distinct Performance Obligation

Nature of Products and Services.

Licenses. Our perpetual software licenses provide the customer with a right to use the software as it exists at the time of purchase. We recognize revenue for distinct software licenses once the license period has begun and we have made the software available to the customer.

Our perpetual software licenses are sold with maintenance under which we provide customers with telephone consulting, product updates on a when and if available basis, and releases of new versions of products previously purchased by the customer, as well as error reporting and correction services.

Subscription Fees. Subscription fees include SaaS revenues for the right to use the software for a limited period of time in an environment hosted by the Company or by a third party. The customer accesses and uses the software on an as-needed basis over the Internet or via a dedicated line; however, the customer has no right to take delivery of the software without incurring a significant penalty. The underlying arrangements typically include a single fee for the service that is billed monthly, quarterly or annually. The Company’s SaaS solutions represent a series of distinct services that are substantially the same and have the same pattern of transfer to the customer. Revenue from a SaaS solution is generally recognized ratably over the term of the arrangement.

Professional Services and other. Our services revenue consists of fees generated from consulting, implementation and training services, including reimbursements of out-pocket expenses in connection with our services. Services are typically optional to our customers, and are distinct from our software. Fees for our services are separately priced and are generally billed on an hourly basis, and revenue is recognized over time as the services are performed. We believe the output method of hours worked provides the best depiction of the transfer of our services since the customer is receiving the benefit from our services as the

 

11


Table of Contents

work is performed. The total amount of expense reimbursement included in professional services and other revenue was approximately $388,000 and $719,000 for the three and six months ended October 31, 2018, respectively, and approximately $421,000 and $947,000 for the three and six months ended October 31, 2017, respectively.

Maintenance. Revenue is derived from maintenance under which we provide customers with telephone consulting, product updates on a when and if available basis, and releases of new versions of products previously purchased by the customer, as well as error reporting and correction services. Maintenance for perpetual licenses is renewable, generally on an annual basis, at the option of the customer. Maintenance terms typically range from one to three years. Revenue related to maintenance is generally paid in advance and recognized ratably over the term of the agreement since the Company is standing ready to provide a series of maintenance services that are substantially the same each period over the term; therefore, time is the best measure of progress.

Indirect Channel Revenue. We record revenues from sales made through the indirect sales channels on a gross basis, because we control the goods or services and act as the principal in the transaction. In reaching this determination, we evaluated sales through our indirect channel on a case-by-case basis and considered a number of factors including indicators of control such as the party having the primary responsibility to provide specified goods or services, and the party having discretion in establishing prices.

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

Significant Judgments. Our contracts with customers typically contain promises to transfer multiple products and services to a customer. Judgment is required to determine whether each product and service is considered to be a distinct performance obligation that should be accounted for separately under the contract. We allocate the transaction price to distinct performance obligations based on their relative standalone selling price (“SSP”). We estimate SSP primarily based on the prices charged to customers for products or services sold on a standalone basis, or by using information such as market conditions and other observable inputs. However, the selling prices of our software licenses are highly variable or uncertain. Therefore, we estimate SSP for software licenses using the residual approach, determined based on total transaction price less the SSP of other products and services promised in the contract. When performing relative selling price allocations, we use the contract price as the estimate of SSP if it falls within the Company’s range estimate of SSP since any point within the range would be a valid price point on a standalone basis. If the contract price falls outside of the range of SSP, the Company will use the nearest point in the SSP range in its relative selling price allocation.

Contract Balances. Timing of invoicing to customers may differ from timing of revenue recognition and these timing differences result in receivables, contract assets (unbilled accounts receivable), or contract liabilities (deferred revenue) on the Company’s Condensed consolidated balance sheets. Fees for our software licenses are generally due within 30 days of contract execution. We have an established history of collecting under the terms of our software license contracts without providing refunds or concessions to our customers. SaaS solutions and maintenance are typically billed in advance on a monthly, quarterly, or annual basis. Services are typically billed as performed. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined that our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with predictable ways to purchase our software and services, not to provide or receive financing. Additionally, we are applying the practical expedient to exclude any financing component from consideration for any contracts with payment terms of one year or less since we rarely offer terms extending beyond one year. The consideration in our customer contracts is fixed.

We have an unconditional right to consideration for all goods and services transferred to our customers. That unconditional right to consideration is reflected in billed and unbilled accounts receivable in the accompanying condensed consolidated balance sheet in accordance with FASB Accounting Standards Codification (“ASC”) Topic 606.

Deferred revenue consists of amounts collected prior to having completed the performance of maintenance, SaaS, hosting, and managed services. We typically invoice customers for cloud subscription and support fees in advance on a monthly, quarterly or annual basis, with payment due at the start of the cloud subscription or support term. During the six months ended October 31, 2018, we recognized $13 million of revenue that was included in the deferred revenue balance as of April 30, 2018, as adjusted for Topic 606, at the beginning of the period.

 

     October 31,
2018
     May 1,
2018
 

Contract Balances:

     

Contract assets, current

   $ 3,104      $ 3,815  

Contract assets, long-term

     1,394        332  
  

 

 

    

 

 

 

Total contract assets

   $ 4,498      $ 4,147  
  

 

 

    

 

 

 

Deferred revenue, current

   $ 29,395      $ 32,705  

Deferred revenue, long-term

     —          147  
  

 

 

    

 

 

 

Total deferred revenue

   $ 29,395      $ 32,852  
  

 

 

    

 

 

 

 

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Table of Contents

Remaining Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under Topic 606. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied by transferring the promised good or service to the customer. The Company identifies and tracks the performance obligations at contract inception so that the Company can monitor and account for the performance obligations over the life of the contract. Remaining performance obligations represent the transaction price of orders for which products have not been delivered or services have not been performed. As of October 31, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $54 million. The Company expects to recognize revenue on approximately three-quarters of the remaining performance obligations over the next 12 months, with the remainder recognized thereafter.

Disaggregated Revenue. The Company disaggregates revenue from contracts with customers by geography, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

 

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Table of Contents

The Company’s revenue by geography is as follows:

 

     Three Months Ended
October 31,
     Six Months Ended
October 31,
 
     2018      2017      2018      2017  

Revenues:

           

Domestic

   $ 22,502      $ 20,996      $ 44,454      $ 42,542  

International

     5,531        5,341        10,978        10,680  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 28,033      $ 26,337      $ 55,432      $ 53,222  
  

 

 

    

 

 

    

 

 

    

 

 

 

Practical Expedients and Exemptions. There are several practical expedients and exemptions allowed under Topic 606 that impact the timing of revenue recognition and the Company’s disclosures. Below is a list of practical expedients the Company applied in the adoption and application of Topic 606:

-The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer.

-The Company does not disclose the value of unsatisfied performance obligations for contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed (apply to time-and-material engagements).

Contract costs. The Company capitalizes the incremental costs of obtaining a contract with a customer if the Company expects to recover those costs. The incremental costs of obtaining a contract are those that the Company incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, a sales commission). The Company capitalizes the costs incurred to fulfill a contract only if those costs meet all of the following criteria:

 

  a.

The costs relate directly to a contract or to an anticipated contract that the Company can specifically identify.

 

  b.

The costs generate or enhance resources of the Company that will be used in satisfying (or in continuing to satisfy) performance obligations in the future.

 

  c.

The costs are expected to be recovered.

Certain sales commissions incurred by the Company were determined to be incremental costs to obtain the related contracts, which are deferred and amortized ratably over the economic benefit period. These deferred commission costs are classified as current or non-current based on the timing of when the Company expects to recognize the expense. The current and non-current portions of deferred commissions are included in prepaid expenses and other current assets and other long-term assets, respectively, in the Company’s condensed consolidated balance sheets. Total deferred commissions at October 31, 2018 and April 30, 2018 were $2.3 million and $2.5 million, respectively. Amortization of sales commissions was $0.4 million for the three months ended October 31, 2018 and $0.6 million for the six months ended October 31, 2018, which is included in sales and marketing expense in the accompanying condensed consolidated statements of operations. No impairment losses were recognized during the periods.

C. Declaration of Dividend Payable

On August 22, 2018, our Board of Directors declared a quarterly cash dividend of $0.11 per share of our Class A and Class B common stock. The cash dividend is payable on December 5, 2018 to Class A and Class B shareholders of record at the close of business on November 19, 2018.

D. Earnings Per Common Share

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

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

 

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Table of Contents

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

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

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

Basic earnings per common share:

 

     Three Months Ended
October 31, 2018
     Six Months Ended
October 31, 2018
 
     Class A
Common
Shares
     Class B
Common
Shares
     Class A
Common
Shares
     Class B
Common
Shares
 

Distributed earnings

   $ 0.11      $ 0.11      $ 0.22      $ 0.22  

Undistributed losses

     (0.07      (0.07      (0.13      (0.13
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0.04      $ 0.04      $ 0.09      $ 0.09  
  

 

 

    

 

 

    

 

 

    

 

 

 

Distributed earnings

   $ 3,200      $ 205      $ 6,396      $ 409  

Undistributed losses

     (2,033      (129      (3,927      (250
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,167      $ 76      $ 2,469      $ 159  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average common shares outstanding

     29,104        1,822        28,959        1,866  

 

     Three Months Ended
October 31, 2017
     Six Months Ended
October 31, 2017
 
     Class A
Common
Shares
     Class B
Common
Shares
     Class A
Common
Shares
     Class B
Common
Shares
 

Distributed earnings

   $ 0.11      $ 0.11      $ 0.22      $ 0.22  

Undistributed losses

     (0.03      (0.03      (0.05      (0.05
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0.08      $ 0.08      $ 0.17      $ 0.17  
  

 

 

    

 

 

    

 

 

    

 

 

 

Distributed earnings

   $ 3,064      $ 249      $ 6,078      $ 505  

Undistributed losses

     (768      (65      (1,269      (109
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,296      $ 184      $ 4,809      $ 396  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average common shares outstanding

     27,589        2,317        27,448        2,340  

 

15


Table of Contents

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

Three Months Ended October 31, 2018

 

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

Per Basic

   $ 1,167        29,104      $ 0.04  

Common Stock Equivalents

     —          552        —    
  

 

 

    

 

 

    

 

 

 
     1,167        29,656        0.04  

Class B Common Share Conversion

     76        1,822        —    
  

 

 

    

 

 

    

 

 

 

Diluted EPS for Class A Common Shares

   $ 1,243        31,478      $ 0.04  
  

 

 

    

 

 

    

 

 

 

Six Months Ended October 31, 2018

 

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

Per Basic

   $ 2,469        28,959      $ 0.09  

Common Stock Equivalents

     —          587        —    
  

 

 

    

 

 

    

 

 

 
     2,469        29,546        0.08  

Class B Common Share Conversion

     159        1,866        —    
  

 

 

    

 

 

    

 

 

 

Diluted EPS for Class A Common Shares

   $ 2,628        31,412      $ 0.08  
  

 

 

    

 

 

    

 

 

 

Three Months Ended October 31, 2017

 

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

Per Basic

   $ 2,296        27,589      $ 0.08  

Common Stock Equivalents

     —          323        —    
  

 

 

    

 

 

    

 

 

 
     2,296        27,912        0.08  

Class B Conversion

     184        2,317        —    
  

 

 

    

 

 

    

 

 

 

Diluted EPS for Class A Common Shares

   $ 2,480        30,229      $ 0.08  
  

 

 

    

 

 

    

 

 

 

Six Months Ended October 31, 2017

 

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

Per Basic

   $ 4,809        27,448      $ 0.17  

Common Stock Equivalents

     —          322        —    
  

 

 

    

 

 

    

 

 

 
     4,809        27,770        0.17  

Class B Conversion

     396        2,340        —    
  

 

 

    

 

 

    

 

 

 

Diluted EPS for Class A Common Shares

   $ 5,205        30,110      $ 0.17  
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

Three Months Ended October 31, 2018     

 

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

Per Basic

   $ 76        1,822      $ 0.04  

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

     2      —          —    
  

 

 

    

 

 

    

 

 

 

Diluted EPS for Class B Common Shares

   $ 78        1,822      $ 0.04  

Six Months Ended October 31, 2018

 

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

Per Basic

   $ 159        1,866      $ 0.09  

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

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Diluted EPS for Class B Common Shares

   $ 159        1,866      $ 0.09  
  

 

 

    

 

 

    

 

 

 

Three Months Ended October 31, 2017

 

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

Per Basic

   $ 184        2,317      $ 0.08  

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

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Diluted EPS for Class B Common Shares

   $ 184        2,317      $ 0.08  
  

 

 

    

 

 

    

 

 

 

Six Months Ended October 31, 2017

 

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

Per Basic

   $ 396        2,340      $ 0.17  

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

     1        —          —    
  

 

 

    

 

 

    

 

 

 

Diluted EPS for Class B Common Shares

   $ 397        2,340      $ 0.17  
  

 

 

    

 

 

    

 

 

 

 

*

Amounts adjusted for rounding

 

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For the three and six months ended October 31, 2018, we excluded options to purchase 12,000 and 6,065 Class A Common Shares, respectively, and for the three and six months ended October 31, 2017, we excluded options to purchase 1,184,124 and 1,105,521 Class A Common Shares, respectively, from the computation of diluted earnings per Class A Common Shares. We excluded these option share amounts because the exercise prices of those options were greater than the average market price of the Class A Common Shares during the applicable period. As of October 31, 2018, we had a total of 4,119,923 options outstanding and as of October 31, 2017, we had a total of 3,440,512 options outstanding.

E. Stock-Based Compensation

During the six months ended October 31, 2018 and 2017, we granted options for 1,189,000 and 884,000 shares of Class A common stock, respectively. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The forfeiture rates are estimated using historical data. We recorded stock option compensation cost of approximately $443,000 and $477,000 and income tax excess benefits of approximately $12,000 and shortfall of $47,000 from option exercises during the three months ended October 31, 2018 and 2017, respectively. We recorded stock option compensation cost of approximately $841,000 and $793,000, and income tax excess benefits of approximately $286,000 and $80,000 from option exercises during the six months ended October 31, 2018 and 2017, respectively. We record stock-based compensation expense on a straight-line basis over the vesting period directly to additional paid-in capital.

During the six months ended October 31, 2018 and 2017, we issued 343,000 and 482,000 shares of Class A common stock, respectively, resulting from the exercise of stock options. The total intrinsic value of options exercised during the six months ended October 31, 2018 and 2017 based on market value at the exercise dates was approximately $1.9 million and $1.3 million, respectively. As of October 31, 2018, unrecognized compensation cost related to unvested stock option awards approximated $5.4 million, which we expect to recognize over a weighted average period of 2.04 years.

F. Fair Value of Financial Instruments

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

 

   

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

 

   

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

 

   

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

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

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

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

 

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The following tables present our assets and liabilities that we measured at fair value on a recurring basis as of October 31, 2018 and April 30, 2018, respectively, and indicates the fair value hierarchy of the valuation techniques we used to determine such fair value (in thousands):

 

     October 31, 2018  
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Balance  

Cash equivalents

   $ 43,193      $ —      $ —      $ 43,193  

Marketable securities

     9,676        22,065        —          31,741  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 52,869      $ 22,065      $ —      $ 74,934  
  

 

 

    

 

 

    

 

 

    

 

 

 
     April 30, 2018  
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Balance  

Cash equivalents

   $ 46,972      $ —      $ —      $ 46,972  

Marketable securities

     11,125        23,889        —          35,014  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 58,097      $ 23,889      $ —      $ 81,986  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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G. Stock Repurchases

On August 19, 2002, our Board of Directors authorized the repurchase of up to an additional 2.0 million shares of our Class A common stock. We have made and will make these repurchases through open market purchases at prevailing market prices. The timing of any repurchase will depend upon market conditions, the market price of our Class A common stock and management’s assessment of our liquidity and cash flow needs. Under this repurchase plan, through October 31, 2018, we have repurchased 1,053,679 shares of Class A common stock at a cost of approximately $6.2 million. As of October 31, 2018, under all repurchase plans previously authorized, including this most recent plan, we have repurchased a total of 4,588,632 shares of common stock at a cost of approximately $25.6 million.

H. Comprehensive Income

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

I. Industry Segments

FASB ASC 280, Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of a public entity about which separate financial information is available that is evaluated regularly by the chief operating decision makers (“CODMs”), or decision making group, in deciding how to allocate resources and in assessing performance. Our CODMs are our Principal Executive Officer (“PEO”) and President. While our CODMs are apprised of a variety of financial metrics and information, we manage our business primarily on a segment basis, with the CODMs evaluating performance based upon segment operating profit or loss, with certain corporate and other common expenses included in the Other segment. Our CODMs review the operating results of our three segments, assess performance and allocate resources in a manner that is consistent with the changing market dynamics that we have experienced. We recently updated our operating segments to reflect the fact that we provide our software solutions through three major operating segments, which are further broken down into a total of six major product and service groups. The three operating segments are (1) Supply Chain Management (“SCM”), (2) Information Technology (“IT”) Consulting and (3) Other.

The SCM segment primarily consists of Logility, which is a leading provider of collaborative supply chain optimization and advanced retail planning solutions that help medium, large and Fortune 500 companies transform their supply chain operations to gain a competitive advantage and which is recognized for its high-touch approach to customer service, rapid implementations and industry-leading return on investment (ROI). The SCM segment also includes (i) Demand Management, Inc (“DMI”), which delivers affordable, easy-to-use SaaS supply chain planning solutions designed to increase forecast accuracy, improve customer service and reduce inventory to maximize profits and lower costs, (ii) New Generation Computing (“NGC”), which is a leading provider of cloud-based supply chain and product lifecycle management solutions for brands, retailers and consumer products companies, and (iii) Halo Business Intelligence (“Halo”), which is an advanced analytics software provider leveraging an innovative blend of artificial intelligence and machine learning technology to drive greater supply chain performance. The Other segment consists of (i) American Software ERP, which provides purchasing and materials management, customer order processing, financial, e-commerce and traditional manufacturing solutions, and (ii) corporate overhead and other common expenses.

Previously, we maintained three operating segments: (1) SCM, (2) IT and (3) Enterprise Resource Planning (“ERP”). As a result of the organizational realignment during the third quarter of fiscal 2018, NGC was repositioned out of the ERP segment and into the SCM segment. There were no changes to the IT segment. Certain prior year amounts have been recast to conform to fiscal 2019 presentation. The change in reportable segments had no effect on our previously reported consolidated financial position or results of operations.

All of our revenues are derived from external customers. We do not have any intersegment revenue. Our income taxes and dividends are paid at a consolidated level. Consequently, it is not practical to show these items by operating segment.

 

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In the following table, we have broken down the intersegment transactions applicable to the three and six months ended October 31, 2018 and 2017 (in thousands):

 

     Three Months Ended
October 31,
     Six Months Ended
October 31,
 
     2018      2017      2018     2017  

Revenues:

          

Supply Chain Management

   $ 22,114      $ 21,178      $ 43,572     $ 43,064  

IT Consulting

     5,222        4,596        10,579       8,965  

Other

     697        563        1,281       1,193  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 28,033      $ 26,337      $ 55,432     $ 53,222  
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income (loss) before intersegment eliminations:

          

Supply Chain Management

   $ 3,973      $ 4,669      $ 7,040     $ 9,582  

IT Consulting

     396        357        755       591  

Other

     (2,843      (1,784      (5,662     (3,310
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,526      $ 3,242      $ 2,133     $ 6,863  
  

 

 

    

 

 

    

 

 

   

 

 

 

Intersegment eliminations*:

          

Supply Chain Management

     —          —          —         —    

IT Consulting

     —          —          —         —    

Other

     —          —          —         —    
  

 

 

    

 

 

    

 

 

   

 

 

 
     —          —          —         —    
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income (loss) after intersegment eliminations:

          

Supply Chain Management

   $ 3,973      $ 4,669      $ 7,040     $ 9,582  

IT Consulting

     396        357        755       591  

Other

     (2,843      (1,784      (5,662     (3,310
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,526      $ 3,242      $ 2,133     $ 6,863  
  

 

 

    

 

 

    

 

 

   

 

 

 

Capital expenditures:

          

Supply Chain Management

   $ 52      $ 57      $ 124     $ 81  

IT Consulting

     —          4        1       6

Other

     128        17        769       125  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 180      $ 78      $ 894     $ 212  
  

 

 

    

 

 

    

 

 

   

 

 

 

Capitalized software:

          

Supply Chain Management

   $ 1,204      $ 1,330      $ 2,088     $ 2,617  

IT Consulting

     —          —          —         —    

Other

     —          —          —         —    
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,204      $ 1,330      $ 2,088     $ 2,617  
  

 

 

    

 

 

    

 

 

   

 

 

 

Depreciation and amortization:

          

Supply Chain Management

   $ 1,828      $ 1,273      $ 3,554     $ 2,605  

IT Consulting

     2        2        4       4  

Other

     83        46        153       96  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,913      $ 1,321      $ 3,711     $ 2,705  
  

 

 

    

 

 

    

 

 

   

 

 

 

Earnings (loss) before income taxes:

          

Supply Chain Management

   $ 4,008      $ 4,718      $ 7,058     $ 9,792  

IT Consulting

     396        357        755       591  

Other

     (3,068      (1,157      (5,117     (2,245
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,336      $ 3,918      $ 2,696     $ 8,138  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

*

Fiscal 2018 recast to adjust for corporate overhead and other common expenses, which were no longer allocated starting in fiscal 2019.

 

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J. Major Customers

No one customer accounted for more than 10% of total revenues for the three and six months ended October 31, 2018 and 2017.

K. Contingencies

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

L. Subsequent Event

On November 15, 2018, our Board of Directors declared a quarterly cash dividend of $0.11 per share of our Class A and Class B common stock. The cash dividend is payable on February 22, 2019 to Class A and Class B shareholders of record at the close of business on February 8, 2019.

 

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Item 2.

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

FORWARD-LOOKING STATEMENTS

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

 

   

results of operations;

 

   

liquidity, cash flow and capital expenditures;

 

   

demand for and pricing of our products and services;

 

   

annual contract value (“ACV”);

 

   

viability and effectiveness of strategic alliances;

 

   

industry conditions and market conditions;

 

   

acquisition activities and the effect of completed acquisitions; and

 

   

general economic conditions.

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

ECONOMIC OVERVIEW

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

In October 2018, the International Monetary Fund (“IMF”) provided an update to the World Economic Outlook (“WEO”) for the 2018 and 2019 world economic growth forecast. The update noted that, “Global growth is projected at 3.7 percent for 2018– 19—0.2 percentage point lower for both years than forecast in April. In the United States, momentum is still strong as fiscal stimulus continues to increase, but the forecast for 2019 has been revised down due to recently announced trade measures, including the tariffs imposed on $200 billion of US imports from China. Growth projections have been marked down for the euro area and the United Kingdom, following surprises that suppressed activity in early 2018. Among emerging market and developing economies, the growth prospects of many energy exporters have been lifted by higher oil prices, but growth was revised down for Argentina, Brazil, Iran, and Turkey, among others, reflecting country-specific factors, tighter financial conditions, geopolitical tensions, and higher oil import bills. China and a number of Asian economies are also projected to experience somewhat weaker growth in 2019 in the aftermath of the recently announced trade measures.”

For fiscal 2019, we expect the global economy to improve modestly when compared to the prior year. We believe information technology spending will incrementally improve over the long term as increased global competition forces companies to improve productivity by upgrading their technology systems, which could result in an improved selling environment. Although this improvement could slow or regress at any time, due in part to concerns in global capital markets and general economic conditions, we believe that our organizational and financial structure will enable us to take advantage of any sustained economic rebound. Customers continue to take long periods to evaluate discretionary software purchases.

 

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We believe improved economic conditions may be driving some businesses to focus on achieving more process and efficiency enhancements in their operations and to invest in solutions that improve operating margins, rather than make large infrastructure-type technology purchases. If this trend continues, we believe it may tend to favor solutions such as our supply chain solutions, which are designed to provide a more rapid return on investment and are targeted at some of the largest profit drivers in a customer’s business.

BUSINESS OVERVIEW

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

The SCM segment primarily consists of Logility, which is a leading provider of collaborative supply chain optimization and advanced retail planning solutions that help medium, large and Fortune 500 companies transform their supply chain operations to gain a competitive advantage and which is recognized for its high-touch approach to customer service, rapid implementations and industry-leading return on investment (ROI). The SCM segment also includes (i) DMI, which delivers affordable, easy-to-use Software-as-a-Service (SaaS) supply chain planning solutions designed to increase forecast accuracy, improve customer service and reduce inventory to maximize profits and lower costs, (ii) NGC, which is a leading provider of cloud-based supply chain and product lifecycle management solutions for brands, retailers and consumer products companies, and (iii) Halo, which is an advanced analytics software provider leveraging an innovative blend of artificial intelligence and machine learning technology to drive greater supply chain performance. The Other segment consists of (i) American Software ERP, which provides purchasing and materials management, customer order processing, financial, e-commerce and traditional manufacturing solutions, and (ii) corporate overhead and other common expenses.

We derive revenues primarily from four sources: software licenses, subscriptions, professional services and other, and maintenance. We generally determine software license and SaaS fees based on the depth of functionality, contractual term, number of production deployments, users and/or sites licensed and/or subscribed. Professional services and other revenues consist primarily of fees from software implementation, training, and consulting services. We bill primarily under time and materials arrangements and recognize revenues as we perform services. SaaS and maintenance agreements typically are for a one- to three-year term, commencing at the time of the initial contract. We generally bill these fees annually in advance under agreements with terms of one to three years, and then recognize the resulting revenues ratably over the term of the agreement. Deferred revenue represents payments or billings for subscriptions, software licenses, services and maintenance in advance of the time we recognize the related revenues.

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

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

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

 

   

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

 

   

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

 

   

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

 

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Table of Contents
   

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

 

   

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

A discussion of a number of additional risk factors associated with our business is included in our Annual Report for the fiscal year ended April 30, 2018. Additional information and other factors that could affect future financial results may be included, from time to time, in our filings with the Securities and Exchange Commission (“SEC”).

Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements, if any, and the impact of these pronouncements on our consolidated financial statements, if any, see Note A in the Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.

COMPARISON OF RESULTS OF OPERATIONS

Three-Month Comparisons. The following table sets forth certain revenue and expense items as a percentage of total revenues and the percentage changes in those items for the three months ended October 31, 2018 and 2017:

 

     Three Months Ended October 31,  
     Percentage of Total
Revenues
    Pct. Change in
Dollars
 
     2018     2017     2018 vs. 2017  

Revenues:

      

License

     7     9     (18 )% 

Subscription Fees

     12     8     64

Professional Services and other

     39     42     —  

Maintenance

     42     41     7
  

 

 

   

 

 

   

Total revenues

     100     100     6
  

 

 

   

 

 

   

Cost of revenues:

      

License

     6     6     7

Subscription Fees

     5     3     43

Professional Services and other

     29     29     8

Maintenance

     8     9     (3 )% 
  

 

 

   

 

 

   

Total cost of revenues

     48     47     8
  

 

 

   

 

 

   

Gross margin

     52     53     5
  

 

 

   

 

 

   

Research and development

     12     10     26

Sales and marketing

     19     17     20

General and administrative

     16     14     22

Amortization of acquisition-related intangibles

     —       —       43
  

 

 

   

 

 

   

Total operating expenses

     47     41     22
  

 

 

   

 

 

   

Operating income

     5     12     (53 )% 
  

 

 

   

 

 

   

Other income:

      

Interest income

     2     1     48

Other, net

     (3 )%      1     (322 )% 
  

 

 

   

 

 

   

Earnings before income taxes

     4     14     (66 )% 

Income tax expense

     —       5     (94 )% 
  

 

 

   

 

 

   

Net earnings

     4     9     (50 )% 
  

 

 

   

 

 

   

 

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Table of Contents

Six-Month Comparisons. The following table sets forth certain revenue and expense items as a percentage of total revenues and the percentage changes in those items for the six months ended October 31, 2018 and 2017:

 

     Six Months Ended October 31,  
     Percentage of Total
Revenues
    Pct. Change in
Dollars
 
     2018     2017     2018 vs. 2017  

Revenues:

      

License

     7     12     (43 )% 

Subscription Fees

     12     7     78

Professional Services and other

     40     40     3

Maintenance

     41     41     7
  

 

 

   

 

 

   

Total revenues

     100     100     4
  

 

 

   

 

 

   

Cost of revenues:

      

License

     6     6     17

Subscription Fees

     4     3     35

Professional Services and other

     31     28     14

Maintenance

     8     8     (2 )% 
  

 

 

   

 

 

   

Total cost of revenues

     49     45     13
  

 

 

   

 

 

   

Gross margin

     51     55     (3 )% 
  

 

 

   

 

 

   

Research and development

     13     10     36

Sales and marketing

     19     18     8

General and administrative

     16     13     20

Amortization of acquisition-related intangibles

     —       1     (50 )% 
  

 

 

   

 

 

   

Total operating expenses

     48     42     18
  

 

 

   

 

 

   

Operating income

     3     13     (69 )% 
  

 

 

   

 

 

   

Other income:

      

Interest income

     2     1     43

Other, net

     (1 )%      1     (183 )% 
  

 

 

   

 

 

   

Earnings before income taxes

     4     15     (67 )% 

Income tax expense

     —       6     (98 )% 
  

 

 

   

 

 

   

Net earnings

     4     9     (50 )% 
  

 

 

   

 

 

   

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2018 AND 2017

REVENUES

 

     Three Months Ended October 31,  
                         % of Total Revenue  
     2018      2017      % Change     2018     2017  
     (in thousands)                     

License

   $ 2,012      $ 2,449        (18 )%      7     9

Subscription Fees

     3,341        2,041        64     12     8

Professional Services and other

     11,056        11,008        —       39     42

Maintenance

     11,624        10,839        7     42     41
  

 

 

    

 

 

      

 

 

   

 

 

 

Total revenues

   $  28,033      $  26,337        6     100     100

 

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     Six Months Ended October 31,  
                         % of Total Revenue  
     2018      2017      % Change     2018     2017  
     (in thousands)                     

License

   $ 3,714      $ 6,464        (43 )%      7     12

Subscription Fees

     6,509        3,660        78     12     7

Professional Services and other

     22,064        21,431        3     40     40

Maintenance

     23,145        21,667        7     41     41
  

 

 

    

 

 

      

 

 

   

 

 

 

Total revenues

   $ 55,432      $ 53,222        4     100     100

For the three months ended October 31, 2018, the 6% increase in revenues over the three months ended October 31, 2017 was attributable primarily to a 64% increase in subscription fees revenues and to a lesser extent a 7% increase in maintenance revenues, when compared to the same period last year. This increase was partially offset by a 18% decrease in license revenues.

For the six months ended October 31, 2018, the 4% increase in revenues over the six months ended October 31, 2017 was attributable primarily to a 78% increase in subscription fees revenues, and to a lesser extent a 7% increase in maintenance revenues and a 3% increase in professional services revenues, when compared to the same period last year. This increase was partially offset by a 43% decrease in license revenues.

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

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

International revenues represented approximately 20% of total revenues in the three and six months ended October 31, 2018 and 2017, respectively. Our revenues, in particular our international revenues, may fluctuate substantially from period to period primarily because we derive most of our license fee revenues from a relatively small number of customers in a given period.

License Revenues

 

     Three Months Ended October 31,  
     2018      2017      % Change  
     (in thousands)         

Supply Chain Management

   $ 1,932      $ 2,438        (21 )% 

Other

     80        11        627
  

 

 

    

 

 

    

Total license revenues

   $ 2,012      $ 2,449        (18 )% 
  

 

 

    

 

 

    

 

     Six Months Ended October 31,  
     2018      2017      % Change  
     (in thousands)         

Supply Chain Management

   $ 3,614      $ 6,442        (44 )% 

Other

     100        22        355
  

 

 

    

 

 

    

Total license revenues

   $ 3,714      $ 6,464        (43 )% 
  

 

 

    

 

 

    

For the three and six months ended October 31, 2018, license fee revenues decreased 18% and 43%, respectively, when compared to the same period in the prior year. In the three and six months ended October 31, 2018, license fee revenues from our SCM segment decreased 21% and 44%, respectively, when compared to the corresponding periods in the prior year due to an increase in sales of our products on Logility’s cloud services platform that require revenue to be deferred over the life of the contracted period, which is typically one to three years. For the three months ended October 31, 2018 and 2017, our SCM segment constituted approximately 96% and 100% of total license fee revenues, respectively. For the six months ended October 31, 2018 and 2017, our SCM segment constituted approximately 97% and 100% of total license fee revenues, respectively. Our Other segment license fee revenues increased by 627% and 355%, respectively, for the three and six months ended October 31, 2018 when compared to the same period in the prior year primarily due to timing of additional sales to our existing ERP customers.

 

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The direct sales channel provided approximately 93% and 91% of license fee revenues for the three and six months ended October 31, 2018, compared to approximately 60% and 76% in the comparable periods last year. The increase in the percentage of sales by our direct sales channel was due to our indirect channel selling proportionately more SaaS than license contracts compared to our direct channel. For the three and six months ended October 31, 2018, our margins after commissions on direct sales were approximately 85% and 88%, compared to 91% and 86% in the comparable periods last year. The decrease in margins is due to the mix of sales commission rates based on each individual salesperson’s quotas and related achievement. For the three months ended October 31, 2018 and 2017, our margins after commissions on indirect sales were approximately 60% and 43%, respectively. For the six months ended October 31, 2018 and 2017, our margins after commissions on indirect sales were approximately 55% and 37%, respectively. The indirect channel margins for the current quarter increased compared to the same periods in the prior year due to the mix of value-added reseller (“VAR”) commission rates. These margin calculations include only commission expense for comparative purposes and do not include other costs of license fees such as amortization of capitalized software.

Subscription Fees

 

     Three Months Ended October 31,  
     2018      2017      % Change  
     (in thousands)         

Supply Chain Management

   $ 3,341      $ 2,041        64
  

 

 

    

 

 

    

Total Subscription Fees revenues

   $ 3,341      $ 2,041        64
  

 

 

    

 

 

    

 

     Six Months Ended October 31,  
     2018      2017      % Change  
     (in thousands)         

Supply Chain Management

   $ 6,509      $ 3,660        78
  

 

 

    

 

 

    

Total Subscription Fees revenues

   $ 6,509      $ 3,660        78
  

 

 

    

 

 

    

For the three and six months ended October 31, 2018, subscription fees revenues increased by 64% and 78%, respectively, primarily due to the increased subscription fees revenues from our SCM segment which increased sales of our products on our cloud services platform that require revenue to be deferred over the life of the contracted period, which is typically one to three years.

For the six months ended October 31, 2018, cloud services ACV increased approximately 46% to $14.5 million compared to $9.9 million in the same period of the prior year due to increased sales of our products on our Cloud Services platform that require revenue to be deferred over the life of the contracted period, which is typically one to three years. ACV is a forward-looking operating measure used by management to better understand cloud services (SaaS and other related cloud services) revenue trends within our business, as it reflects our current estimate of revenue to be generated under existing client contracts in the forward 12-month period.

Professional Services and other revenues

 

     Three Months Ended October 31,  
     2018      2017      % Change  
     (in thousands)         

Supply Chain Management

   $ 5,553      $ 6,228        (11 )% 

IT Consulting

     5,222        4,596        14

Other

     281        184        53
  

 

 

    

 

 

    

Total Professional Services and other revenues

   $ 11,056      $ 11,008        —  
  

 

 

    

 

 

    

 

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     Six Months Ended October 31,  
     2018      2017      % Change  
     (in thousands)         

Supply Chain Management

   $ 10,999      $ 12,068        (9 )% 

IT Consulting

     10,579        8,965        18

Other

     486        398        22
  

 

 

    

 

 

    

Total Professional Services and other revenues

   $ 22,064      $ 21,431        3
  

 

 

    

 

 

    

For the three and six months ended October 31, 2018, professional services and other revenues were flat and increased by 3%, respectively, due to the increased professional services and other revenues from our Other and IT Consulting segments. This increase was partially offset by a decrease in professional services and other revenues from our SCM segment. For the three and six months ended October 31, 2018, our Other segment’s revenues increased 53% and 22% when compared to the same periods last year. For the three and six months ended October 31, 2018, our IT Consulting segment’s revenues increased 14% and 18% when compared to the same periods in the prior year due to an increase in project work from existing and new customers. For the three and six months ended October 31, 2018, our SCM segment’s revenues decreased 11% and 9%, primarily because certain implementation project work ended during the quarter before new projects could start. We have observed that there is a tendency for services and other revenues, other than from IT Consulting, to lag changes in license and subscription revenues by one to three quarters, as new licenses and subscriptions in one quarter often involve implementation and consulting services in subsequent quarters, for which we recognize revenues only as we perform those services.

Maintenance Revenues

 

     Three Months Ended October 31,  
     2018      2017      % Change  
     (in thousands)         

Supply Chain Management

   $ 11,288      $ 10,471        8

Other

     336        368        (9 )% 
  

 

 

    

 

 

    

Total maintenance revenues

   $ 11,624      $ 10,839        7
  

 

 

    

 

 

    

 

     Six Months Ended October 31,  
     2018      2017      % Change  
     (in thousands)         

Supply Chain Management

   $ 22,450      $ 20,894        7

Other

     695        773        (10 )% 
  

 

 

    

 

 

    

Total maintenance revenues

   $ 23,145      $ 21,667        7
  

 

 

    

 

 

    

For the three and six months ended October 31, 2018, maintenance revenues increased 7% when compared to the same periods in the prior year. Our SCM maintenance revenue increased 8% and 7% for the three and six months ended October 31, 2018, when compared to the same periods last year due primarily to our recent Halo acquisition in the third quarter of fiscal 2018 and improved customer retention. The SCM segment accounted for 97% of total maintenance revenues for the three and six months ended October 31, 2018 and accounted for 97% and 93% for the same periods in the prior year. Typically, our maintenance revenues have had a direct relationship to current and historic license fee revenues, since new licenses are the potential source of new maintenance customers.

GROSS MARGIN

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

 

     Three months ended October 31,     Six months ended October 31,  
     2018            2017            2018            2017         

Gross margin on license fees

   $ 252        13   $ 798        33   $ 240        6   $ 3,498        54

Gross margin on subscription fees

     2,052        61     1,138        56     4,153        64     1,911        52

Gross margin on professional services and other

     2,953        27     3,520        32     5,293        24     6,670        31

Gross margin on maintenance

     9,410        81     8,550        79     18,733        81     17,151        79
  

 

 

      

 

 

      

 

 

      

 

 

    

Total gross margin

   $ 14,667        52   $ 14,006        53   $ 28,419        51   $ 29,230        55
  

 

 

      

 

 

      

 

 

      

 

 

    

 

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For the three and six months ended October 31, 2018, our total gross margin percentages decreased when compared to the same periods in the prior year primarily due to our lower margins on license fee revenue and professional services and other revenue, partially offset by higher margins on subscription fees and maintenance revenue.

Gross Margin on License Fees

License fee gross margin percentage for the three and six months ended October 31, 2018 decreased when compared to the same period in the prior year. License fee gross margin percentage tends to be directly related to the level of license fee revenues due to the relatively fixed cost of computer software amortization expense, amortization of acquired software and the sales mix between our direct and indirect channels.

Gross Margin on Subscription Fees

Our gross margin percentage on subscription fees revenues increased from 56% and 52% for the three and six months ended October 31, 2017 to 61% and 64% for the three and six months ended October 31, 2018, respectively, primarily due to the increase in subscription revenue, combined with a lower incremental increase in cost.

Gross Margin on Professional Services and Other

Our gross margin percentage on professional services and other revenues decreased from 32% for the three months ended October 31, 2017 to 27% for the three months ended October 31, 2018. Our gross margin percentage on professional services and other revenues decreased from 31% for the six months ended October 31, 2017 to 24% for the six months ended October 31, 2018. This decrease was primarily due to lower gross margins in our SCM segment services of 28% and 32% for the three months ended October 31, 2018 and 2017, and 23% and 31% for the six months ended October 31, 2018 and 2017, respectively, due to lower billing utilization from several large projects ending during the quarter. Our Other segment professional services gross margin increased from 28% to 51% for the three months ended October 31, 2018 and 2017, respectively, and from 33% to 45% for the six months ended October 31, 2018 and 2017, due to higher margin projects in the current quarter. Our IT Consulting segment professional services gross margin increased from 23% to 24% for the three months ended October 31, 2018 and 2017, respectively, and 21% to 24% for the six months ended October 31, 2018 and 2017, due to higher margin projects in the current quarter. Professional services and other gross margin is directly related to the level of services and other revenues. The primary component of cost of services and other revenues is services staffing, which is relatively inelastic in the short term.

Gross Margin on Maintenance

Maintenance gross margin percentage for the three and six months ended October 31, 2018 increased to 81% from 79% when compared to the same periods last year due to an increase in maintenance revenue. The primary cost component is maintenance staffing, which is relatively inelastic in the short term.

EXPENSES

 

     Three Months Ended October 31,     Six Months Ended October 31,  
     2018     2017      % of Revenues     2018      2017      % of Revenues  
     2018     2017      2018     2017  
     (in thousands)                  (in thousands)               

Research and development

   $ 3,332     $ 2,643        12     10   $ 7,007      $ 5,151        13     10

Sales and marketing

   $ 5,304     $ 4,437        19     17   $ 10,484      $ 9,670        19     18

General and administrative

   $ 4,408     $ 3,616        16     14   $ 8,601      $ 7,155        16     13

Amortization of acquisition-related intangible assets

   $ 97     $ 68        —       —     $ 194      $ 391        —       1

Other (expense)/income, net

   $ (190   $ 676        (1 )%      2   $ 563      $ 1,275        1     2

Income tax expense

   $ 93     $ 1,438        —       5   $ 68      $ 2,933        —       6

 

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Research and Development

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

 

     Three Months Ended October 31,  
     2018     2017     % Change  
     (in thousands)              

Total capitalized computer software development costs

   $  1,204     $  1,330       (9 )% 

Percentage of gross product research and development costs

     27     34  

Total research and development expense

   $ 3,332     $ 2,643       26
  

 

 

   

 

 

   

Percentage of total revenues

     12     10  

Total gross research and development expense and capitalized computer software development costs

   $ 4,536     $ 3,973       14

Percentage of total revenues

     16     15  

Total amortization of capitalized computer software development costs *

   $ 1,145     $ 892       28
     Six Months Ended October 31,  
     2018     2017     % Change  
     (in thousands)              

Total capitalized computer software development costs

   $  2,088     $  2,617       (20 )% 

Percentage of gross product research and development costs

     23     34  

Total research and development expense

   $ 7,007     $ 5,151       36
  

 

 

   

 

 

   

Percentage of total revenues

     13     10  

Total gross research and development expense and capitalized computer software development costs

   $ 9,095     $ 7,768       17

Percentage of total revenues

     16     15  

Total amortization of capitalized computer software development costs *

   $ 2,198     $ 1,763       25

 

*

Included in cost of license fees and subscription fees.

For the three and six months ended October 31, 2018, gross product research and development costs increased 14% and 17%, respectively, when compared to the same periods in the previous year due partially to the recent Halo acquisition in the third quarter of fiscal 2018 and increased headcount in our SCM segment. We expect capitalized product development costs to decrease due to timing of projects and we expect capitalized software amortization expense to be relatively stable in coming quarters. Costs included in gross product development are salaries of product development personnel, hardware lease expense, computer software expense, telephone expense and rent.

Sales and Marketing

For the three and six months ended October 31, 2018, sales and marketing expenses increased 20% and 8%, respectively, when compared to the same periods a year ago, primarily due to increased headcount in our SCM segment.

General and Administrative

For the three and six months ended October 31, 2018, general and administrative expenses increased 22% and 20%, respectively, when compared to the same periods a year ago, primarily due to the recent Halo acquisition in the third quarter of fiscal 2018.

At October 31, 2018, the total number of employees was 452 compared to 390 at October 31, 2017.

 

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Operating Income/(Loss)

 

     Three Months Ended October 31,     Six Months Ended October 31,  
     2018     2017     % Change     2018     2017     % Change  
     (in thousands)           (in thousands)        

Supply Chain Management

   $ 3,973     $ 4,669       (15 )%    $ 7,040     $ 9,582       (27 )% 

IT Consulting

     396       357       11     755       591       28

Other*

     (2,843     (1,784     59     (5,662     (3,310     71
  

 

 

   

 

 

     

 

 

   

 

 

   

Total Operating Income

   $ 1,526     $ 3,242       (53 )%    $ 2,133     $ 6,863       (69 )% 
  

 

 

   

 

 

     

 

 

   

 

 

   

 

*

Includes all corporate overhead and other common expenses in fiscal 2019.

Our SCM segment operating income decreased by 15% and 27% in the three and six months ended October 31, 2018 compared to the same periods in the prior year primarily due to the recent Halo acquisition in the third quarter of fiscal 2018.

Our IT Consulting segment’s operating income increased by 11% and 28% for the three and six months ended October 31, 2018 compared to same periods last year primarily due to increased revenues and gross margins.

Our Other segment operating loss increased by 59% and 71% for the three and six months ended October 31, 2018 when compared to the same periods in the prior year because all corporate overhead and common expenses are included in this segment in fiscal 2019.

Other Income

Other income is comprised of net interest and dividend income, rental income, exchange rate gains and losses, and realized and unrealized gains and losses from investments. For the three and six months ended October 31, 2018, the decrease in other income is mainly due to higher unrealized losses on investments when compared to the same periods last year. We recorded losses of approximately $700,000 and $312,000 for the three and six months ended October 31, 2018, respectively, from our trading securities portfolio. We recorded gains of approximately $268,000 and $381,000 the three and six months ended October 31, 2017, respectively, from our trading securities portfolio.

For the three and six months ended October 31, 2018, our investments generated an annualized yield of approximately 1.32% and 1.40%, respectively, compared to approximately 1.30% and 1.38% for the three and six months ended October 31, 2017, respectively.

Income Taxes

We recognize deferred tax assets and liabilities based on the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases. We measure deferred tax assets and liabilities using statutory tax rates in effect in the year in which we expect the differences to reverse. We establish a deferred tax asset for the expected future benefit of net operating loss and credit carry-forwards. Under the Income Tax Topic of the FASB ASC, we cannot recognize a deferred tax asset for the future benefit of our net operating losses, tax credits and temporary differences unless we can establish that it is “more likely than not” that the deferred tax asset would be realized.

During the three and six months ended October 31, 2018, we recorded income tax expense of $93,000 and $68,000, respectively, primarily due to discrete stock compensation benefits of $12,000 and $286,000, respectively, net of normal income tax expense from operations. After adjusting for these discrete tax benefits, our effective tax rate would have been 7.9% and 13.1%, respectively, in the three and six months ended October 31, 2018 compared to our tax effective rate of 36.7% and 36.0% in the three and six months ended October 31, 2017. The Tax Cuts and Jobs Act enacted on December 22, 2017, which lowered our U.S. statutory federal income tax rate from 35% to 21%, was the primary driver of the reduction in our effective tax rate. In addition, research and development and foreign tax credits reduced our effective tax rate by 8% and 3%, respectively, in the six months ended October 31, 2018, compared to reductions of 2% and 1%, respectively, in the six months ended October 31, 2017.

Operating Pattern

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

 

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LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

Sources and Uses of Cash

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

 

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The following table shows information about our cash flows and liquidity positions during the six months ended October 31, 2018 and 2017. You should read this table and the discussion that follows in conjunction with our condensed consolidated statements of cash flows contained in “Item 1” in Part I of this Quarterly Report and in our Annual Report for the fiscal year ended April 30, 2018.

 

     Six Months Ended
October 31,
(in thousands)
 
     2018      2017  

Net cash provided by operating activities

   $ 4,802      $ 520  

Net cash used in investing activities

     (2,982      (2,829

Net cash used in financing activities

     (3,681      (2,450
  

 

 

    

 

 

 

Net change in cash and cash equivalents

   $ (1,861    $ (4,759
  

 

 

    

 

 

 

For the six months ended October 31, 2018, the net increase in cash provided by operating activities when compared to the same period last year was due primarily to the following:

(1) a decrease in purchases of trading securities, (2) a relative decrease in prepaid expenses when compared to the same period in the prior year due to the timing of purchases, (3) an increase in depreciation and amortization, (4) higher proceeds from the maturity and sales of trading securities, (5) a gain on investments compared to a loss in the same period last year and (6) an increase in stock-based compensation expense.

This increase in cash provided by operating activities was partially offset by: (1) a decrease in net earnings, (2) a relative decrease in deferred revenue due to timing of revenue recognition, (3) a relative decrease in accounts payable and other accruals due to timing of payments, (4) a relative decrease in customer accounts receivables caused by the timing of closing customer sales and related collections and (5) a decrease in deferred income tax.

The increase in cash used in investing activities when compared to the same period in the prior year was due primarily to an increase in purchases of property and equipment, partially offset by lower capitalized computer software development costs.

The increase in cash used in financing activities compared to the prior year was due primarily to an increase in dividends paid, partially offset by a decrease in proceeds from exercise of stock options.

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

 

     As of October 31,
(in thousands)
 
     2018      2017  

Cash and cash equivalents

   $ 50,933      $ 61,242  

Short and long-term investments

     31,741        29,773  
  

 

 

    

 

 

 

Total cash and short and long-term investments

   $ 82,674      $ 91,015  
  

 

 

    

 

 

 

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

   $ (5,134    $ 1,227  

Our total activities used more cash and investments during the six months ended October 31, 2018, when compared to the prior year period, primarily due to normal business operations.

Days Sales Outstanding in accounts receivable were 66 days as of October 31, 2018, compared to 57 days as of October 31, 2017. This increase is primarily due to the timing of cash collections. Our current ratio on October 31, 2018 was 2.8 to 1 and on October 31, 2017 was 2.7 to 1.

Our business in recent periods has generated substantial positive cash flow from operations, excluding purchases and proceeds of sale of trading securities. For this reason, and because we had $82.7 million in cash and investments with no debt as of October 31, 2018, we believe that our sources of liquidity and capital resources will be sufficient to satisfy our presently anticipated requirements during at least the next twelve months for working capital, capital expenditures and other corporate needs. However, at some future date we may need to seek additional sources of capital to meet our requirements. If such need arises, we may be required to raise additional funds through equity or debt financing. We do not currently have a bank line of credit. We can provide no assurance that bank lines of credit or other financing will be available on terms acceptable to us. If available, such financing may result in dilution to our shareholders or higher interest expense.

 

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On August 19, 2002, our Board of Directors approved a resolution authorizing the repurchase of up to an additional 2.0 million shares of our Class A common stock. We have made and will make these repurchases through open market purchases at prevailing market prices. The timing of any repurchase will depend upon market conditions, the market price of our common stock and management’s assessment of our liquidity and cash flow needs. Under this repurchase plan, through October 31, 2018, we have repurchased 1,053,679 shares of common stock at a cost of approximately $6.2 million. As of October 31, 2018, under all repurchase plans previously authorized, including this most recent plan, we have repurchased a total of 4,588,632 shares of common stock at a cost of approximately $25.6 million.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We have based the foregoing discussion and analysis of financial condition and results of operations on our condensed consolidated financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1 in the Notes to the Consolidated Financial Statements in our Annual Report for the fiscal year ended April 30, 2018, describes the significant accounting policies that we have used in preparing our consolidated financial statements. On an ongoing basis, we evaluate our estimates, including, but not limited to, those related to revenue/collectability, stock-based compensation and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results could differ materially from these estimates under different assumptions or conditions.

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

Revenue Recognition. For information with respect to revenue recognition policy, see Notes A and B in the Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.

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

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

 

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency. In each of the three and six months ended October 31, 2018, we generated approximately 20% of our revenues outside the United States. We typically make international sales through our foreign branches or Logility and denominate those sales in U.S. dollars, British pounds sterling or euros. However, expenses incurred in connection with these sales are typically denominated in the local currencies. We recorded exchange rate losses of approximately $108,000 and of $355,000 for the three and six months ended October 31, 2018, respectively, compared to an exchange rate loss of approximately $41,000 and a gain of $400 for the three months and six months ended October 31, 2017, respectively. We estimate that a 10% movement in foreign currency rates would have had the effect of creating up to a $387,000 exchange rate gain or loss for the three and six months ended October 31, 2018. We have not engaged in any hedging activities.

Interest Rates and Other Market Risks. We have no debt, and therefore limit our discussion of interest rate risk to risk associated with our investment profile. We manage our interest rate risk by maintaining an investment portfolio of trading investments with high credit quality and relatively short average maturities. These instruments include, but are not limited to, money-market instruments, bank time deposits, and taxable and tax-advantaged variable rate and fixed rate obligations of corporations, municipalities, and national, state, and local government agencies, in accordance with an investment policy approved by our Board of Directors. These instruments are denominated in U.S. dollars. The fair market value of these instruments as of October 31, 2018 was approximately $74.9 million compared to $86.6 million as of October 31, 2017.

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

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

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

 

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Item 4.

Controls and Procedures

Management’s Report on Internal Control Over Financial Reporting

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

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

Changes in Internal Control over Financial Reporting

We adopted and implemented Topic 606 in the first quarter of fiscal 2019, which impacted our condensed consolidated balance sheet and our ongoing revenue recognition. See Notes A and B within the Notes to Condensed Consolidated Financial Statements for more information on the impact of adopting Topic 606 and ongoing considerations. In connection with the adoption of Topic 606, we modified our internal control over financial reporting (as this term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), including our accounting policies and procedures, operational processes and documentation practices. These modifications included:

 

   

updates to our policies and procedures for revenue recognition, including assessment of SSP and documentation processes related to meeting the new criteria for revenue recognition;

 

   

changes to our contract review controls to take into account the new criteria for recognizing revenue, with specific focus on assessing whether the allocation objective is met;

 

   

the addition of controls for reviewing recoverability of contract assets and reevaluation of our significant contract judgments and estimates on a periodic basis; and

 

   

the addition of controls to address related required disclosures, including processes to evaluate changes in contract assets and liabilities and disaggregation of revenue.

Other than as described above relating to the adoption of Topic 606, there have been no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1.

Legal Proceedings

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

 

Item 1A.

Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors disclosed in Item 1A, “Risk Factors,” of our Annual Report for the fiscal year ended April 30, 2018. There have been no material changes to the risk factors as previously disclosed in such Annual Report.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

 

Item 3.

Defaults Upon Senior Securities

Not applicable.

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

Item 5.

Other Information

None.

 

Item 6.

Exhibits

 

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

 

(1)

Incorporated by reference herein. Filed by the Company as an exhibit to its Quarterly Report filed on Form 10-Q for the quarter ended October 31, 1990. (P) Filed in paper format.

(2)

Incorporated by reference herein. Filed by the Company as Exhibit 3.1 to its Quarterly Report filed on Form 10-Q for the quarter ended January 31, 2010.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    AMERICAN SOFTWARE, INC.
Date: December 7, 2018     By:  

/s/ James C. Edenfield

      James C. Edenfield
     

Executive Chairman, Treasurer and Director

(Principal Executive Officer)

Date: December 7, 2018     By:  

/s/ Vincent C. Klinges

      Vincent C. Klinges
     

Chief Financial Officer

(Principal Financial Officer)

Date: December 7, 2018     By:  

/s/ Bryan L. Sell

      Bryan L. Sell
      Controller and Principal Accounting Officer

 

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