Presentation and Summary of Significant Accounting Policies (Policies)

3 Months Ended

Jul. 31, 2018

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 with 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 July 31, 2018, results of operations for the three months ended July 31, 2018 and 2017 and cash flows for the three months ended July 31, 2018 and 2017. The Company’s results for the three months ended July 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 for the fiscal year ended April 30, 2018 (the “Annual Report”).

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 and Cash Flows for the three months ended July 31, 2017 have not been revised for the effects of Topic 606 and are therefore not comparable to the July 31, 2018 period.

Principles of Consolidation

Principles of Consolidation

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

Recent Accounting Pronouncements

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 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 is expected to be an increase in opening retained earnings, with a corresponding increase to contract assets and a decrease in deferred revenue.

The following table presents the cumulative effect 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

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


	As reported under Topic 606			Adjustments			Balances under Prior GAAP
				(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	54,855		$	—		$	54,855
Investments		29,992			—			29,992
Trade accounts receivable, net
Billed		13,683			—			13,683
Unbilled		3,311			(439	)		2,872
Prepaid expenses and other current assets		6,433			(168	)		6,265

Total current assets		108,274			(607	)		107,667
Investments—Noncurrent		2,509			—			2,509
Property and equipment, net		3,600			—			3,600
Capitalized software, net		9,559			—			9,559
Goodwill		25,888			—			25,888
Other intangibles, net		4,523			—			4,523
Other assets		4,055			(1,211	)		2,844

Total assets	$	158,408		$	(1,818	)	$	156,590

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,166		$	—		$	2,166
Accrued compensation and related costs		2,305			—			2,305
Dividends payable		3,400			—			3,400
Other current liabilities		925			(80	)		845
Deferred revenue		29,518			1,008			30,526

Total current liabilities		38,314			928			39,242
Deferred income taxes		3,222			(503	)		2,719
Long-term deferred revenue		—			—			—
Other long-term liabilities		1,485			—			1,485

Total liabilities		43,021			425			43,446
Shareholders’ equity:
Common stock:
Class A		3,367			—			3,367
Class B		182			—			182
Additional paid-in capital		134,292			—			134,292
Retained earnings		3,105			(2,243	)		862
Class A treasury stock		(25,559	)		—			(25,559	)

Total shareholders’ equity		115,387			(2,243	)		113,144

Commitments and contingencies
Total liabilities and shareholders’ equity	$	158,408		$	(1,818	)	$	156,590

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


	As reported under Topic 606			Adjustments			Balances under Prior GAAP
				(in thousands, except per share amounts)
Revenues:
License	$	1,702		$	(446	)	$	1,256
Subscription Fees		3,168			2			3,170
Professional Services and other		11,008			60			11,068
Maintenance		11,521			—			11,521

Total revenues		27,399			(384	)		27,015

Cost of revenues:
License		1,714			—			1,714
Subscription Fees		1,068			—			1,068
Professional Services and other		8,667			—			8,667
Maintenance		2,198			—			2,198

Total cost of revenues		13,647			—			13,647

Gross margin		13,752			(384	)		13,368

Research and development		3,675			—			3,675
Sales and marketing		5,180			30			5,210
General and administrative		4,193			—			4,193
Amortization of acquisition-related intangibles		97			—			97

Total operating expenses		13,145			30			13,175

Operating income		607			(414	)		193
Other income:
Interest income		504			—			504
Other, net		249			—			249

Earnings before income taxes		1,360			(414	)		946
Income tax (benefit) expense		(25	)		76			(101	)

Net earnings	$	1,385		$	(338	)	$	1,047

Earnings per common share:
Basic	$	0.05		$	(0.01	)	$	0.04

Diluted	$	0.04		$	(0.01	)	$	0.03

The Company’s net cash provided by operating activities for the three months ended July 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 three months ended July 31, 2018:


	As reported under Topic 606		Adjustments			Balances under Prior GAAP
			(in thousands)
Deferred income taxes	$	28	$	579		$	607
Accounts receivable, net	$	5,466	$	(440	)	$	5,026


	As reported under Topic 606			Adjustments			Balances under Prior GAAP
Prepaid expenses and other assets	$	330		$	(1,451	)	$	(1,121	)
Accounts payable and other liabilities	$	(4,223	)	$	80		$	(4,143	)
Deferred revenue	$	(3,334	)	$	(521	)	$	(3,855	)

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.

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 – Identify 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 – Determining 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.

License. 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 a hosted environment by the Company or by a third party and 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 work is performed. The total amount of expense reimbursement included in professional services and other revenue was approximately $331,000 and $525,000 for the three months ended July 31, 2018 and 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, and 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 its 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 ASC 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 three months ended July 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.


	July 31, 2018		May 1, 2018
Contract Balances:
Contract assets, current	$	3,311	$	3,815
Contract assets, long-term		233		332

Total contract assets	$	3,544	$	4,147

Deferred revenue, current	$	29,518	$	32,705
Deferred revenue, long-term		—		147

Total deferred revenue	$	29,518	$	32,852

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 July 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.

The Company’s revenue by geography is as follows:


	Three Months Ended July 31,
	2018		2017
Revenues:
Domestic	$	21,952	$	21,546
International		5,447		5,340

	$	27,399	$	26,886

Practical Expedients and Exemptions. There are several practical expedients and exemptions allowed under Topic 606 that impacts 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:

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

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.

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 July 31, 2018 and April 30, 2018 were $2.4 million and $2.5 million, respectively. Amortization of sales commissions was $0.2 million for the three months ended July 31, 2018, which is included in sales and marketing expense in the accompanying condensed consolidated statement of operations. No impairment losses were recognized during the periods.

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’s Accounting Standards Codification, 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 to Class A Common Shares.

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 were 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.