Presentation and Summary of Significant Accounting Policies

Basis of Presentation

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

The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1 in the Notes to the Consolidated Financial Statements for fiscal 2018 contained in the Annual Report describes the significant accounting policies that we have used in preparing our consolidated financial statements. On an ongoing basis, we evaluate our estimates, including but not limited to those related to revenue/collectability, stock-based compensation, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results could differ materially from these estimates under different assumptions or conditions. The accompanying condensed consolidated balance sheet as of April 30, 2018 and the condensed consolidated statements of operations for the three and nine months and cash flows for the nine months ended January 31, 2018 have not been revised for the effects of Topic 606 and are therefore not comparable to the January 31, 2019 period.

Principles of Consolidation

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

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which replaced the previous 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 fiscal 2019, which is the result of recognizing revenue for the license component of its term licenses and certain perpetual license contracts that were previously recognized over time due to the lack of vendor-specific objective evidence (VSOE) of fair value at the point in time at which control of the software license is transferred to the customer, rather than ratably over the term of the contract. In addition, under the new standard, the Company will capitalize a portion of sales commission expenses and recognize them ratably over the associated period of economic benefit, which the Company has determined to be six years, which will have 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 will be an increase in opening retained earnings, with a corresponding increase in contract assets and a decrease in deferred revenue.

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



	April 30, 2018			Topic 606			May 1, 2018
	(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	52,794		$	—		$	52,794
Investments	26,121			—			26,121
Trade accounts receivable, net
Billed	18,643			—			18,643
Unbilled	3,375			440			3,815
Prepaid expenses and other current assets	6,592			126			6,718
Total current assets	107,525			566			108,091
Investments—Noncurrent	8,893			—			8,893
Property and equipment, net	3,034			—			3,034
Capitalized software, net	9,728			—			9,728
Goodwill	25,888			—			25,888
Other intangibles, net	5,120			—			5,120
Other assets	2,777			1,325			4,102
Total assets	$	162,965		$	1,891		$	164,856
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,974		$	—		$	1,974
Accrued compensation and related costs	6,310			—			6,310
Dividends payable	3,367			—			3,367
Other current liabilities	1,246			80			1,326
Deferred revenue	33,226			(521		)	32,705
Total current liabilities	46,123			(441		)	45,682
Deferred income taxes	2,615			579			3,194
Long-term deferred revenue	147			—			147
Other long-term liabilities	1,496			—			1,496
Total liabilities	50,381			138			50,519
Shareholders’ equity:
Common stock:
Class A	3,314			—			3,314
Class B	205			—			205
Additional paid-in capital	131,258			—			131,258
Retained earnings	3,366			1,753			5,119
Class A treasury stock	(25,559		)	—			(25,559		)
Total shareholders’ equity	112,584			1,753			114,337
Commitments and contingencies
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 January 31, 2019:



	As reported under Topic 606			Adjustments			Balances under Prior GAAP
	(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	55,058		$	—		$	55,058
Investments	28,106			—			28,106
Trade accounts receivable, net
Billed	20,298			—			20,298
Unbilled	2,992			(339		)	2,653
Prepaid expenses and other current assets	6,184			(180		)	6,004
Total current assets	112,638			(519		)	112,119
Investments—Noncurrent	998			—			998
Property and equipment, net	3,562			—			3,562
Capitalized software, net	10,497			—			10,497
Goodwill	25,888			—			25,888
Other intangibles, net	3,328			—			3,328
Other assets	3,910			(1,303		)	2,607
Total assets	$	160,821		$	(1,822	)	$	158,999
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,789		$	—		$	1,789
Accrued compensation and related costs	2,909			—			2,909
Dividends payable	3,417			—			3,417
Other current liabilities	1,279			(80		)	1,199
Deferred revenue	32,947			267			33,214
Total current liabilities	42,341			187			42,528
Deferred income taxes	3,027			(535		)	2,492
Long-term deferred revenue	—			—			—
Other long-term liabilities	1,097			—			1,097
Total liabilities	46,465			(348		)	46,117
Shareholders’ equity:
Common stock:
Class A	3,383			—			3,383
Class B	182			—			182
Additional paid-in capital	136,522			—			136,522
Retained earnings	(172		)	(1,474		)	(1,646		)
Class A treasury stock	(25,559		)	—			(25,559		)
Total shareholders’ equity	114,356			(1,474		)	112,882
Commitments and contingencies
Total liabilities and shareholders’ equity	$	160,821		$	(1,822	)	$	158,999

The following table summarizes the effects of adopting Topic 606 on the Company’s condensed consolidated statement of operations for the three months ended January 31, 2019:



	As reported under Topic 606		Adjustments		Balances under Prior GAAP
	(in thousands, except per share amounts)
Revenues:
License	$	1,718	$	368	$	2,086
Subscription Fees	3,687		2		3,689
Professional Services and other	10,176		31		10,207
Maintenance	11,422		—		11,422
Total revenues	27,003		401		27,404
Cost of revenues:
License	1,831		—		1,831
Subscription Fees	1,389		—		1,389
Professional Services and other	7,714		—		7,714
Maintenance	2,030		—		2,030
Total cost of revenues	12,964		—		12,964
Gross margin	14,039		401		14,440
Research and development	2,811		—		2,811
Sales and marketing	4,699		41		4,740
General and administrative	4,302		—		4,302
Amortization of acquisition-related intangibles	97		—		97
Total operating expenses	11,909		41		11,950
Operating income	2,130		360		2,490
Other income:
Interest income	523		—		523
Other, net	4		—		4
Earnings before income taxes	2,657		360		3,017
Income tax expense	356		49		405
Net earnings	$	2,301	$	311	$	2,612
Earnings per common share:
Basic	$	0.07	$	0.01	$	0.08
Diluted	$	0.07	$	0.01	$	0.08

The following table summarizes the effects of adopting Topic 606 on the Company’s condensed consolidated statement of operations for the nine months ended January 31, 2019:



	As reported under Topic 606			Adjustments		Balances under Prior GAAP
	(in thousands, except per share amounts)
Revenues:
License	$	5,432		$	313	$	5,745
Subscription Fees	10,196			6		10,202
Professional Services and other	32,240			137		32,377
Maintenance	34,567			—		34,567
Total revenues	82,435			456		82,891
Cost of revenues:
License	5,305			—		5,305
Subscription Fees	3,746			—		3,746
Professional Services and other	24,484			—		24,484
Maintenance	6,442			—		6,442
Total cost of revenues	39,977			—		39,977
Gross margin	42,458			456		42,914
Research and development	9,818			—		9,818
Sales and marketing	15,183			134		15,317
General and administrative	12,903			—		12,903
Amortization of acquisition-related intangibles	291			—		291
Total operating expenses	38,195			134		38,329
Operating income	4,263			322		4,585
Other income:
Interest income	1,551			—		1,551
Other, net	(461		)	—		(461		)
Earnings before income taxes	5,353			322		5,675
Income tax expense	424			44		468
Net earnings	$	4,929		$	278	$	5,207
Earnings per common share:
Basic	$	0.16		$	0.01	$	0.17
Diluted	$	0.16		$	0.01	$	0.17

The Company’s net cash provided by operating activities for the nine months ended January 31, 2019 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 nine months ended January 31, 2019:



	As reported under Topic 606			Adjustments			Balances under Prior GAAP
				(in thousands)
Net earnings	$	4,929		$	278		$	5,207
Deferred income taxes	$	(166	)	$	44		$	(122	)
Changes in operating assets and liabilities:
Accounts receivable, net	$	(831	)	$	(101	)	$	(932	)
Prepaid expenses and other assets	$	724		$	32		$	756
Accounts payable and other liabilities	$	(4,031	)	$	—		$	(4,031	)
Deferred revenue	$	94		$	(253	)	$	(159	)

In February 2016, the FASB issued ASU 2016-02, Leases, which established new ASC Topic 842 (ASC 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. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months.

Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new standard will require both types of leases to be recognized on the balance sheet. ASC 842 also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.

ASC 842 was previously required to be adopted using the modified retrospective approach. However, in July 2018, the FASB issued ASU 2018-11, which allows for retrospective application with the recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Under this option, entities would not need to apply ASC 842 (along with its disclosure requirements) to the comparative prior periods presented.

ASC 842 is effective for the Company in the first quarter of fiscal 2020 and we expect that most of our operating leases (primarily real estate) will be recognized as operating lease liabilities and right of use assets on our balance sheet. The Company is continuing to evaluate the impact that the adoption of this standard will have on its consolidated financial statements but we currently believe it is likely that the Company will elect to adopt certain of the optional practical expedients, including the package of practical expedients, which, among other things, gives us the option to not reassess: 1) whether expired or existing contracts are or contain leases; 2) the lease classification for expired or existing leases; and 3) initial direct costs for existing leases.