A. Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and 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

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

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.