NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(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 three months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2018. 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, 2017, which was filed with the SEC on September 28, 2017.
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 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 up to 85,000GBP.
At times deposits held with financial institutions in the UK may exceed the 85,000GBP limit.
F-6
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(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 September 30, 2017 and June 30, 2017. No customer accounted for more than 10% of the Company’s revenues for the three months ended September 30, 2017 and 2016.
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; and
|
5.
|
They both operate in a non-regulatory environment.
|
Geographic Concentrations
The Company conducts business in the US and Canada (US and Canada are collectively referred to as the "NA Market"), and the UK and Ireland (UK and Ireland are collectively referred to as the “UK Market”). For customers headquartered in those respective countries, the Company derived approximately 61% of its net
revenues from the UK, 37% from the US, 1% from Ireland, and 1% from Canada during the three months ended September 30, 2017, compared to 62% of its net revenues from the UK, 36% from the US, 1% from Ireland and 1% from Canada during the three months ended September 30, 2016.
At September 30, 2017 and June 30, 2017, the Company maintained 76% of its net property and equipment in the UK and the remaining 24% in the US.
F-7
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the US 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 determination of the fair value of acquired intangible assets, 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 re-measured 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 belong may require significant judgment. The Company evaluates its hierarchy disclosures each quarter. The Company believes that the carrying values of all financial instruments, except long-term debt, approximate their values due to their nature and respective durations. The carrying value of long-term debt approximates fair value based on borrowing rates currently available to the Company.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is based on specific identification of customer accounts and the Company's best estimate of the likelihood of potential loss, taking into account such factors as the financial condition and payment history of major customers. The Company evaluates the collectability of its receivables at least quarterly. The allowance for doubtful accounts is subject to estimates based on the historical actual costs of bad debt experienced, total accounts receivable amounts, age of accounts receivable and any knowledge of the customers' ability or inability to pay outstanding balances. If the financial condition of the Company's customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required. The differences could be material and could significantly impact cash flows from operating activities.
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 $41,000 for the three months ended September 30, 2017 and 2016, respectively.
F-8
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(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 to ten years) of the product including the period being reported on. Amortization of capitalized software development costs is 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 included in costs of revenues was $
84,000
and $67,000 for the three months ended September 30, 2017 and 2016, 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 $20
,000
and $20,000 for the three months ended September 30, 2017 and 2016, 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 September 30, 2017, the Company does not believe there is an impairment of its goodwill. However, there can be no assurance 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 three months ended September 30, 2017 and 2016, goodwill activity was as follows:
In thousands
|
|
For the Three Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Beginning Balance
|
|
$
|
8,191
|
|
|
$
|
8,363
|
|
Effect of exchange rate changes
|
|
|
173
|
|
|
|
(186
|
)
|
Ending Balance
|
|
$
|
8,364
|
|
|
$
|
8,177
|
|
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 useful 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 September 30, 2017, the Company's 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.
F-9
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Debt Issuance Costs
Debt issuance costs represent costs incurred in connection with the issuance of long-term debt. Debt issuance costs are amortized over the term of the financing instrument using the effective interest method. Debt issuance costs are presented in the condensed consolidated balance sheets as an offset to current and non-current portions of long-term debt.
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 accounted for as they are incurred. 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.
F-10
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
In those instances in which arrangements include significant customization, contractual milestones, acceptance criteria or other contingencies,
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.
Cost of Revenue
s
Cost of revenues primarily consists of expenses related to delivering our service and providing support, amortization expense associated with capitalized software related to our services, and acquired developed technologies and certain fees paid to various
third parties for the use of their technology, services and data. Included in costs of revenues is cost of professional services, which consists primarily of employee-related costs associated with these services, the cost of subcontractors, certain third-party fees, and allocated overhead
.
As we continue to invest in new products and services, the amortization expense associated with these capitalizable activities will be included in cost of revenues. Additionally, as we enter into new contracts with thi
rd parties for the use of their technology, services or data, or as our sales volume grows, the fees paid to use such technology or services may increase. The timing of these additional expenses will affect our cost of revenues, both in terms of absolute dollars and as a percentage of revenues, in the affected periods
.
Advertising Expense
The Company expenses advertising costs as incurred. For the three months ended September 30, 2017 and 2016, advertising expense totale
d $38,000
and $57,000, 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. The translation gain (loss) adjustment totaled $
0.3 million
and $(0.5) million for the three months ended September 30, 2017 and 2016, 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 material foreign currency transaction gains (losses) 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 months ended September 30, 2017 and 2016, the components of comprehensive income consist of foreign currency translation gains (losses).
F-11
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(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 has an accrual of $0.1 million for interest or penalties on the Company’s condensed consolidated balance sheets at September 30, 2017 and June 30, 2017, and has not recognized interest and/or penalties in the condensed consolidated statements of comprehensive income for the three months ended September 30, 2017 and 2016.
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 months ended September 30, 2017 and 2016, there were common stock equivalents
of 55,277 and
95,757, respectively, included in the computation of the DEPS. For the three months ended September 30, 2017 and 2016,
503,951 and 6
35,054 shares of common stock, respectively, 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 months ended September 30, 2017 and 2016 (in thousands, except for per share amounts):
For the Three Months Ended September 30,
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,114
|
|
|
$
|
1,213
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted-average shares outstanding
|
|
|
11,816
|
|
|
|
11,699
|
|
Effect of dilutive securities
|
|
|
55
|
|
|
|
96
|
|
Diluted weighted-average shares outstanding
|
|
|
11,871
|
|
|
|
11,795
|
|
Basic earnings per common share
|
|
$
|
0.09
|
|
|
$
|
0.10
|
|
Diluted earnings per common share
|
|
$
|
0.09
|
|
|
$
|
0.10
|
|
Reclassifications
Certain assets were classified from inventories to other current assets and other long-term assets and certain liabilities were reclassified from accrued expenses to accrued payroll and related expenses and deferred revenues, net of current portion, as of June 30, 2017 in order to conform to the current period presentation in the accompanying condensed consolidated balance sheets and cash flows with no net effect on the previously reported net income.
F-12
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Recent Accounting Pronouncement
s
Recently Adopted Accounting Standards
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments
. The Company did not have additional disclosures or changes in cash flow presentation in its consolidated financial statements as a result of the adoption of this standard on July1, 2017.
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 update requires management to assess 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). Based on the Company's evaluation as of September 30, 2017, there is not substantial doubt about the Company's ability to continue as a going concern and no additional disclosures are required at this time.
Accounting Standards Not Yet Adopte
d
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC Topic 718. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 will be effective for the Company for the fiscal year ending June 30, 2019 and interim reporting periods within that year. Early adoption is permitted. The Company expects the adoption of this guidance will not have a material effect on the Company’s consolidated financial statements.
In January 2017, the FASB issued
ASU 2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. This update simplifies the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. Under the new guidance, an entity performs its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the carrying amount of goodwill allocated to the reporting unit. ASU 2017-04 will be effective for the Company for the fiscal year ending June 30, 2021. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-04 to have a significant impact 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 will be effective for the Company for the fiscal year ending June 30, 2021. The Company is currently assessing the impact the adoption of ASU 2016-02 will have on its consolidated financial statements.
F-13
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
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. In July 2015, the FASB provided a one-year delay in the effective date of ASU 2014-09, to be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and a permission to early adopt for annual and interim periods beginning after December 15, 2016. The Company has performed a review of the new revenue standard and is monitoring the activity of the FASB and the transition resource group as it relates to specific interpretative guidance. The Company is assessing the impact of the five-step model of the new standard on its contracts compared to the results of current accounting practice. The Company plans to adopt ASU 2014-09 on July 1, 2018. The Company has not yet determined whether it will adopt the provisions of ASU 2014-09 on a retrospective basis or through a cumulative adjustment to retained earnings. The new standard could change the amount and timing of revenue and costs under certain arrangement types and could increase the administrative burden on the Company’s operations to properly account for customer contracts and provide the more expansive required disclosures. The Company is currently evaluating the impact of adopting ASU 2014-09, but has not yet determined what effect, if any, the new guidance will have on its consolidated financial position, results of operations or cash flows.
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 effects 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, including indemnifications that the software provided does not violate any intellectual property rights. The duration of the guarantees and indemnities varies, and is generally tied to the life of the agreement. These guarantees and indemnities may 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
The 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 ("2007 LTIP") and 2017 Equity Incentive Plan (“2017 EIP”) 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.
F-14
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(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
.
On
January 6, 2017, the Company approved the issuance of 37,795 shares of common stock to the non-management members of the Board of Directors under the Company’s 2017 EIP in respect of quarterly compensation. The shares vest over a three-year period and are issued quarterly. The shares were valued at approximately $241,000, based on the closing market price of the Company’s common stock on the day of the grant
.
On July 3, 2017, the Company approved the issuance of 34,592 shares of common stock to the non-management members of the Board of Directors under the Company's 2017 EIP in respect of quarterly compensation. The shares vest over a three-year period and are issued quarterly. The shares were valued at approximately $220,000, based on the closing market price of the Company's common stock on the day of the grant.
During the three months ended September 30, 2017, the Company issued
7,624 s
hares of common stock
for the vesting of shares granted to the non-management members of the Board of Directors under the Company’s 2007 LTIP and 2017 EIP and in lieu of cash compensation.
Treasury Stock
No treasury stock was retired during the three months ended September 30, 2017 and 2016.
Stock-Based Compensation
Stock-based compensation expense for restricted stock and stock
issuances of $0
.1
million
and $0.1 million was recorded for the three months ended September 30, 2017 and 2016, respectively, and was recorded in general and administrative expenses in the 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, 2017
|
|
|
68
|
|
|
$
|
1.30
|
|
|
|
|
|
Options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Options cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Options outstanding
– September 30, 2017
|
|
|
68
|
|
|
$
|
1.30
|
|
|
|
3.7
|
|
Options exercisable - September 30, 2017
|
|
|
68
|
|
|
$
|
1.30
|
|
|
|
3.7
|
|
Options exercisable and vested - September 30, 2017
|
|
|
68
|
|
|
$
|
1.30
|
|
|
|
3.7
|
|
F-15
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(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, 2017
|
|
|
504
|
|
|
$
|
0.94
|
|
Issuance of restricted stock
|
|
|
-
|
|
|
|
-
|
|
Vesting
|
|
|
-
|
|
|
|
-
|
|
Forfeitures
|
|
|
-
|
|
|
|
-
|
|
Restricted stock outstanding - September 30, 2017
|
|
|
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 (as defined under the ESPP Plans) of the current Offering Period (as defined under the ESPP Plans) or 85 percent of the fair market value of the Company's common stock on the Grant Date (as defined under the ESPP Plans) 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 three months
ended September 30, 2017, the Company issued
6,958
share
s of common stock to employees, including executive officers, under the ESPP Plans in lieu of compensation.
During the three months
ended September 30, 2016, the Company issued 7,008 shares of common stock to employees, including an executive officer, under the ESPP Plans in lieu of compensation.
F-16
MAM SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
NOTE 5. LONG-TERM DEBT
Debt obligations consisted of the following at September 30, 2017 and June 30, 2017:
|
|
As of
|
|
(in thousands)
|
|
September 30, 2017
|
|
|
June 30, 2017
|
|
Debt obligations:
|
|
|
|
|
|
|
|
|
Revolving loan facility
|
|
$
|
-
|
|
|
$
|
-
|
|
Term loan
|
|
|
7,817
|
|
|
|
8,217
|
|
Less: unamortized debt issuance costs
|
|
|
(86
|
)
|
|
|
(97
|
)
|
Total
|
|
|
7,731
|
|
|
|
8,120
|
|
Less current portion
|
|
|
(1,792
|
)
|
|
|
(1,734
|
)
|
Long-term debt
|
|
$
|
5,939
|
|
|
$
|
6,386
|
|
On March 2, 2017, the Company entered into a credit facility ("New Credit Facility") with Univest Bank and Trust Co
. (“Univest”). In connection with the New Credit Facility, the parties entered into ancillary agreements, including a credit agreement, a revolving credit note and a term note (collectively, the "Credit Agreements"). The New Credit Facility allows for borrowings up to $11.5 million consisting of an $8.75 million term loan and a $2.75 million revolver. The Company used the initial proceeds of the New Credit Facility to repay all of its obligations under its prior credit facility. The borrowings under the Credit Agreements bear interest at a variable rate based on either LIBO Rate (as defined in the Credit Agreements) or the Univest Float Rate (as defined in the Credit Agreements), plus an applicable margin of 2.75% to 3.25%, based upon financial covenants. The term note requires monthly payments of $133,333 through December 1, 2017, then $158,333 through December 1, 2018, and $175,000 thereafter through maturity. The maturity date under the Credit Agreements is August 1, 2021
.
As of
September 30, 2017, the Company did not have any borrowings under its revolving credit note. Under the terms of the 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 Credit Agreements are secured by all of the Company’s US assets and are guaranteed by the Company’s US wholly-owned subsidiary, MAM Software Inc. Additionally, the Company pledged 65% of the stock of MAM Software Limited, its UK subsidiary. As of September 30, 2017, the Company was in compliance with its loan covenants
.
NOTE 6. INCOME TAXES
|
|
For the Three Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Provision for income taxes
|
|
$
|
309
|
|
|
$
|
34
|
|
Effective tax rate
|
|
|
22
|
%
|
|
|
3
|
%
|
For the three months ended September 30, 2017, the Company's effective tax rate differed from federal statutory rate primarily due to profits from the UK that are subject to a lower statutory rate, the utilization of research and development credits in the UK, and the utilization of prior net operating losses against income generated in the US.
For the three months ended September 30, 2016, the Company's effective tax rate differed from federal statutory rate primarily due to profits from the UK that are subject to a lower statutory rate, the utilization of research and development credits in the UK, the utilization of prior net operating losses against income generated in the US, and the partial release of valuation allowance in the US.
Effective July 1, 2017, the Company expects future foreign unremitted earnings will be permanently reinvested.
NOTE 7. SUBSEQUENT EVENTS
The Company has performed an evaluation of events occurring subsequent to September 30, 2017, through the filing date of this Quarterly Report on Form 10-Q. Based on its evaluation, there are no events, except for the matter discussed below, that are required to be disclosed herein.
Subsequent to September 30, 2017, but before the filing date, the Company granted 240,000 restricted shares of common stock to employees under the 2017 EIP. The restricted stock becomes vested when the Company's VWAP per share is at or above certain levels.
F-17