NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31
, 2016
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been prepared by MAM Software Group, Inc. (“MAM” or the “Company”), without audit, pursuant to the rules and regulations of the
United States Securities and Exchange Commission (“SEC”). Certain information normally included in the condensed consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US”) has been omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation have been included.
Operating results for the six months ended
December 31, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2017. It is suggested that the condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2016, which was filed with the SEC on
September 26, 2016. The Company has evaluated subsequent events through the filing date of this Quarterly Report on Form 10-Q, and determined that no subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosure in the notes thereto.
NOTE 2. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MAM Software Group, Inc
. is a leading provider of integrated information management solutions and services and a leading provider of cloud-based software solutions for the automotive aftermarket sector. The Company conducts its businesses through wholly owned subsidiaries with operations in Europe and North America. MAM Software Ltd. (“MAM Ltd.”) is based in Tankersley, Barnsley, United Kingdom (“UK”), Origin Software Solutions, Ltd. (“Origin”) is based in the UK (MAM Ltd. and Origin are collectively referred to as “MAM UK”), and MAM Software, Inc. (“MAM NA”) is based in the United States of America ("US") in Blue Bell, Pennsylvania.
Principles of Consolidation
The condensed consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.
Concentrations of Credit Risk
The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.
Cash and Cash Equivalents
In the
US, the Company maintains cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At times deposits held with financial institutions in the US may exceed the $250,000 limit.
In the
UK, the Company maintains cash balances at financial institutions that are insured by the Financial Services Compensation Scheme (“FSCS”) up to 75,000GBP. At times deposits held with financial institutions in the UK may exceed the 75,000GBP limit.
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31
, 2016
(Unaudited)
The Company maintains its cash accounts at financial institutions which it believes to be credit worthy. The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes.
Customers
The Company performs periodic evaluations of its customers and maintains allowances for potential credit losses as deemed necessary. The Company generally does not require collateral to secure its accounts receivable. Credit risk is managed by discontinuing sales to customers who are delinquent. The Company estimates credit losses and returns based on management
’s evaluation of historical experience and current industry trends. Although the Company expects to collect amounts due, actual collections may differ from the estimated amounts.
No customer accounted for more than 10% of the Company
’s accounts receivable at December 31, 2016 and June 30, 2016. No customer accounted for more than 10% of the Company’s revenues for the three and six months ended December 31, 2016 and 2015.
Segment Reporting
The Company operates in one reportable segment.
Though the Company has two operational segments (MAM UK and MAM NA), the Company evaluated its operations in accordance with ASC 280-10-50,
Segment Reporting,
and determined that the segments have the same economic characteristics, are similar in the following areas and can therefore be aggregated into one reportable segment:
1.
|
The products and services are software and professional services
|
2.
|
The products are produced through professional services
|
3.
|
The customers for these products are primarily for the automotive aftermarket
|
4.
|
The methods used to distribute these products are via software that the customer can host locally or that the Company will host
|
5.
|
They both operate in a non-regulatory environment
|
Geographic Concentrations
The Company conducts business in the
US, Canada, the UK and Ireland (UK and Ireland are collectively referred to as the “UK Market”). For customers headquartered in their respective countries, the Company derived approximately 64% of its net revenues from the UK, 34% from the US, 1% from Ireland, and 1% from Canada during the three months ended December 31, 2016, compared to 71% of its net revenues from the UK, 28% from the US, 1% from Ireland and less than 1% from Canada during the three months ended December 31, 2015.
The Company derived approximately 63% of its net revenues from the UK, 35% from the US, 1% from Ireland, and 1% from Canada during the six months ended December 31, 2016, compared to 71% of its net revenues from the UK, 28% from the US, 1% from Ireland and less than 1% from Canada during the six months ended December 31, 2015.
At
December 31, 2016, the Company maintained 77% of its net property and equipment in the UK and the remaining 23% in the US. At June 30, 2016, the Company maintained 79% of its net property and equipment in the UK and the remaining 21% in the US.
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31
, 2016
(Unaudited)
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U
S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure 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. Significant estimates made by the Company’s management include, but are not limited to, the collectability of accounts receivable, the realizability of inventories, the recoverability of goodwill and other long-lived assets, valuation of deferred tax assets and liabilities and the estimated fair value of stock options, warrants and shares issued for compensation and non-cash consideration. Actual results could materially differ from those estimates.
Fair Value of Financial Instruments
The Company
’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and debt. Financial assets and liabilities that are remeasured and reported at fair value at each reporting period are classified and disclosed in one of the following three categories:
•
Level 1 – Fair value based on quoted prices in active markets for identical assets or liabilities.
•
Level 2 – Fair value based on significant directly observable data (other than Level 1 quoted prices) or significant indirectly observable data through corroboration with observable market data. Inputs would normally be (i) quoted prices in active markets for similar assets or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or liabilities, or (iii) information derived from or corroborated by observable market data.
•
Level 3 – Fair value based on prices or valuation techniques that require significant unobservable data inputs. Inputs would normally be a reporting entity’s own data and judgments about assumptions that market participants would use in pricing the asset or liability.
Determining
into which category within the hierarchy an asset or liability may require significant judgment. The Company evaluates its hierarchy disclosures each quarter.
Inventories
Inventories are stated at the lower of cost or current estimated market value. Cost is determined using the first-in, first-out method. Inventories consist primarily of hardware that will be sold to customers. The Company periodically reviews its inventories and records a provision for excess and obsolete inventories based primarily on the Company
’s estimated forecast of product demand and production requirements. Once established, write-downs of inventories are considered permanent adjustments to the cost basis of the obsolete or excess inventories.
Property and Equipment
Property and equipment are stated at cost, and are being depreciated using the straight-line method over the estimated useful lives of the related assets, ranging from three to five years. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives of the assets or the related lease terms. Equipment under capital lease obligations is depreciated over the shorter of the estimated useful lives of the related assets or the term of the lease. Maintenance and routine repairs are charged to expense as incurred. Significant renewals and betterments are capitalized. At the time of retirement or other disposition of property and equipment, the cost and
related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the condensed consolidated statements of comprehensive income. Depreciation expense was $38,000 and $87,000 for the three months ended December 31, 2016 and 2015, respectively, and was $79,000 and $150,000 for the six months ended December 31, 2016 and 2015, respectively.
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31
, 2016
(Unaudited)
Software Development Costs
Costs incurred to develop computer software products to be sold or otherwise marketed are charged to expense until technological feasibility of the product has been established. Once technological feasibility has been established, computer software development costs (consisting primarily of internal labor costs) are capitalized and reported at the lower of amortized cost or estimated realizable value. Purchased software development cost is recorded at its estimated fair market value. When a product is ready for general release, its capitalized costs are amortized on a product-by-product basis. The annual amortization is the greater of the amounts of: the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product; and, the straight-line method over the remaining estimated economic life (a period of three years) of the product including the period being reported on.
Amortization of capitalized software development costs are included in the cost of revenues line on the consolidated statements of comprehensive income. If the future market viability of a software product is less than anticipated, impairment of the related unamortized development costs could occur, which could significantly impact the Company’s results of operations. Amortization expense on software development costs was $67,000 and $73,000 for the three months ended December 31, 2016 and 2015, respectively, and was $134,000 and $137,000 for the six months ended December 31, 2016 and 2015, respectively.
Amortizable Intangible Assets
Amortizable intangible assets consist of completed software technology, customer
contracts/relationships, automotive data services, and acquired intellectual property, and are recorded at cost. Completed software technology and customer contracts/relationships are amortized using the straight-line method over their estimated useful lives of 9 to 10 years, automotive data services are amortized using the straight-line method over their estimated useful lives of 20 years and acquired intellectual property is amortized over the estimated useful life of 10 years.
Amortization expense on amortizable intangible assets was $
19,000 and $23,000 for the three months ended December 31, 2016 and 2015, respectively, and was $39,000 and $49,000 for the six months ended December 31, 2016 and 2015, respectively.
Goodwill
Goodwill is not amortized, but rather is tested at least annually for impairment.
Goodwill is subject to impairment reviews by applying a fair-value-based test at the reporting unit level, which generally represents operations one level below the segments reported by the Company. As of
December 31, 2016, the Company does not believe there is an impairment of its goodwill. There can be no assurance, however, that market conditions will not change and/or demand for the Company’s products and services will continue at a level consistent with past results, which could result in impairment of goodwill in the future.
For the
six months ended December 31, 2016 and 2015, goodwill activity was as follows:
In thousands
|
|
For the Six Months Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Beginning Balance
|
|
$
|
8,363
|
|
|
$
|
9,202
|
|
Acquisition of Origin
|
|
|
-
|
|
|
|
202
|
|
Effect of exchange rate changes
|
|
|
(467
|
)
|
|
|
(403
|
)
|
Ending Balance
|
|
$
|
7,896
|
|
|
|
9,001
|
|
Long-Lived Assets
The Company
’s management assesses the recoverability of long-lived assets (other than goodwill discussed above) upon the occurrence of a triggering event by determining whether the carrying value of long-lived assets can be recovered through projected undiscounted future cash flows over their remaining lives. The amount of long-lived asset impairment, if any, is measured based on fair value and is charged to operations during the period in which long-lived asset impairment is determined by management. At December 31, 2016, management believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change or demand for the Company’s products and services will continue, which could result in impairment of long-lived assets in the future.
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31
, 2016
(Unaudited)
Issuance of Equity Instruments to Non-Employees
All issuances of the Company
’s equity instruments to non-employees are measured based upon either the fair value of the equity instruments issued or the fair value of consideration received, depending on which option is more readily determinable. The majority of stock issuance for non-cash consideration received pertains to services rendered by consultants and others and has been valued at the fair value of the equity instruments on the dates issued.
The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor
’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. Assets acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes.
Stock-Based Compensation
The Company accounts for stock-based compensation under the provisions of ASC No. 718,
Compensation - Stock Compensation
(“ASC 718”). ASC 718 requires the recognition of the fair value of the stock-based compensation in net income. Compensation expense associated with market-based restricted stock is determined using a Monte-Carlo valuation model, and compensation expense associated with time-based restricted stock is determined based on the number of shares granted and the fair value on the date of grant.
For valuing stock options awards, the Company has elected to use the Black-Scholes model
. For the expected term, the Company uses a simple average of the vesting period and the contractual term of the option. Volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate during the expected term of the option. For volatility, the Company considers its own volatility as applicable for valuing its options and warrants. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The risk-free interest rate is based on the relevant US Treasury Bill Rate at the time of each grant. The dividend yield represents the dividend rate expected to be paid over the option’s expected term; the Company currently has no plans to pay dividends. The fair value of stock-based awards is amortized over the vesting period of the award or expected vesting date of the market-based restricted shares and the Company elected to use the straight-line method for awards granted.
Revenue Recognition
Software license revenue is recognized when persuasive evidence of an arrangement exists, delivery of the product component has occurred, the fee is fixed and determinable, and collectability is reasonably assured. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met.
The Company accounts for delivered elements in accordance with the selling price when arrangements include multiple product components or other elements and vendor-specific objective evidence exists for the value of all undelivered elements. Revenues on undelivered elements are recognized once delivery is complete.
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31
, 2016
(Unaudited)
In those instances, in which arrangements include significant customization, contractual milestones, acceptance criteria or other contingencies (which represents the majority of the Company
’s arrangements), the Company accounts for the arrangements using contract accounting, as follows:
|
1)
|
When customer acceptance can be estimated, but reliable estimated costs to complete cannot be determined, expenditures are capitalized as work-in process and deferred until completion of the contract at which time the costs and revenues are recognized.
|
|
2)
|
When customer acceptance cannot be estimated based on historical evidence, costs are expensed as incurred and revenue is recognized at the completion of the contract when customer acceptance is obtained.
|
The Company records amounts collected from customers in excess of recognizable revenue as deferred revenue in the accompanying consolidated balance sheets. Revenues for maintenance agreements, software support, on-line services and information products are recognized ratably over the term of the service agreement.
The Company recognizes revenue on a net basis, which excludes sales tax collected from customers and remitted to governmental authorities.
Advertising Expense
The Company expenses advertising costs as incurred. For the three months ended
December 31, 2016 and 2015, advertising expense totaled $215,000 and $131,000, respectively, and was $272,000 and $267,000 for the six months ended December 31, 2016 and 2015, respectively.
Foreign Currency
Management has determined that the functional currency of its subsidiaries is the local currency. Assets and liabilities of the
UK subsidiaries are translated into US dollars at the quarter-end exchange rates. Income and expenses are translated at an average exchange rate for the period and the resulting translation gain adjustments are accumulated as a separate component of stockholders’ equity. Foreign currency translation loss totaled $(196,000) and $(211,000) for the three months ended December 31, 2016 and 2015, respectively, and $(672,000) and $(816,000) for the six months ended December 31, 2016 and 2015, respectively.
Foreign currency gains and losses from transactions denominated in currencies other than the respective local currencies are included in income. The Company had no foreign currency transaction gain (loss) for all periods presented.
Comprehensive Income
Comprehensive income includes all changes in equity (net assets) during a period from non-owner sources. For the three and six months ended
December 31, 2016 and 2015, the components of comprehensive income consist of foreign currency translation loss.
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31
, 2016
(Unaudited)
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. Deferred taxation is provided in full in respect of timing differences between the treatment of certain items for taxation and accounting purposes. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The Company
’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties on the Company’s condensed consolidated balance sheets at December 31, 2016 and June 30, 2016, and has not recognized interest and/or penalties in the condensed consolidated statements of comprehensive income for the three and six months ended December 31, 2016 and 2015.
Basic and Diluted Earnings Per Share
Basic earnings per share (“BEPS”) is computed by dividing the net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share (“DEPS”) is computed giving effect to all dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of incremental shares issuable upon the exercise of stock options and warrants using the “treasury stock” method. The computation of DEPS does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings. For the three and six months ended
December 31, 2016, there were 97,078 and 96,431, respectively, common share equivalents included in the computation of the DEPS. For the three and six months ended December 31, 2016, 503,951 shares of common stock vest based on the market price of the Company’s common stock and were excluded from the computation of DEPS because the shares have not vested, but no stock options were excluded from the computation of DEPS.
For the three and six months ended
December 31, 2015, there were 98,765 and 97,147, respectively, common share equivalents included in the computation of the DEPS. For the three and six months ended December 31, 2015, 1,026,252 shares of common stock vest based on the market price of the Company’s common stock and were excluded from the computation of DEPS because the shares have not vested, but no stock options were excluded from the computation of DEPS.
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computation for the
three and six months ended December 31, 2016 and 2015 (in thousands, except for per share amounts):
For the Three Months Ended
December 31,
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
250
|
|
|
$
|
738
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted-average shares outstanding
|
|
|
11,716
|
|
|
|
12,907
|
|
Effect of dilutive securities
|
|
|
97
|
|
|
|
99
|
|
Diluted weighted-average shares outstanding
|
|
|
11,813
|
|
|
|
13,006
|
|
Basic earnings per common share
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
Diluted earnings per common share
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
For the Six Months Ended
December 31,
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,463
|
|
|
$
|
1,568
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted-average shares outstanding
|
|
|
11,709
|
|
|
|
13,151
|
|
Effect of dilutive securities
|
|
|
96
|
|
|
|
97
|
|
Diluted weighted-average shares outstanding
|
|
|
11,805
|
|
|
|
13,248
|
|
Basic earnings per common share
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
Diluted earnings per common share
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31
, 2016
(Unaudited)
Reclassification
Certain expenses were reclassified from
depreciation and amortization to cost of revenues in the accompanying condensed consolidated statement of comprehensive income for the three and six months ended December 31, 2015 in order to conform to the current period presentation.
The Company adopted Accounting Standards Update ("ASU") 2015-03,
Imputation of Interest - Simplifying the Presentation of Debt Issuance Costs,
on a retroactive basis on July 1, 2016 and prior period amounts have been reclassified to conform to the current period presentation. As of December 31, 2016 and June 30, 2016, net debt issuance costs of $94,000 and $91,000, respectively, were reclassified in the condensed consolidated balance sheet from other long-term assets to an offset against the current and non-current portions of long-term debt.
Recent Accounting Pronouncements
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments
. The update provides guidance for how certain cash receipts and cash payments are to be presented on the statement of cash flows. ASU 2016-15 will be effective for the Company beginning the first quarter of fiscal 2018. Early adoption is permitted. ASU 2016-15 is to be adopted using the retrospective transition method, unless it is impracticable, in which case it can be applied prospectively as of the earliest practical date. The Company does not expect the adoption of ASU 2016-15 to have a significant impact on the disclosure or cash flow presentation in its consolidated financial statements.
In March
2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting.
The update provides guidance on simplifying various aspects of the accounting for shared-based compensation. The standard is effective for the annual and interim periods within those annual periods beginning after December 15, 2017. Early adoption is permitted, however adoption of all amendments must occur in the same period. The method of adoption (prospective or retrospective) will be applied to each of the amendments as required in ASU 2016-09. The Company is currently assessing the impact the adoption of ASU 2016-09 will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
. The update requires lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. The guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for years beginning after December 15, 2019. Early adoption is permitted. The Company is currently assessing the impact the adoption of ASU 2016-02 will have on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
. Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, the amendments in this update required that deferred tax liabilities be classified as noncurrent in a classified statement of financial position. The current requirement is that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this update. ASU 2015-17 will be effective for the Company beginning for its first quarter of fiscal 2018. Early adoption is permitted. The amendments to ASU 2015-17 may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all period presented. The Company does not expect the adoption of ASU 2015-17 to have a significant impact on the disclosure or balance sheet presentation in its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03,
Imputation of Interest - Simplifying the Presentation of Debt Issuance Costs.
The update provides guidance on simplifying the presentation for debt issuance costs and debt discount and premium. The Company adopted ASU 2015-03 on July 1, 2016.
In May 2014, the FASB issued ASU 2014-09
, Revenue from Contracts with Customers
(Topic 606), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09 will be effective for the Company beginning in its first quarter of 2018. Early adoption is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the impact of adopting the new revenue standard on its consolidated financial statements.
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31
, 2016
(Unaudited)
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements-Going Concern
. Currently, there is no guidance in accounting principles generally accepted in the US about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in US auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for the reporting periods beginning after December 15, 2016 and early application is permitted. The Company is currently assessing the impact the adoption of ASU 2014-15 will have on its consolidated financial statements.
NOTE 3. COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, the Company is subject to various legal claims and proceedings arising in the ordinary course of business. The ultimate disposition of such a proceeding if initiated could have material adverse effect
s on the consolidated financial position or results of operations of the Company. There are currently no pending material legal proceedings.
Indemnities and Guarantees
The Company has made certain indemnities and guarantees, under which it may be required to make payments to a guaranteed or indemnified party, in relation to certain actions or transactions. The Company indemnifies its directors, officers, employees and agents, as permitted under the laws of the State of Delaware.
In connection with its credit facility (see Note 6), the Company indemnified the lender for certain losses, claims, and other liabilities that are standard for this type of agreement. In connection with its facility leases, the Company has indemnified its lessors for certain claims arising from the use of the facilities. In connection with its customers’ contracts the Company indemnifies the customer that the software provided does not violate any US patent. The duration of the guarantees and indemnities varies, and is generally tied to the life of the agreement. These guarantees and indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not been obligated nor incurred any payments for these obligations and, therefore, no liabilities have been recorded for these indemnities and guarantees in the accompanying condensed consolidated balance sheets.
NOTE 4. STOCKHOLDERS
’ EQUITY
Common Stock
T
he Company issues shares of common stock to the non-management members of the Board of Directors under the Company’s 2007 Long Term Incentive Plan ("LTIP") in respect of quarterly compensation. The shares vest over a three-year period and are issued quarterly. The Company also gives the non-management members of the Board of Directors the option to receive shares of common stock in lieu of cash compensation.
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31
, 2016
(Unaudited)
On July 1, 2015
, the Company approved the issuance of 47,663 shares of common stock to the non-management members of the Board of Directors under the Company’s 2007 LTIP in respect of quarterly compensation. The shares vest over a three-year period and are issued quarterly. The shares were valued at approximately $255,000, based on the closing market price of the Company’s common stock on the date of the grant.
During the three and six months ended December 31, 2016, t
he Company issued 7,060 and 17,769 shares of common stock, respectively, for the vesting of shares granted to
the non-management members of the Board of Directors under the Company’s 2007 LTIP and in lieu of cash compensation.
On December 20, 2016, the sharesholders approved the Company's 2017 Equity Incentive Plan ("EIP"). The Compensations Commitee of the Board of Directors has been tasked with determining the vesting schedule for the EIP.
T
ender Offer
On
December 1, 2015, the Company completed a cash tender offer (the “Tender Offer”) and purchased 2.0 million shares of its common stock at a purchase price of $7.50 per share for a total purchase price of $15.0 million. The Company canceled and retired the shares purchased pursuant to the Tender Offer.
Treasury Stock
From July 1, 2015 until
December 31, 2015, the Company repurchased 29,695 shares of common stock at a cost of $161,000. As of December 31, 2016, the Company has repurchased 1,982,235 shares at a cost of $4,698,000, pursuant to a stock repurchase program approved by the Company’s Board of Directors. The stock repurchase program was cancelled on October 30, 2015 in connection with the Tender Offer.
Stock-Based Compensation
Total stock-based compensation expense related to management grants, non-management members of the Board of Directors grants and the employee stock purchase plan for restricted stock
and stock issuances of $116,000 and $101,000 was recorded in the three months ended December 31, 2016 and 2015, respectively, and $200,000 and $142,000 was recorded for the six months ended December 31, 2016 and 2015, respectively, and was recorded in the general and administrative line of the condensed consolidated statements of comprehensive income.
A summary of the Company's common stock option activity is presented below (shares in thousands)
:
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
Shares
|
|
|
Average
|
|
|
Remaining
|
|
|
|
(in
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
thousands)
|
|
|
Price
|
|
|
Life (in years)
|
|
Options outstanding - July 1, 201
6
|
|
|
121
|
|
|
$
|
1.23
|
|
|
|
|
|
Options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Options cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Options outstanding
– December 31, 2016
|
|
|
121
|
|
|
$
|
1.23
|
|
|
|
4.5
|
|
Options exercisable -
December 31, 2016
|
|
|
121
|
|
|
$
|
1.23
|
|
|
|
4.5
|
|
Options exercisable and vest
ed - December 31, 2016
|
|
|
121
|
|
|
$
|
1.23
|
|
|
|
4.5
|
|
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31
, 2016
(Unaudited)
A summary of the Company's
restricted common stock activity is presented below (shares in thousands):
|
|
|
|
|
Weighted
Average
|
|
|
|
Number of
|
|
|
Initial
Value Price
|
|
|
|
Shares
|
|
|
Per Share
|
|
Restricted stock
outstanding - July 1, 2016
|
|
|
776
|
|
|
$
|
0.87
|
|
Issuance of restricted stock
|
|
|
-
|
|
|
|
-
|
|
Vesting
|
|
|
(85
|
)
|
|
|
0.39
|
|
Forfeitures
|
|
|
(187
|
)
|
|
|
0.35
|
|
Restricted stock
outstanding - December 31, 2016
|
|
|
504
|
|
|
$
|
0.94
|
|
A summary of the
vesting levels of the Company's restricted common stock is presented below (shares in thousands):
|
|
|
|
|
Weighted
Average
|
|
|
|
Number of
|
|
|
Initial
Value Price
|
|
|
|
Shares
|
|
|
Per Share
|
|
30 day VWAP per share vesting level (1):
|
|
|
|
|
|
|
|
|
$8.00 per share
|
|
|
294
|
|
|
$
|
0.48
|
|
$9.00 per share
|
|
|
82
|
|
|
$
|
1.25
|
|
$10.00 per share
|
|
|
48
|
|
|
$
|
1.79
|
|
$11.00 per share
|
|
|
48
|
|
|
$
|
1.79
|
|
$12.00 per share
|
|
|
32
|
|
|
$
|
1.79
|
|
|
|
|
|
|
|
|
|
|
(1)
The restricted stock becomes vested when the Company’s 30 day volume weighted average price (“VWAP”) per share is at or above these levels.
|
|
Employee Stock Purchase Plan
The Company has established Employee Stock Purchase Plans ("ESPP Plans"). Under the ESPP Plans, the Company will grant eligible employees the right to purchase common stock through payroll deductions. US employees purchase stock at a price equal to the lesser of 85 percent of the fair market value of a share of
the Company’s common stock on the Exercise Date of the current Offering Period or 85 percent of the fair market value of the Company's common stock on the Grant Date of the Offering Period. UK
employees
purchase
at a price equal to the lesser of 100 percent of the fair market value of a share of
the Company’s common stock on the Exercise Date of the current Offering Period or 100 percent of the fair market value of the Company's common stock on the Grant Date of the Offering Period,
but receive a 15 percent matching contribution from the Company.
During the
six months ended December 31, 2016, the Company issued 7,008 shares of common stock to employees including executive officers, under the ESPP in lieu of compensation. No shares were issued during the three months ended December 31, 2016.
During the
three and six months ended December 31, 2015, the Company issued 784 and 8,532 shares of common stock to employees including an executive officer, under the ESPP in lieu of compensation.
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2016
(Unaudited)
NOTE
5
.
ACQUISITION
On July 1, 2015, MAM Ltd. acquired 100% of the stock of Origin, a UK-based provider of e-commerce solutions for the automotive aftermarket.
With the acquisition of Origin, MAM is able to strengthen its e-commerce strategy by being able to provide customers with a range of e-commerce solutions for the automotive aftermarket. The Company paid $503,000 at closing of the acquisition. The Company will also make future cash payments of $416,000 and issue stock consideration of $283,000 in the future if Origin reaches established earnings targets. The Company recorded the estimated fair value of the contingent consideration of $497,000 in other long-term liabilities on its condensed consolidated balance sheet as of December 31, 2016. In connection with the acquisition, the Company incurred acquisition-related costs of $43,000, which were expensed and included in general and administrative expenses in the accompanying condensed consolidated statement of comprehensive income for the six months ended December 31, 2015.
The Company allocated the purchase consideration to acquire Origin to (1) net assets acquired of $177,000, (2) finite-lived intangible assets of $1.0 million for acquired intellectual property (with an estimated useful life of 10 years), (3) a deferred tax liability of $202,000, and (4) goodwill of $202,000. The goodwill from this acquisition is non-deductible for tax purposes. The results of operations of Origin have been included in the Company's condensed consolidated statements of comprehensive income from the date of acquisition, however the results from Origin were not significant to the Company
’s consolidated results of operations and thus pro forma information is not presented.
NOTE 6.
LONG-TERM
DEBT
Debt obligations consisted of the following at
December 31, 2016 and June 30, 2016:
|
|
As of
|
|
(
in thousands)
|
|
December 31, 2016
|
|
|
June
30, 2016
|
|
Debt obligations
:
|
|
|
|
|
|
|
|
|
R
evolving loan facility
|
|
$
|
1,250
|
|
|
$
|
1,150
|
|
Term loan
|
|
|
7,600
|
|
|
|
8,550
|
|
Equipment financing
|
|
|
66
|
|
|
|
78
|
|
Less: unamortized debt issuance costs
|
|
|
(94
|
)
|
|
|
(91
|
)
|
Total
|
|
|
8,822
|
|
|
|
9,687
|
|
Less current portion
|
|
|
(1,884
|
)
|
|
|
(1,879
|
)
|
Long-term debt
|
|
$
|
6,938
|
|
|
$
|
7,808
|
|
On December 1, 2015
, the Company entered into a new credit agreement with J.P. Morgan Chase Bank, N.A. ("Credit Facility") to provide for borrowings up to $12.0 million consisting of a $9.5 million term loan and a $2.5 million revolver. On September 26, 2016, the Company entered into an amendment to its credit facility with J.P. Morgan Chase Bank, N.A. (the "Amendment" and as amended, the "Amended Credit Agreements"). The Amendment changed certain loan covenants, including the financial ratios and liquidity requirements. The borrowings under the Amended Credit Agreements bear interest at a variable rate based on either LIBO Rate or a Prime Rate, as defined in the Amended Credit Agreements, plus an applicable margin of 3.50% to 4.00%, based upon financial covenants. The maturity date under the Amended Credit Agreements remains unchanged at December 1, 2018.
As of
December 31, 2016, the interest rate was 4.625%. Under the terms of the Amended Credit Agreements, the Company is required to comply with certain loan covenants, which include, but are not limited to, the maintenance of certain financial ratios as well as certain financial reporting requirements and limitations. The Company’s obligations under the Amended Credit Agreements are secured by all of the Company’s US assets and are guaranteed by the Company’s US wholly-owned subsidiary. Additionally, the Company pledged 65% of the stock of MAM Software Limited, its UK subsidiary. As of December 31, 2016, the Company was in compliance with its loan covenants.
On December 1, 2015
, the Company borrowed $10.5 million under the Credit Facility to fund a portion of the Tender Offer (see Note 4).