10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2016

( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                      to                                          

Commission file number 000-19608

ARI Network Services, Inc.

(Exact name of registrant as specified in its charter)

WISCONSIN	39-1388360
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

10850 West Park Place, Suite 1200, Milwaukee, Wisconsin  53224

(Address of principal executive offices)

(414) 973-4300

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES☑NO☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (S232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES☑NO☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☑
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES☐NO☑

As of June  8, 2016,there were  17,265,315  shares of the registrant’s common stock outstanding.

ARI Network Services, Inc.

FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDEDAPRIL 30, 2016

INDEX

		Page
PART I             FINANCIAL INFORMATION
Item 1	Consolidated Financial Statements	3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4	Controls and Procedures	32
PART II           OTHER INFORMATION
Item 1	Legal Proceedings	33
Item 1A	Risk Factors	33
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3	Defaults upon Senior Securities	33
Item 4	Mine Safety Disclosures	33
Item 5	Other Information	33
Item 6	Exhibits	33
Signatures		34

2

PART I.   FINANCIAL INFORMATION

Item 1. Financial Statements

ARI Network Services, Inc.
Consolidated Balance Sheets
(Dollars in Thousands, Except per Share Data)
	(Unaudited)		(Audited)
	April 30		July 31
	2016		2015
ASSETS
Cash and cash equivalents	$	4,440	$	2,284
Trade receivables, less allowance for doubtful accounts of $392
and $372 at April 30, 2016 and July 31,2015, respectively		2,294		2,046
Work in process		185		165
Prepaid expenses and other		851		820
Deferred income taxes		3,495		3,092
Total current assets		11,265		8,407
Equipment and leasehold improvements:
Computer equipment and software for internal use		3,502		2,800
Leasehold improvements		629		629
Furniture and equipment		2,716		2,981
Total equipment and leasehold improvements		6,847		6,410
Less accumulated depreciation and amortization		(4,637)		(3,989)
Net equipment and leasehold improvements		2,210		2,421
Capitalized software product costs:
Amounts capitalized for software product costs		27,006		25,463
Less accumulated amortization		(21,908)		(20,337)
Net capitalized software product costs		5,098		5,126
Deferred income taxes		1,135		2,398
Other intangible assets		8,275		10,116
Goodwill		21,639		21,168
Total non-current assets		38,357		41,229
Total assets	$	49,622	$	49,636

See accompanying notes

3

ARI Network Services, Inc.
Consolidated Balance Sheets
(Dollars in Thousands, Except per Share Data)
	(Unaudited)		(Audited)
	April 30		July 31
	2016		2015
LIABILITIES
Current portion of long-term debt	$	2,172	$	1,338
Current portion of contingent liabilities		382		754
Accounts payable		574		708
Deferred revenue		7,135		7,327
Accrued payroll and related liabilities		1,979		1,752
Accrued sales, use and income taxes		182		140
Other accrued liabilities		736		748
Current portion of capital lease obligations		56		174
Total current liabilities		13,216		12,941
Long-term debt		7,281		9,079
Long-term portion of contingent liabilities		124		362
Capital lease obligations		68		106
Other long-term liabilities		176		199
Total non-current liabilities		7,649		9,746
Total liabilities		20,865		22,687
SHAREHOLDERS' EQUITY
Cumulative preferred stock, par value $.001 per share, 1,000,000 shares authorized; 0 shares issued and outstanding at April 30, 2016 and July 31, 2015, respectively		—		—
Junior preferred stock, par value $.001 per share, 100,000 shares authorized; 0 shares issued and outstanding at April 30, 2016 and July 31, 2015, respectively		—		—
Common stock, par value $.001 per share, 25,000,000 shares authorized; 17,262,940 and  17,097,426 shares issued and outstanding at April 30, 2016 and July 31, 2015, respectively		17		17
Additional paid-in capital		115,243		114,700
Accumulated deficit		(86,508)		(87,793)
Other accumulated comprehensive income		5		25
Total shareholders' equity		28,757		26,949
Total liabilities and shareholders' equity	$	49,622	$	49,636

See accompanying notes

4

ARI Network Services, Inc.
Consolidated Statements of Operations
(Dollars in Thousands, Except per Share Data)
(Unaudited)
	Three months ended April 30				Nine months ended April 30
	2016		2015		2016		2015
Net revenue	$	11,984	$	10,280	$	35,473	$	29,531
Cost of revenue		2,334		1,780		6,467		5,391
Gross profit		9,650		8,500		29,006		24,140
Operating expenses:
Sales and marketing		2,801		2,718		8,314		7,928
Customer operations and support		2,374		1,831		7,248		5,392
Software development and technical support (net of capitalized software product costs)		1,221		1,102		3,795		3,046
General and administrative		1,732		1,709		5,247		4,901
Depreciation and amortization (exclusive of amortization of software product costs included in cost of revenue)		601		465		1,800		1,245
Net operating expenses		8,729		7,825		26,404		22,512
Operating income		921		675		2,602		1,628
Other income (expense):
Interest expense		(118)		(123)		(350)		(352)
Other, net		13		30		5		33
Total other income (expense)		(105)		(93)		(345)		(319)
Income before provision for income tax		816		582		2,257		1,309
Income tax expense		(368)		(243)		(972)		(606)
Net income	$	448	$	339	$	1,285	$	703
Weighted average common shares outstanding:
Basic		17,258		14,362		17,199		14,100
Diluted		17,769		14,786		17,689		14,536
Net income per common share:
Basic	$	0.03	$	0.02	$	0.07	$	0.05
Diluted	$	0.03	$	0.02	$	0.07	$	0.05
See accompanying notes
Consolidated Statements of Comprehensive Income (Loss)
(Dollars in Thousands)
(Unaudited)
	Three months ended April 30				Nine months ended April 30
	2016		2015		2016		2015
Net income	$	448	$	339	$	1,285	$	703
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		(18)		6		(20)		44
Total other comprehensive income (loss)		(18)		6		(20)		44
Comprehensive income	$	430	$	345	$	1,265	$	747

See accompanying notes

5

ARI Network Services, Inc.

Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

	Nine months ended April 30
	2016		2015
Operating activities:
Net income	$	1,285	$	703
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of software products		1,571		1,560
Non-cash interest expense		34		55
Depreciation and other amortization		1,800		1,245
(Gain) loss on change in fair value of earn-out receivable and payable		(5)		(28)
Provision for bad debt allowance		80		131
Deferred income taxes		860		531
Stock based compensation		316		305
Net change in assets and liabilities:
Trade receivables		(308)		(594)
Work in process, prepaid expenses and other		(51)		(16)
Other long-term assets		-		(139)
Accounts payable		(145)		69
Deferred revenue		(252)		142
Accrued payroll and related liabilities		342		349
Accrued taxes and other accrued liabilities		16		282
Net cash provided by operating activities	$	5,543	$	4,595
Investing activities:
Purchase of equipment, software and leasehold improvements		(557)		(469)
Cash received on earn-out from disposition of a component of the business		-		111
Cash paid for contingent liabilities related to acquisitions		(505)		(250)
Cash paid for net assets related to acquisitions		-		(5,950)
Software development costs capitalized		(1,310)		(1,000)
Net cash used in investing activities	$	(2,372)	$	(7,558)
Financing activities:
Borrowings under line of credit, net	$	-	$	1,750
Payments on long-term debt		(912)		(470)
Borrowings under long-term debt		-		2,168
Payments of capital lease obligations		(165)		(184)
Proceeds from exercise of common stock options		66		75
Net cash provided by (used in) financing activities	$	(1,011)	$	3,339
Effect of foreign currency exchange rate changes on cash		(4)		(23)
Net change in cash and cash equivalents		2,156		353
Cash and cash equivalents at beginning of period		2,284		1,808
Cash and cash equivalents at end of period	$	4,440	$	2,161
Cash paid for interest	$	338	$	256
Cash paid for income taxes	$	45	$	25
Non-cash investing and financing activities
Issuance of common stock in connection with acquisitions	$	-	$	2,780
Debt issued in connection with acquisition		-		2,933
Capital leases acquired in connection with acquisitions		-		105
Current assets acquired in connection with acquisitions		36		639
Accrued liabilities assumed in connection with acquisitions		58		623
Issuance of common stock related to payment of contingent liabilities		60		42
Tax benefit of stock options exercised		-		55
Cashless exercise of common stock warrants		46		-
Contingent liabilities incurred in connection with acquisition		62		911

See accompanying notes

6

ARI Network Services, Inc. 

Notes to Consolidated Financial Statements

1. Description of the Business and Significant Accounting Policies

Description of the Business 

ARI Network Services, Inc. (“ARI” or “the Company”) creates software-as-a-service (“SaaS”), data-as-a-service (“DaaS”) and other solutions that help equipment manufacturers, distributors and dealers in selected vertical markets to Sell More Stuff!™ – online and in-store. We remove the complexity of selling and servicing new and used whole goods inventory and PG&A for customers in the automotive tire and wheel aftermarket (“ATW”), automotive aftermarket parts and service (“AAPS”), powersports, outdoor power equipment (“OPE”), marine, home medical equipment (“HME”), recreational vehicles (“RV”) and appliance industries. Our innovative products are powered by a proprietary library of enriched original equipment and aftermarket content from over 1,800 manufacturers. More than 23,500 equipment dealers, distributors and manufacturers worldwide leverage our web and eCatalog platforms to Sell More Stuff!™

We were incorporated in Wisconsin in 1981. Our principal executive office and headquarters is located in Milwaukee, Wisconsin. The office address is 10850 West Park Place, Suite 1200, Milwaukee, WI 53224, and our telephone number at that location is (414) 973-4300. Our principal website address is www.arinet.com. ARI also maintains operations in Cypress, California; Floyds Knobs, Indiana; Des Moines, Iowa; Duluth, Minnesota; Wexford, Pennsylvania; Cookeville, Tennessee; Salt Lake City, Utah; Leiden, The Netherlands; and New Delhi, India.

Basis of Presentation

These consolidated financial statements include the consolidated financial statements of ARI and its wholly-owned subsidiaries, ARI Europe B.V. and ARI Network Services Pvt. Ltd. and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). We eliminated all significant intercompany balances and transactions in consolidation. All adjustments that, in the opinion of management, are necessary for a fair presentation of the periods presented have been reflected as required by Regulation S-X, Rule 10-01.

Fiscal Year

Our fiscal year ends on July 31. References to fiscal 2016, for example, refer to the fiscal year ending July 31, 2016, and references to fiscal 2015 refer to the fiscal year ended July 31, 2015.  

Revenue Recognition

Revenues from subscription fees for use of our software, access to our catalog content, and software maintenance and support fees are all recognized ratably over the contractual term of the arrangement. The Company has customer contracts with multiple services or elements, which may be delivered at different times. 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. Revenue on undelivered elements is recognized when the elements are delivered. ARI considers all arrangements with payment terms extending beyond 12 months not to be fixed or determinable and evaluates other arrangements with payment terms longer than normal to determine whether the arrangement is fixed or determinable. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer. Arrangements that include acceptance terms beyond the standard terms are not recognized until acceptance has occurred. If collectability is not considered probable, revenue is recognized when the fee is collected.

For software license arrangements that do not require significant modification or customization of the underlying software, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable.

7

Revenues for professional services to customize complex features and functionality in a product’s base software code or develop complex interfaces within a customer’s environment are recognized as the services are performed if they are determined to have standalone value to the customer or if all of the following conditions are met i) the customer has a contractual right to take possession of the software; ii) the customer will not incur significant penalty if it exercises this right; and iii) it is feasible for the customer to either run the software on its own hardware or contract with another unrelated party to host the software. When the current estimates of total contract revenue for professional services and the total related costs indicate a loss, a provision for the entire loss on the contract is made in the period the amount is determined. Professional service revenues for set-up and integration of hosted websites, or other services considered essential to the functionality of other elements of the arrangement, are amortized over the term of the contract.

Revenue for variable transaction fees, primarily for use of the shopping cart feature of our websites, is recognized as it is earned.

Amounts received for shipping and handling fees are reflected in revenue. Costs incurred for shipping and handling are reported in cost of revenue.

Amounts invoiced to customers prior to recognition as revenue, as discussed above, are reflected in the accompanying balance sheets as deferred revenue.

No single customer accounted for 10% or more of ARI’s revenue during the nine months endedApril 30, 2016 or 2015.  

Trade Receivables, Credit Policy and Allowance for Doubtful Accounts

Trade receivables are uncollateralized customer obligations due on normal trade terms, most of which require payment within thirty (30) days from the invoice date. Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.

The carrying amount of trade receivables is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews receivable balances that exceed ninety (90) days from the invoice date and, based on an assessment of current creditworthiness, estimates the portion of the balance that will not be collected. The allowance for potential doubtful accounts is reflected as an offset to trade receivables in the accompanying consolidated balance sheets.

Capitalized and Purchased Software Product Costs

Certain software development and acquisition costs are capitalized when incurred. Capitalization of these costs begins upon the establishment of technological feasibility. The establishment of technological feasibility and the on-going assessment of recoverability of software costs require considerable judgment by management with respect to certain external factors, including, but not limited to, the determination of technological feasibility, anticipated future gross revenue, estimated economic life and changes in software and hardware technologies. The Company capitalizes software enhancements on an on-going basis and all other software development and support expenditures are charged to expense in the period incurred.

The annual amortization of software products is computed using the straight-line method over the estimated economic life of the product, which currently ranges from2 to 14 years. Amortization starts when the product is available for general release to customers.

Deferred Loan Fees and Debt Discounts

Fees associated with securing debtare capitalized and shown as contra-debt, reducing the carrying amount of long-termdebt on the consolidated balance sheet. Deferred loan fees and debt discounts are amortized to interest expense over the life of the debt using the effective interest method.

8

Deferred Income Taxes

The tax effect of the temporary differences between the book and tax bases of assets and liabilities and the estimated tax benefit from tax net operating losses is reported as deferred tax assets and liabilities in the consolidated balance sheets. An assessment of the likelihood that net deferred tax assets will be realized from future taxable income is performed at each reporting date or when events or changes in circumstances indicate that there may be a change in the valuation allowance. Because the ultimate realizability of deferred tax assets is highly subject to the outcome of future events, the amount established as a valuation allowance is considered to be a significant estimate that is subject to change in the near term. To the extent a valuation allowance is established or there is a change in the allowance during a period, the change is reflected with a corresponding increase or decrease in income tax expense in the consolidated statements of operations. 

Legal Provisions

ARI is periodically involved in legal proceedings arising from contracts, patents or other matters in the normal course of business. We reserve for any material estimated losses if the outcome is probable and reasonably estimable. We had no provisions for legal proceedings during the nine months endedApril 30, 2016 or 2015.

Recently Adopted Accounting Standards

On August 1, 2015, the Company retrospectively adopted Accounting Standards Update (“ASU”) 2015-03 related to the presentation of debt issuance costs. Debt issuance costs of $29,000, previously recorded to prepaid expenses and other, and $84,000,previously recorded to other long-term assets as of July 31, 2015, are now presented as a direct deduction from the carrying amount of long-term debt on the balance sheet.

2. Basic and Diluted Net Income per Common Share 

Basic net income per common share is computed by dividing net income by the basic weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period and reflects the potential dilution that could occur if all of ARI’s outstanding stock options and warrants that are in the money were exercised (calculated using the treasury stock method).

The following table is a reconciliation of basic and diluted net income per common share (in thousands, except per share data): 

	Three months ended April 30				Nine months ended April 30
	2016		2015		2016		2015
Net income	$	448	$	339	$	1,285		$	703
Weighted-average common shares outstanding		17,258		14,362		17,199			14,100
Effect of dilutive stock options and warrants		511		424		490			436
Diluted weighted-average common shares outstanding		17,769		14,786		17,689			14,536
Net income per share
Basic	$	0.03	$	0.02	$	0.07		$	0.05
Diluted	$	0.03	$	0.02	$	0.07		$	0.05
Options and warrants that could potentially dilute net income per share in the future that are not included in the computation of diluted net income per share, as their impact is anti-dilutive		-		10		-			10

9

3. Debt 

Silicon Valley Bank

On April 26, 2013, the Company entered into a Loan and Security Agreement (the “Agreement”) with Silicon Valley Bank (“SVB”), pursuant to which SVB extended to the Company credit facilities consisting of a $3,000,000 revolving credit facility with a maturity date of April 26, 2015 and a $4,500,000 term loan with a maturity date of April 26, 2018. 

On September 30, 2014, in connection with the Company’s acquisition of Tire Company Solutions, LLC (“TCS”), the Company entered into the First Loan Modification Agreement (the “Modification Agreement”) with SVB, which contained substantial amendments to the terms of the Agreement.

The Modification Agreement includes credit facilities consisting of a $3,000,000 revolving credit facility with a maturity date of September 30, 2016 and a $6,050,000 term loan with a maturity date of September 30, 2019. This term loan is an amendment to the existing $4,500,000 term loan with an original maturity date of April 26, 2018.

The term loan and any loans made under the SVB revolving credit facility accrue interest at a per annum rate equal to the Prime Rate plus the Applicable Margin for Prime Rate Loans set forth in the chart below based on the Total Leverage Ratio, as defined in the Modification Agreement. The Company had $0 outstanding on the revolving credit facility and the effective interest rate was 4.00% at April 30, 2016, based upon a prime rate of 3.50%.

	Applicable Margin
Total Leverage Ratio	for Prime Rate Loans
>= 2.50 to 1.0:	1.50	%
>  1.75 to 1.00 but <2.50 to 1.00:	1.00	%
<= 1.75 to 1.00:	0.50	%

Principal in respect of any loans made under the revolving facility is required to be paid in its entirety on or before September 30, 2016. Principal in respect of the term loan is required to be paid in quarterly installments on the first day of each fiscal quarter of the Company as follows:$151,250 commenced on November 1, 2014 through August 1, 2016; $226,875 commencing on November 1, 2016 through August 1, 2017; and $302,500 commencing on November 1, 2017 through August 1, 2019. All remaining principal in respect of the term loan is due and payable on September 30, 2019. The Company is permitted to prepay all of, but not less than all of, the outstanding principal amount of the term loan upon notice to SVB and, in certain circumstances, the payment of a prepayment penalty of up to $61,000.  Following July 31, 2015, the Modification Agreement requires the Company to make additional payments in the amount of 25% of excess cash flow, as defined in the agreement, until the Company’s Total Leverage Ratio is less than 2.00 to 1.00.

The Modification Agreement contains covenants that restrict, among other things and subject to certain conditions, the ability of the Company to permit a change of control, incur debt, create liens on its assets, make certain investments, enter into merger or acquisition transactions and make distributions to its shareholders. Financial covenants include the maintenance of a minimum Total Leverage Ratio equal to or less than 3.00 to 1.00 and the maintenance of a Fixed Charge Coverage Ratio (as defined in the Modification Agreement) equal to or greater than 1.25 to 1.00. The Total Leverage Ratio was 1.18 and the Fixed Charge Ratio was 2.71 for the twelve months ended April 30, 2016.  The Modification Agreement also contains customary events of default that, if triggered, could result in an acceleration of the Company’s obligations under the Modification Agreement. The loans are secured by a first priority security interest in substantially all assets of the Company.

TCS Promissory Notes

In connection with the acquisition of TCS, on September 30, 2014, the Company issued two promissory notes (the “TCS Notes”) in the aggregate principal amount of $3,000,000 to the former owners of TCS. In February 2015, the principal amount of the TCS Notes was reduced by approximately$67,000 as a result of post-closing adjustments to the valuation of the net assets acquired, pursuant to the terms of the asset purchase agreement.The TCS Notes initially accrue interest on the outstanding unpaid principal balance at a rate per annum equal to 5.0%; however, if any amount payable under a TCS Note is not paid when due, such overdue amount will bear interest at the default rate of 7.5% from the date of such non-payment until such amount is paid in full. Accrued interest on the TCS Notes is due and payable quarterly commencing on December 29, 2014 and continuing on each 90th calendar day thereafter, until September 30, 2018, at which time all accrued interest and outstanding principal balance will be due and payable in full. The first four payments due and payable under the TCS Notes were interest-only payments, and payments of principal and interest commenced on December 29, 2015. The payments are subject to acceleration upon certain Events of Default, as defined in the TCS Notes.

10

DCi Promissory Note

In connection with the acquisition of Direct Communications Inc. (“DCi”), on July 13, 2015, the Company issued a promissory note (the “DCi Note”) in the aggregate principal amount of $2,000,000 to the former owners of DCi. The principal amount of the DCi Note was reduced by approximately $64,000 as a result of post-closing adjustments to the estimated valuation of the net assets acquired, pursuant to the terms of the asset purchase agreement. The DCi Note initially accrues interest on the outstanding unpaid principal balance at a rate per annum equal to 4.0%. Accrued interest on the DCi Note is due and payable quarterly commencing on October 13, 2015 and continuing on each 90th calendar day thereafter, until July 13, 2019, at which time all accrued interest and outstanding principal balance will be due and payable in full. The first four payments due and payable under the DCi Note are interest only payments, and payments of principal and interest shall not commence until the payment due on October 13, 2016. The payments are subject to acceleration upon certain Events of Default, as defined in the DCi Note.

The following table sets forth certain information related to the Company’s long-term debt as of April 30, 2016 and July 31, 2015 (in thousands): 

	April 30		July 31
	2016		2015
Notes payable principal	$	9,553	$	10,529
Less debt issuance costs		(100)		(112)
Less current maturities		(2,172)		(1,338)
Notes payable - non-current	$	7,281	$	9,079

Minimum principal payments due on the SVB Term Note, the TCS Notes and the DCi Note are as follows for the fiscal years ending (in thousands): 

	SVB Term Note		TCS Notes			DCi Notes		Total Notes Payable
2016 remaining	$	151	$	234	$	—	$	385
2017		832		965		620		2,417
2018		1,134		1,014		645		2,793
2019		1,211		261		671		2,143
2020		1,815		—		—		1,815
	$	5,143	$	2,474	$	1,936	$	9,553

4. Business Combinations

DCi Acquisition

On July 13, 2015, the Company acquired substantially all of the assets of DCi, a leading provider of differentiated product content and electronic catalog software serving manufacturers, distributors, jobbers and independent retailers in the AAPS. Consideration for the acquisition included: (1) a cash payment equal to $3,750,000; (2) 159,795 shares of the Company’s common stock; and (3) the issuance of a promissory note in principal amount of $2,000,000 to DCi.  The principal amount of the DCi Note was reduced by approximately $64,000 as a result of post-closing adjustments to the estimated valuation of the net assets acquired, pursuant to the terms of the asset purchase agreement.

The Company expects the DCi acquisition to accelerate its growth in the AAPS and provide a platform to further expand the reach of ARI’s data-driven eCommerce websites and automotive point-of-sale software. The combined customer benefits and operational efficiencies are expected to result in a stronger organization that can create more value for our customers, shareholders and employees.

11

The DCi acquisition was funded from cash on hand, seller financing and the Company’s common stock. The following tables show the preliminary allocation of the preliminary DCi purchase price (in thousands):

	Preliminary
	Purchase
	Price
Cash	$	3,750
Financed by note payable		1,936
Issuance of common stock		500
Purchase price	$	6,186
	Preliminary
	Purchase
	Allocation
Trade receivables	$	422
Prepaid expense and other		38
Assumed liabilities		(260)
Furniture and equipment		387
Software product costs		698
Intangible assets		1,830
Goodwill		3,071
Purchase price allocation	$	6,186

Intangible assets include the fair value of tradenames, customer relationships, and non-competition agreements. Estimated goodwill represents the additional benefits provided to the Company by the acquisition of DCi operational synergies. The Company acquired approximately $3,300,000 of tax deductible goodwill related to the DCi acquisition. The final purchase price, as well as the purchase price allocation, is subject to the completion of the final valuation of the acquired net assets. The final valuation is expected to be completed as soon as is practicable but no later than July 13, 2016 and could have a material impact on the preliminary purchase price allocation disclosed above.

TASCO Acquisition

On April 27, 2015, the Company acquired substantially all of the assets of TASCO Corporation and its affiliated company Signal Extraprise Corporation (collectively “TASCO”), a leading provider of business management software designed exclusively for the automotive tire and wheel aftermarket industry. Consideration for the acquisition included: (1) a cash payment at the closing of the transaction equal to $1,750,000, which was funded through a borrowing on the Company’s revolving credit facility; (2) 242,424 shares of the Company’s common stock; and (3) a $200,000 holdback payable on April 27, 2016.In October 2015, the holdback amount was reduced by approximately $62,000 as a result of post-closing adjustments to the valuation of the net assets acquired, pursuant to the terms of the asset purchase agreement. The Company acquired approximately $1,500,000 of tax deductible goodwill related to the TASCO acquisition. The Company determined that the TASCO assets acquired did not constitute a business that is “significant” as defined in the applicable SEC regulations.

The following tables show the allocation of the purchase price (in thousands):

	Purchase
	Price
Cash	$	1,750
Issuance of common stock		800
Contingent holdback		138
Purchase price	$	2,688
	Purchase
	Allocation
Trade receivables	$	120
Assumed liabilities		(227)
Software product costs		434
Intangible assets		1,000
Goodwill		1,361
Purchase price allocation	$	2,688

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TCS Acquisition

On September 30, 2014, the Company acquired substantially all of the assets of TCS, a leading provider of software, websites and digital marketing solutions designed exclusively for dealers, wholesalers, retreaders and manufacturers within the automotive tire and wheel industries. Consideration for the acquisition included (1) a cash payment equal to $4,200,000; (2) 618,744 shares of the Company's common stock; (3) the issuance of two promissory notes in aggregate principal amount of $2,933,000 (as adjusted) to the former owners of TCS; and (4) a contingent earn-out purchase price contingent upon the attainment of specific revenue goals over the first three years following the acquisition. The earn-out, with an original fair value of $711,000, was amended in March 2016 to four quarterly payments of $120,905, which commenced in December 2016, followed by four quarterly payments of $70,000.

The TCS acquisition increased the Company’s portfolio of ATW dealer websites by more than 30%.  The acquisition is expected to accelerate ARI’s opportunity to drive organic growth through the cross‐selling of new products. It also provides solutions for the entire ATW supply chain, including wholesalers, retreaders and manufacturers. The TCS business offers a business management solution for ATW dealers as well as for auto repair shops. The combined customer benefits and operational efficiencies are expected to result in a stronger organization that can create more value for our customers, shareholders and employees. 

The acquisition was funded from cash on hand, an increase in our SVB Term Loan, funds available on our revolving credit facility seller financing and the Company’s common stock. The following tables show the allocation of the purchase price (in thousands):

	Purchase
	Price
Cash	$	4,200
Financed by note payable		2,933
Issuance of common stock		1,980
Contingent earn-out		711
Purchase price	$	9,824
	Purchase
	Allocation
Trade receivables	$	606
Prepaid expense and other		33
Assumed liabilities		(668)
Furniture and equipment		117
Software product costs		820
Intangible assets		4,080
Goodwill		4,836
Purchase price allocation	$	9,824

Intangible assets include the fair value of tradenames, customer relationships and non-competition agreements. Goodwill represents the additional benefits provided to the Company by the acquisition of TCS operational synergies. The Company acquired approximately $5,200,000 of tax deductible goodwill related to the TCS acquisition. 

Pro Forma Information

The following unaudited pro forma combined financial information presents the Company's results as if the Company had acquired TCS and DCi on August 1, 2014. The unaudited pro forma information has been prepared with the following considerations:

i. The unaudited pro forma condensed consolidated financial information has been prepared using the acquisition method of accounting under existing GAAP. The Company is the acquirer for accounting purposes.

ii. The pro forma combined financial information does not reflect any operating cost synergy savings that the combined company may achieve as a result of the acquisition, the costs necessary to achieve these operating synergy savings or additional charges necessary as a result of the acquisition.

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The unaudited pro forma financial information presented is for informational purposes only and does not purport to represent what the Company's, TCS’s or DCi’s financial position or results of operations would have been had the acquisition in fact occurred on such date or at the beginning of the period indicated, nor does it project the financial position or results of operation for any future date or period of the Company, TCS or DCi.  

	Three months ended April 30				Nine months endedApril 30
	2016		2015		2016		2015
Revenue	$	11,984	$	11,223	$	35,473	$	33,354
Net income	$	448	$	355	$	1,285	$	818
Net income per common share:
Basic	$	0.03	$	0.02	$	0.07	$	0.05
Diluted	$	0.03	$	0.02	$	0.07	$	0.05

Pro forma adjustments to net income include amortization costs related to the acquired intangible assets, acquisition-related professional fees, interest expense on the debt incurred to acquire the assets of TCS and DCi, the tax effect of the historical TCS and DCi results of operations and the pro forma adjustments at an estimated tax rate of 40% as follows:

	Three months ended April 30				Nine months endedApril 30
	2016		2015		2016		2015
Amortization of intangible assets		-		72		-		271
Acquisition-related professional fees		-		(38)		-		(256)
Interest expense		-		20		-		105
Income tax benefit (expense)		-		10		-		77
Total adjustments		-		64		-		197

The Company increased goodwill by approximately $471,000 during the nine months endedApril 30, 2016, as a result of adjustments to the preliminary purchase price allocation of the TCS, TASCO and DCi acquisitions. The Company cannot determine revenue and expenses specifically related to its acquisitions since the date of acquisition, as we begin integrating these operations into our business upon closing of the acquisitions.

5. Contingent Liabilities 

Consideration for the April 2015 TASCO acquisition included a $138,000 (as adjusted) holdback payable, which has been paid in full as of April 30, 2016. 

Consideration for the September 2014 TCS acquisition includes a contingent earn-out purchase price, originally payable in three potential payments and contingent upon the attainment of specific revenue goals. The fair value of the earn-out was originally estimated at $711,000. On March 7, 2016 the TCS Asset Purchase Agreement was amended in relation to the contingent earnout, whereas four quarterly payments of $120,905 commenced on December 31, 2015, followed by four quarterly payments of $70,000, commencing December 31, 2016.  The Company recorded a gain of $13,000 as a result of the Amendment during the nine months ended April 30, 2016.

Consideration for the 2012 Ready2Ride acquisition included a contingent hold-back purchase price of up to $250,000 and contingent earn-out payments as follows: (i) the first earn-out payment, composed of $125,000 was paid in October 2013 and 10,000 shares of common stock issued in November 2013; (ii) the second earn-out payment, composed of $125,000 and 15,000 shares of common stock, was paid in September 2014; and (iii) the third earn-out payment, composed of $125,000 and 15,000 shares of common stock, was paid in August 2015. The Company recorded a loss of $8,000 as a result of a change in estimate related to an increase in the market price of the Company’s common stock during the nine months ended April 30, 2016.

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The following table shows changes in the holdback and earn-out payable related to the TCS and TASCO acquisition (in thousands):

	Nine months ended April 30
	2016		2015
Beginning balance	$	1,116	$	448
Additions		-		911
Adjustments		(62)		-
Payments		(565)		(292)
Imputed interest recognized		22		37
Gain on change in fair value of earn-out		(5)		-
Ending balance	$	506	$	1,104
Less current portion	$	(382)	$	(627)
Ending balance, long-term	$	124	$	477

The following table shows the remaining estimated payments of contingent liabilities related to the TCS acquisition at April 30, 2016, (in thousands):

2016	$	121
2017		331
2018		70
Total estimated payments		522
Less imputed interest		(16)
Present value of contingent liabilities	$	506

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6. Other Intangible Assets

Amortizable intangible assets include customer relationships and other intangibles including trade names and non-compete agreements. Amortizable intangible assets are composed of the following at April 30, 2016 and 2015 (in thousands): 

	Nine months ended April 30, 2015						Wtd. avg.
	Cost		Accumulated		Net		remaining
Customer relationships	Basis		Amortization		Value		life
Beginning balance	$	7,174	$	(3,584)	$	3,590
Activity		3,838		(598)		3,240
Ending balance	$	11,012	$	(4,182)	$	6,830	11.46
Other intangibles
Beginning balance	$	383	$	(361)	$	22
Activity		1,399		(159)		1,240
Ending balance	$	1,782	$	(520)	$	1,262	1.66
Total intangibles
Beginning balance	$	7,557	$	(3,945)	$	3,612
Activity		5,237		(757)		4,480
Ending balance	$	12,794	$	(4,702)	$	8,092	11.07
	Nine months ended April 30, 2016						Wtd. avg.
	Cost		Accumulated		Net		remaining
Customer relationships	Basis		Amortization		Value		life
Beginning balance	$	11,947	$	(4,418)	$	7,529
Activity		(220)		(853)		(1,073)
Ending balance	$	11,727	$	(5,271)	$	6,456	11.98
Other intangibles
Beginning balance	$	3,203	$	(616)	$	2,587
Activity		(467)		(301)		(768)
Ending balance	$	2,736	$	(917)	$	1,819	8.73
Total intangibles
Beginning balance	$	15,150	$	(5,034)	$	10,116
Activity		(688)		(1,154)		(1,841)
Ending balance	$	14,463	$	(6,188)	$	8,275	11.26

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7. Stock-based Compensation Plans 

The Company uses the Black-Scholes model to value stock options granted. Volatility is calculated as management’s estimate of future volatility over the expected term of the option based on historical volatility of the Company’s stock. The expected life of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual term of the options is based on the United States Treasury yields in effect at the time of grant.  

Stock options granted to employees under the Company’s stock option plan typically vest 25% on the first anniversary of the grant and 25% on the one year anniversary of each of the three following years. Stock options granted to non-employee directors under the Company’s stock option plan typically vest 50% on the first anniversary of the grant and 50% on the next one year anniversary. The Company recognizes stock option expense over the vesting period for each vesting tranche.

As recognizing stock-based compensation expense is based on awards ultimately expected to vest, the amount of recognized expense has been reduced for estimated forfeitures based on the Company’s historical experience. Total stock option compensation expense recognized by the Company was approximately $19,000 and $41,000 during the three month periods ended April 30, 2016 and 2015, respectively, and approximately $59,000 and $110,000 for the nine month periods ended April 30, 2016 and 2015, respectively. There was approximately $61,000 and $193,000 of total unrecognized compensation costs related to non-vested options granted under the Company’s stock option plans as of April 30,  2016 and 2015, respectively. Total unrecognized compensation cost will be adjusted for any future changes in estimated and actual forfeitures. There were no capitalized stock-based compensation costs during the periods presented.   

The following table shows the weighted average assumptions used to estimate the fair value of options granted:  

	Nine months ended April 30
	2016			2015
Expected life (years)		n/a			5.0
Risk-free interest rate		n/a			1.7	%
Expected volatility		n/a			63.6	%
Expected forfeiture rate		10.1	%		9.1	%
Expected dividend yield		-			-
Weighted-average estimated
fair value per share of options
granted during the year		n/a		$	1.8
Cash received from the exercise
of stock options	$	67,000		$	83,000

2000 Stock Option Plan 

The Company’s 2000 Stock Option Plan (the “2000 Plan”) had 1,950,000 shares of common stock authorized for issuance. Each incentive stock option that was granted under the 2000 Plan is exercisable for a period of not more than ten years from the date of grant (five years in the case of a participant who is a 10% shareholder of the Company, unless the stock options are nonqualified), or such shorter period as determined by the Compensation Committee, and shall lapse upon the expiration of said period, or earlier upon termination of the participant’s employment with the Company. The 2000 Plan expired on December 13, 2010, at which time it was terminated except for outstanding options. While options previously granted under the 2000 Plan will continue to be effective through the remainder of their terms or until exercised, no new options may be granted under the 2000 Plan. 

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Changes in option shares under the 2000 Plan during the nine months endedApril 30, 2016 were as follows:

	Number of Options	Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Period (Years)	Aggregate Intrinsic Value
Outstanding at 7/31/15	472,250	$	1.52	2.52	$	783,174
Granted	-		n/a	n/a		n/a
Exercised	(36,000)		1.35	n/a		n/a
Forfeited	(1,000)		2.15	n/a		n/a
Outstanding at 4/30/2016	435,250	$	1.53	1.94	$	1,129,764
Exercisable at 4/30/2016	435,250	$	1.53	1.94	$	1,129,764

The range of exercise prices for options outstanding under the 2000 Plan was $0.49 to $2.10 at April 30, 2016.

2010 Equity Incentive Plan 

The Board of Directors adopted the ARI Network Services, Inc. 2010 Equity Incentive Plan (as amended, the “2010 Plan”) on November 9, 2010. The plan was approved by the Company's shareholders in December 2010, and amendments to the 2010 Plan were approved by the Company’s shareholders in January 2014. The 2010 Plan is the successor to the Company’s 2000 Plan. There are 1,850,000 shares of Company common stock authorized for issuance under the 2010 Plan. Potential awards under the 2010 Plan include incentive stock options and non-statutory stock options, shares of restricted stock or restricted stock units, stock appreciation rights (“SARs), and shares of common stock. Up to 1,525,000 of the shares authorized for issuance under the 2010 Plan may be used for common stock, restricted stock or restricted stock unit awards.

The exercise price for options and SARs under the 2010 Plan cannot be less than 100% of the fair market value of the Company’s common stock on the date of grant, and the exercise prices for options and SARs cannot be repriced without shareholder approval, except to reflect changes to the capital structure of the Company as described in the 2010 Plan. The maximum term of options and SARs under the 2010 Plan is 10 years. The 2010 Plan does not have liberal share counting provisions (such as provisions that would permit shares withheld for payment of taxes or the exercise price of stock options to be re-granted under the plan).

Changes in option shares under the 2010 Plan during the nine months endedApril 30, 2016 were as follows:

	Number of Options	Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Period (Years)	Aggregate Intrinsic Value
Outstanding at 7/31/15	434,751	$	2.34	7.47	$	387,964
Granted	-		n/a	n/a		n/a
Exercised	(38,750)		1.39	n/a		n/a
Forfeited	(19,625)		1.86	n/a		n/a
Outstanding at 4/30/2016	376,376	$	2.46	7.14	$	627,665
Exercisable at 4/30/2016	237,003	$	2.15	6.78	$	469,414

The range of exercise prices for options outstanding under the 2010 Plan was $0.59 to $3.61 at April 30, 2016.

Changes in the 2010 Plan's non-vested option shares included in the outstanding shares above during the nine months endedApril 30, 2016 were as follows:

	Number of Options	Wtd. Avg. Exercise Price
Non-vested at 7/31/15	161,498	$	2.99
Granted	-		n/a
Vested	(11,250)		3.28
Forfeited	(10,875)		2.54
Non-vested at 4/30/16	139,373	$	2.99

The weighted average remaining vesting period was 1.58 years at April 30, 2016.

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Employee Stock Purchase Plan 

The Company’s 2000 Employee Stock Purchase Plan, as amended, (“ESPP”) has 575,000 shares of common stock reserved for issuance, of which 300,280and 263,974 of the shares have been issued as of April 30,  2016 and 2015, respectively. All employees with at least six months of service are eligible to participate. Shares may be purchased at the end of a specified period at the lower of 85% of the market value at the beginning or end of the specified period through accumulation of payroll deductions, not to exceed 5,000 shares per employee per year. The Company expensed $15,000 and $29,000during the three and nine months ended April 30, 2016, and $0 during the same periods last year related to the ESPP discount.

Restricted Stock

Up to 1,525,000 of the shares authorized for issuance under the 2010 Plan may be granted in the form of shares of common stock, restricted stock or restricted stock units. The Company grants restricted stock to its directors as an annual retainer, and from time to time to directors, officers or employees as incentive compensation or as discretionary compensation in place of cash. 

The Compensation Committee adopted the Long-Term Executive Bonus Plan (“LTEB”) for eligible executive officers of the Company beginning in fiscal 2013.

In March 2015, the Compensation Committee issued 550,000 shares of restricted stock under the LTEB, which will vest according to the following schedule:

· 30% when the volume weighted average price of the Company’s common stock for the previous 30-day trading period (the “30-day VWAP”) equals or exceeds trades at or above $6.00

· 20% when the 30-day VWAPequals or exceeds $7.00

· 20% when the 30-day VWAPequals or exceeds $8.00

· 30% when the 30-day VWAPequals or exceeds $9.00

Under the plan described above, a target price must be reached within a four-year period starting on the date of grant for any restricted stock to vest. All unvested restricted stock will be forfeited when the four-year period expires. The initial value of the common stock granted under the LTEB was approximately $350,000, valued using a Monte Carlo Simulation with a 46% volatility rate and a 1.34% risk-free interest rate, and is expensed over the vesting period.

Restricted stock granted under the 2010 plan during fiscal 2016 was valued using the market price on the date of grant. The Company recognized compensation expense of $79,000 and $54,000 during the three months ended April 30,  2016 and 2015, respectively, and $227,000 and $195,000 during the nine months endedApril 30, 2016 and 2015, respectively,related to all restricted stock.The remaining balance of unrecognized compensation expense related to restricted stock was $467,000 and $526,000 at April 30, 2016 and 2015, respectively.

Changes in unvested restricted shares of common stock under the 2010 Plan during the nine months endedApril 30,  2016 and 2015 were as follows:

	Nine months ended April 30
	2016	2015
Beginning balance unvested restricted stock	671,211	93,704
Granted	42,359	621,471
Vested	(33,060)	(28,610)
Forfeited	(10,292)	-
Ending balance unvested restricted stock	670,218	686,565

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8. Income Taxes 

The provision for income taxes for the three and nine months endedApril 30, 2016 and 2015 is composed of the following (in thousands): 

	Three months ended April 30				Nine months ended April 30
	2016		2015		2016		2015
Current:
Federal	$	(40)	$	(18)	$	(40)	$	(28)
State		(64)		(11)		(76)		(47)
Change in valuation allowance		—		—		—		17
Deferred, net		(264)		(214)		(856)		(548)
Income tax expense	$	(368)	$	(243)	$	(972)	$	(606)

The provision for income taxes is based on taxes payable under currently enacted tax laws and an analysis of temporary differences between the book and tax bases of the Company’s assets and liabilities, including various accruals, allowances, depreciation and amortization, and does not represent current taxes due. The tax effect of these temporary differences and the estimated benefit from tax net operating losses are reported as deferred tax assets and liabilities in the consolidated balance sheet. We have unused net operating loss carry forwards ("NOLs") for federal income tax purposes and, as a result, we generally only pay alternative minimum taxes at the federal level. We have unused NOLs for state income tax purposes of $12,226,000, most of which have a valuation allowance.

The Company also has NOLs related to tax losses incurred by its Netherlands operation. Under tax laws in the Netherlands, NOLs are able to be carried forward for a period of nine years. The Company has determined that, consistent with prior periods, it is not likely that the net operating losses will be utilized by the Company. This conclusion was primarily based on the negative evidence of a history of losses and expired NOLs related to this entity. In the opinion of the management of the Company, there is not enough positive evidence to overcome this negative evidence. Therefore, a full valuation allowance is recorded, resulting in $0 net deferred tax assets related to the Netherlands operation at April 30, 2016 and 2015.

As of April 30, 2016, the Company had accumulated NOLs for federal, state and international tax purposes of approximately $2,493,000,$12,226,000 and $2,294,000, respectively.

We perform an evaluation of uncertain tax positions as a component of income tax expense on an annual basis. We determined that ARI did not have any significant risk related to income tax expense and therefore no amounts were reserved for uncertain tax positions as of April 30, 2016 and 2015. We will accrue and recognize interest and penalties related to uncertain tax positions as a component of income tax expense if it becomes necessary. Fiscal years subsequent to 2011 remain open and subject to examination by state tax jurisdictions and the United States federal tax authorities.

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our results of operations and financial condition should be read together with our unaudited consolidated financial statements for the three and nine months ended April 30, 2016 and 2015, including the notes thereto, which appear elsewhere in this quarterly report on Form 10-Q. All amounts are in thousands, except per share data. This discussion, including, without limitation, the section titled “Summary of Operating Results”, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). All statements other than statements of historical facts are statements that could be deemed to be forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the markets in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,”  “endeavors,” “strives,” “may,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, estimate, or verify, including those identified in Part I, Item 1A of our annual report on Form 10-K for the year ended July 31, 2015, and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

Overview

ARI Network Services, Inc. offers an award-winning suite of data-driven software tools and marketing services to help dealers, equipment manufacturers and distributors in selected vertical markets Sell More Stuff!™ – online and in-store. Our innovative products are powered by a proprietary data warehouse of enriched original equipment and aftermarket electronic content of OEM parts, aftermarket parts, garments and accessories (“PG&A”) and whole goods from more than 1,800 manufacturers. Business is complicated, but we believe our customers’ technology tools don’t have to be. We remove the complexity of selling and servicing new and used whole goods inventory, and PG&A for customers in the automotive tire and wheel aftermarket (“ATW”), automotive aftermarket parts and service (“AAPS”), powersports, outdoor power equipment (“OPE”), marine, home medical equipment (“HME”), recreational vehicles (“RV”) and appliance industries. More than 23,500 equipment dealers, distributors and manufacturers worldwide leverage our web and eCatalog platforms to Sell More Stuff!™

Our Solutions

We offer software as a service (“SaaS”) and data as a service (“DaaS”) solutions to help our customers Sell More Stuff!™ both online and in-store. Our primary solutions include: (i) Lead Generation and eCommerce Websites, which provide a web presence for dealers and wholesalers, and serve as a platform for driving leads and eCommerce sales; (ii) eCatalogs, which drive sales of inventory and PG&A at the dealer’s parts counter, their online website and other sources through parts lookup of our proprietary data warehouse; (iii) business management software designed to streamline every aspect of a dealer’s operation, drive profitability, and allow them to provide better customer service; and (iv) digital marketing solutions designed to generate leads and drive traffic both to the dealer’s website and brick-and-mortar location.

Our solutions also improve our customers’ overall customer satisfaction through a highly efficient and accurate data lookup experience at the parts counter and a quicker response time to online inquiries, both of which serve to significantly improve a customer’s overall experience with the dealer.

Our SaaS and DaaS solutions are sold through our internal sales force and are composed primarily of recurring licenses and subscriptions and, in the case of business management software, perpetual licenses and maintenance contracts. Customers typically sign annual, auto-renewing contracts. Today, approximately 90% of our revenues are recurring.

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Lead Generation and eCommerce Websites

Our Lead Generation and eCommerce-enabled website solutions provide consumers with information about a dealership and its product lines through our extensive library of electronic catalog content and allow consumers to obtain information on whole goods and purchase PG&A via the dealer’s website 24 hours a day, 7 days a week. Our website solutions are tailored to each of the vertical markets we serve and are tightly integrated with our electronic library of inventory and PG&A content. We offer a full menu of website add-ons including a mobile inventory management application, third-party inventory integrations and business management integrations. Our lead generation tools are designed to efficiently manage and nurture generated leads through email campaigns, automated responses, sales team reminders, and other lead generating activities, increasing conversion rates and ultimately revenues for our customers.

Websites are sold through our inside sales teams, which are aligned by vertical market. The sales process will typically include a live demo of the site and may even include a free trial period (we refer to these as “test drives”). In addition to monthly recurring subscription fees, we may also charge a nominal, one-time setup fee to develop a new dealer website as well as variable transaction fees. Our website solutions are typically sold under one year, renewable contracts with monthly payment terms. We estimate that as of April 30, 2016, we host and maintain more than 7,000 websites for dealers across all of our vertical markets.

eCatalog Platform Solutions

Our eCatalog solutions leverage our industry-leading library of electronic whole goods, aftermarket PG&A and OEM parts content to allow manufacturers, distributors, dealers and consumers to view and interact with this information to efficiently support the sales and service of equipment either in-store or online. We offer a variety of both DaaS and SaaS eCatalog products tailored to the specific industries we serve.

Our eCatalog solutions are sold through our dedicated internal sales team. Fees charged for the use of our eCatalog products include a recurring license fee, subscription fees for subscribed catalogs and, in some cases, page view fees.

Business Management Software

Our business management software solutions are designed to streamline every aspect of a dealer’s operations to allow them to provide improved customer service. These products are sold through our dedicated internal sales team, and fees charged include perpetual one-time license or installation fees, maintenance and support fees, as well as hosting fees for our SaaS version. These solutions are a new offering, as a result of our acquisitions of Tire Company Solutions, LLC (TCS) in September 2014 and TASCO Corporation (TASCO) in April 2015, and are currently only offered in the ATW and AAPS aftermarkets.

Digital Marketing Solutions

ARI complements our suite of data-driven software tools with digital marketing solutions that deliver the engaging experiences that today’s consumers demand. ARI’s digital marketing solutions include search engine optimization, email marketing, social media management, search engine marketing (“PPC”), online reputation management and online directory management to help dealers drive more online leads, eCommerce sales and in-store traffic.

Other Solutions

We also offer a suite of complementary solutions, which include software, website customization, professional services and hosting services.

Our Growth Strategy

ARI’s goal is to become the leading provider of SaaS and DaaS solutions that help our customers efficiently and effectively sell more major units, replacement parts, accessories and service – in other words, to Sell More Stuff!™ Our continued goal is to grow revenues at a double-digit rate and to grow earnings through scalability. We will accomplish this goal by deploying our solutions to dealers, distributors, manufacturers, service providers, and consumers in selected vertical markets where the finished goods are complex equipment, requiring service, that are primarily sold and serviced through an independent dealer channel that typically carries multiple brands. We believe this strategy will drive increased value to our shareholders, employees and customers.

We also believe the execution of the following strategic pillars will enable us to achieve the growth and profitability needed to drive long-term sustainable value for our shareholders. These strategic foundations are primarily centered on enhancing the value

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proposition to our customers, which will lead to additional revenues through pricing actions, product and feature upsells, reduced customer churn rates, and expansion by leveraging our core competencies in new complementary markets. Each of these strategic pillars is a long-term foundation for growth; within each we have established near-term goals, as discussed below.

Drive organic growth through expanded service offerings to grow both our subscriber customer base and our average revenue per dealer.

As a subscription-based, recurring revenue (RR) business, the most important drivers of future growth are nurturing and defending our customer base, developing and selling additional products to our existing customer base and acquiring new customers. We define RR as revenue from products and services which are subscription-based and renewable, including software access fees, data content fees, maintenance and support fees and hosting fees. We define churn as the percentage of RR that does not renew. RR increased 18.8%, or $1,751,000 to 92.2% of total revenue for the quarter ended April 30, 2016, compared to the same period last year, and 22.0% or $5,876,000 to 91.7% of total revenue for the nine months ended April 30, 2016, compared to the same period last year. To experience further growth in RR, we will continue to: 

· Develop and deploy innovative new solutions. We have resources assigned to each of our core products that continue to research and develop new value-added features and functionality for our existing products. The introduction of new solutions, upgrades to existing products, and new feature sets are all designed to grow our average revenue per dealer (“ARPD”), an important measure for a subscription-based business, and the increase in our customer base serves to quickly compound the benefits of an increased ARPD. We have recently released a number of new features, upgrades and products, including the following:

Web Platforms

o Value Your Trade  –we have added a new lead type for powersports, OPE, marine and RV dealers to make it easy for consumers to request a quote for their trade-in and for dealers to capture leads.

o Automated merchandising–we have added technology to ensure that promotions from a dealer's preferred OEMs are automatically kept up-to-date, eliminating the need to manually update each time a promotion expires or is added.

o Dealer Management System Integration – we developed advanced integration capabilities with a leading Dealer Management vendor in the RV industry.

o Point of Sale Integration – we developed an integration to Tire Works HD Wholesale, a popular point of sale offering in the Tire and Wheel industry. This business to business integration allows real time quantity, pricing, and ordering to that system from the web.

o Wheel Visualizer – we developedan integration with a leading wheel visualizer application to offer that service on our web sites increasing the tools we offer on our business to business sites.

o Features and Benefits – we have added real time features and benefits from tire manufacturers to our business to business platform. This allows an end user of the site to see all the available manufacturer information about the tire, not just the technical specs. This is important to dealers and end users as it is one more reason for them to stay on a dealer’s site and not visit another site for this information.

o Price and Quoting Calculator – we released an updated version of our pricing calculator for business-to-consumer sites in the Tire and Wheel industry. The updated tool allows our customers to offer more diverse upsell options to their customers.

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eCatalog Platforms

o Data Manager® Development – we continued development and launched customer Alpha testing of the next generation of Data Manager®, our OEM parts product information management software. This next generation platform is designed to reduce OEM publishing costs and time to market through real-time publishing, ensuring end users have access to the most accurate and rich part and service information across ARI’s software ecosystem.

o AccessorySmart® Development – we developed an enhanced integration with CDK’s Lightspeed Business Management Software, in support of a collaborative sales and marketing program with the powersports market-leading solution provider.

Digital Marketing Services

º New Digital Marketing Services Packages – we recently developed and launched a new set of innovative Digital Marketing Services packages, offering a curated blend of services targeted for unique customer segments that increase business traffic and drive sales opportunities. The new solutions recently earned a prestigious powersports industry award.

These product enhancements are designed to automate and enhance the marketing, sales and servicing activities for our customers, in order to help them sell and service more parts, garments, accessories and whole goods.

· Differentiate our content. We believe we have the largest library of replacement part, major unit, and PG&A content in the vertical markets we serve. However, simply offering the largest content library in the markets we serve is not sufficient to drive the long-term revenue growth we desire. We strive to deliver more value to our customers through enrichment of our content. Content enrichment can take several forms, including the incorporation of user reviews and feedback into our existing content, further enhancing content provided to us by our OEM customers, and creating new forms of content that further our customers’ ability to efficiently service and sell more whole goods and PG&A.

o We secured and authored two new PG&A catalogs.

o We secured and authored one new OEM Parts catalog.

· Enter new markets. ARI currently maintains a significant share in our core vertical markets of OPE, powersports, marine and appliances. Accordingly, we anticipate low single-digit growth in these markets. ARI maintains a lower share in our growth vertical markets of HME, ATW and AAPS. Accordingly, we anticipate double-digit growth in these markets. As we continue to increase our share in our current markets, leveraging our technology in new and underserved markets will be important to maintaining substantial organic growth rates. Including the acquisition of TCS, ARI currently has more than 3,000 dealer websites in the ATW market. We estimate that the total market approximates 18,000 dealers. Further, the broader AAPS market, which we entered via our acquisition of DCi, comprises nearly 80,000 independent service providers, more than all of our other markets combined. We intend to continue to invest heavily in this growth market, including seeking opportunities to leverage our products and services in the broader AAPS. We are one of the first website providers to service the HME market. We estimate that this market comprises nearly 25,000 service providers, and believe the market to be in an early stage with respect to eCommerce adoption.

· Expand geographically. Although we maintain relationships with dealers throughout the world, we have low penetration into international markets. Growing our international business will require us to secure and publish electronic content from OEMs outside the U.S. and make changes to our existing products that will allow us to rapidly deploy these products in a scalable and efficient manner, without the need to have “boots on the ground” in those countries.

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Nurture and retain existing customers through world-class customer service and value-added product feature updates.

In order to achieve sustained double-digit growth, we not only need to execute the growth strategies described above, we must also retain our existing customers. In a SaaS business, the cost to retain an existing customer is much less than the cost to acquire a new customer. Accordingly, customer churn is an important metric we track and manage. We experienced improvements in our churn rates the past several years as a result of strategic actions taken by the Company, all of which are designed to enhance the “stickiness” of our product within our customers’ operations. On a trailing twelve month basis, churn was 16.2% for the period endedApril 30, 2016, compared to 14.5% for the same period last year. The increase was due to the termination of  amaintenance and support agreement for a multi-location ATW customer who was recently acquired, termination of a large license arrangement with an OEM, price increases and migrations for some legacy customers who had heavily discounted pricing and were on old billing models, and the growth in website revenue which tends to have a higher churn rate. We will continue to leverage our relationships with existing customers and closely monitor and manage the level of customer churn.

Lead the market with open integration to related platforms.

One of our strategic advantages is our focus on integrating our solutions with dealer business management systems (“DMS”) in order to pass key information, including customer and transactional data, between our solutions and the DMS, saving our customers valuable time and eliminating redundant data entry. The Company recently signed an exclusive reseller agreement with CDK Global Recreation, the provider of Lightspeed,a  renowned DMS in the powersports industry. They have integrated ARI’s AccessorySmart® into their DMS, which will automatically offer our product to their customers. We currently have integration capabilities with over 85 DMS’s (we refer to these relationships as “Compass Partners”), and we continue to seek other strategic alliances that can be integrated with our product and service offerings.

Successfully execute acquisitions that align with our core strategy

Since 1995, we have had a formal corporate development program aimed at identifying, evaluating, and closing acquisitions that align with our strategy. We focus on vertically-oriented markets with a large base of independent, multi-line dealers that sell and service complex equipment. Our strategy is to acquire companies that have one or more of the following attributes: (i) expand our market share in existing verticals; (ii) expand into new markets that fit our desired profile; (iii) provide us with complementary products which can be cross-sold to our existing customer base; (iv) provide opportunities to crosssell our existing products; and (v) can be integrated into our operations, thereby creating cost-saving synergies.

Since the program’s inception, we have closed 16 acquisitions. A summary of some of our most recent acquisitions is as follows:

Acquisition	Date	Strategy
Direct Communications Inc.	July 2015	▪	A leading provider of electronic catalog and content in the AAPS industry
TASCO Corporation (and affiliated Signal	April 2015	▪	Extend business management software platform in the ATW market
Extraprise Corporation)
Tire Company Solutions, LLC	September 2014	▪	Consolidate website position and add new business management software
			in the ATW market
DUO Web Solutions	November 2013	▪	A leading provider of social media and online digital marketing services in the
			powersports industry
50 Below Sales & Marketing, Inc.	November 2012	▪	A market leader in the powersports industry
(Retail Division)		▪	Entrance into ATW and DME industries
		▪	New award-winning website platform
Ready2Ride, Inc.	August 2012	▪	First of its kind aftermarket fitment data for the powersports industry

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Acquisitions

On July 13, 2015, the Company acquired substantially all of the assets of DCi, a leading provider of differentiated product content and electronic catalog software serving manufacturers, distributors, jobbers and independent retailers in AAPS. Consideration for the acquisition included: (1) a cash payment equal to $3,750,000; (2) 159,795 shares of the Company’s common stock; and (3) the issuance of a promissory note in principal amount of $2,000,000 to DCi. The principal amount of the DCi Note was reduced by approximately $64,000 as a result of post-closing adjustments to the valuation of the net assets acquired, pursuant to the terms of the asset purchase agreement.

On April 27, 2015, the Company acquired substantially all of the assets of TASCO, a leading provider of business management software designed exclusively for the automotive ATW aftermarket industry. Consideration for the acquisition included: (1) a cash payment at the closing of the transaction equal to $1,750,000; (2) 242,424 shares of the Company’s common stock; and (3) a $200,000 holdback payable on April 27, 2016. The holdback amount was reduced by approximately $62,000 as a result of post-closing adjustments to the estimated valuation of the net assets acquired, pursuant to the terms of the asset purchase agreement.

On September 30, 2014, the Company acquired substantially all of the assets of TCS, a leading provider of software, websites and marketing services designed exclusively for the automotive ATW vertical. Consideration for the acquisition included: (1) a cash payment equal to $4,200,000; (2) 618,744 shares of the Company's common stock; (3) the issuance of two promissory notes initially in aggregate principal amount of $2,933,000 (as adjusted) to the former owners of TCS; and (4) a contingent earn-out purchase price payable in three potential payments and contingent upon the attainment of specific revenue goals. The earn-out, with an original fair value of $711,000, was amended in March 2016 to four quarterly payments of $120,905, which commenced in December 2016, followed by four quarterly payments of $70,000.

The Company’s strategy is to integrate the sales teams from acquisitions as quickly as possible in order to realize cross-selling synergies. As a result, we do not track revenues and costs specific to the individual acquired businesses.

Summary of Operating Results

Total revenue increased 16.6%, or $1,704,000, to $11,984,000 for the three months ended April 30, 2016 from $10,280,000 for the same period last year. Year-to-date revenue increased 20.1% or $5,942,000 to $35,473,000, compared to $29,531,000 for the same period last year. Recurring revenue increased 18.8% to $11,053,000 during the three months ended April 30, 2016 and 22.0% to $32,531,000 during the nine months ended April 30, 2016, compared to $9,302,000 and $26,655,000, respectively, during the same periods last year. Recurring revenue constituted 91.7% of our total revenue for the nine months ended April 30, 2016 compared to 90.3% for the same period last year. The growth in year-over-year total revenue was attributable to incremental revenue from the TCS business acquired in September 2014, the TASCO business acquired in April 2015 and the DCi business acquired in July 2015, as well as organic growth in revenue from ARI’s historical products, primarily in the lead generation and eCommerce solutions. Growth was also driven by organic growth in the acquired TCS business. 

Operating income increased 36.4%, or $246,000, from $675,000 for the three months ended April 30, 2015 to $921,000 for the same period this year and increased 59.8% or $974,000 from $1,628,000 for the nine months ended April 30, 2015 to $2,602,000 for the same period this year. Net operating expenses increased 11.6% or $904,000during the three month period ended April 30, 2016, compared to the same period last year, primarily due to the additional costs of the DCi and TASCO operations. Net operating expenses increased 17.3% or $3,892,000 during the nine months ended April 30, 2016, compared to the same period last year, primarily due to the additional costs of the DCi and TASCO operations and nine months of TCS operations in fiscal 2016, compared to seven months last year. 

Net income was $448,000, or $0.03 per share, for the three months ended April 30, 2016, compared to $339,000, or $0.02 per share, for the same period last year. Net income for the nine months ended April 30, 2016 was $1,285,000, or $0.07 per share, compared to $703,000, or $0.05 per share, for the same period last year.

Cash provided by operations increased 20.6% to  $5,543,000 for the nine months ended April 30, 2016 compared to $4,595,000 for the same period last year, primarily as a result of revenue growth and operational efficiencies.

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Revenue

The following table summarizes our product revenue and RR and non-recurring revenue (in thousands):

	Three months ended April 30										Nine months ended April 30
	2016		% of Total		2015		% of Total		% Change		2016		% of Total		2015		% of Total		% Change
Lead Generation and eCommerce Websites	$	6,056	50.5	%	$	5,813	56.5	%	4.2	%	$	17,800	50.2	%	$	16,351	55.4	%	8.9	%
eCatalog Services		4,475	37.3	%		3,376	32.8	%	32.6	%		13,435	37.9	%		10,300	34.9	%	30.4	%
Business Management Software		706	5.9	%		602	5.9	%	17.3	%		2,382	6.7	%		1,135	3.8	%	109.9	%
Digital Marketing Solutions		529	4.4	%		325	3.2	%	62.8	%		1,266	3.6	%		896	3.0	%	41.3	%
Other Revenue		218	1.8	%		164	1.6	%	32.9	%		590	1.7	%		849	2.9	%	(30.5)	%
Total revenue	$	11,984	100.0	%	$	10,280	100.0	%	16.6	%	$	35,473	100.0	%	$	29,531	100.0	%	20.1	%
Recurring revenue		11,053	92.2	%		9,302	90.5	%	18.8	%		32,531	91.7	%		26,655	90.3	%	22.0	%
Non-recurring revenue		931	7.8	%		978	9.5	%	(4.8)	%		2,942	8.3	%		2,876	9.7	%	2.3	%
Total revenue	$	11,984	100.0	%	$	10,280	100.0	%	16.6	%	$	35,473	100.0	%	$	29,531	100.0	%	20.1	%

Total revenue increased 16.6% to $11,984,000 and 20.1% to $35,473,000, for the three and nine months ended April 30, 2016, respectively, compared to the same periods last year. RR increased 18.8% to $11,053,000 and 22.0% to $32,531,000 for the three and nine months ended April 30, 2016, respectively, compared to the same periods last year. RR represented 91.7% of total revenue for the first nine months of fiscal 2016, versus 90.3% for the same period in fiscal 2015. We continue to focus on maintaining recurring revenue of over 90%.

Lead Generation and eCommerce Website Revenue

Our lead generation and eCommerce website solutions generate revenue from one-time setup and customization fees to develop new dealer websites, which is recognized ratably over the term of the contract, monthly recurring subscription fees and variable transaction fees. Our lead generation and eCommerce website solutions are typically sold as one year, renewable contracts with monthly payment terms. We estimate that we currently host and maintain more than 7,000 websites for dealers in all of our vertical markets. Lead generation and eCommerce website solutions have become ARI’s largest source of revenue and accounted for 50.2% of total revenue during the nine months ended April 30, 2016. Lead generation and eCommerce revenue increased 4.2% to $6,056,000 for the three months ended April 30, 2016, compared to the same period last year as a result of organic growth. Lead generation and eCommerce revenue increased 8.9% to $17,800,000 for the nine months ended April 30, 2016, compared to the same period last year as a result of both organic growth and our acquisition of TCS in September 2014. We anticipate that our web platforms will continue to be one of the Company’s largest sources of revenue growth.

eCatalog Revenue

Our eCatalog solutions generate revenue from renewable subscription fees for our software, data content, software maintenance and support fees and software customization fees. eCatalog is our second largest source of revenue, representing 37.9% of total revenue during the nine months ended April 30, 2016. eCatalog revenue increased 32.6% to $4,475,000 during the three months ended April 30, 2016 and 30.4% to $13,435,000 during the nine months ended April 30, 2016, compared to the same periods last year, primarily due to our acquisition of DCi in July 2015. The catalog content provided in our eCatalog solutions helps to drive sales growth in our website and lead management solutions, as well as continuing to drive organic growth in other areas of the business. 

Business Management Software

Business management software revenue is generated from perpetual one-time license and installation fees for our new business management software, along with recurring maintenance, support and hosting fees. These products were acquired as part of the TASCO and TCS acquisitions. Business management software revenue increased 17.3% from $602,000 for the three months ended April 30, 2015 to $706,000 for the same period this year. Business management software revenue more than doubled from $1,135,000 for the nine months ended April 30, 2015 to $2,382,000 for the same period this year. Revenue from business management software represented 6.7% of total revenue for the nine months ended April 30, 2016. The increase in business management software revenue is primarily a result of revenue from the newly acquired TASCO product in April 2015, as well as organic growth in the business management software segment acquired through TCS.

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Digital Marketing Revenue

Revenues from our digital marketing solutions are generated from set-up fees and subscription fees for our search engine optimization, social media marketing and website enhancement tools. Total digital marketing revenue increased 62.8% to $529,000 and 41.3% to $1,266,000 during the three and nine months ended April 30, 2016, compared to the same periods last year.The increase was primarily due to a targeted digital marketing campaign we recently ran in ATW, as well as early success with our new Digital Marketing packages. We expect digital marketing revenue to continue to increase over the prior year as we continue to grow this business. 

Other Revenue

We also offer a suite of complementary solutions, which include software and website customization services, perpetually licensed software and hosting services. Other revenue, which is primarily non-recurring in nature, increased 32.9% to $218,000 during the three months ended April 30, 2016, compared to the same period last year.Other revenue decreased 30.5% to $590,000 during the nine months ended April 30, 2016, compared to the same period last year. The decrease in other revenue is principally due to a large one-time professional service contract with one of our major manufacturers resulting in significant revenue during fiscal 2015.

Recurring Revenue

RR is one of the most important growth drivers of our business. Increasing the percentage of our revenues that are recurring, while at the same time reducing the rate of customer churn, enhances our ability to generate profitable growth. Our subscription-based SaaS and DaaS products generate higher margins than our non-recurring products and services, and the incremental cost of selling these products to new dealers (we refer to these as new “logos”) is relatively low. Reducing the rate of our customer churn, which is the percentage of RR that does not renew, helps drive organic growth as it allows for a greater percentage of our new logos to be incremental to the top line (versus making up for lost logos) and also increases the base upon which we can apply price increases and sell additional products and features.

We generate RR from each of our primary product categories from monthly license, subscription, maintenance and support fees. RR increased 18.8%, or $1,751,000 and 22.0% or $5,876,000 for the three and nine months ended April 30, 2016, respectively, compared to the same periods last year. The growth in RR was primarily attributable to both the addition of RR from our acquisitions of TCS, TASCO and DCi and organic growth. We expect RR to continue to grow over the prior year comparable periods for the remainder of fiscal 2016.

Non-recurring Revenue

Non-recurring revenue is generated from one-time perpetual license fees from our business management offerings, certain offerings within the Company’s digital marketing solutions, professional services related to software customization and data conversion, usage fees charged on our RR products, set-up fees and other complementary products and services. Total non-recurring revenue was $931,000 and $2,942,000 for the three and nine months ended April 30, 2016, respectively, versus $978,000 and $2,876,000 for the same periods last year. The fluctuations in non-recurring revenue are primarily due to the timing of non-recurring perpetual license revenue for our business management offerings.

Our goal is to maintain non-recurring revenue of less than 10% of total revenue, as the margin on this revenue tends to be lower than our RR products. Furthermore, non-recurring revenue must be resold each year. 

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Cost of Revenue and Gross Margin

We classify as cost of revenue those costs directly attributable to the provision of services. These costs include (i) software amortization, which represents the periodic amortization of costs for internally developed or purchased software sold to customers; (ii) direct labor for the provision of catalog production, product implementations and professional services revenue; and (iii) other direct costs, which represent amounts paid to third-party vendors for data royalties, as well as data conversion and replication fees directly attributable to the services we provide our customers.

The table below breaks out cost of revenue into each of these three categories (in thousands):

	Three months ended April 30										Nine months ended April 30
			% of				% of						% of				% of
	2016		Revenue		2015		Revenue		% Change		2016		Revenue		2015		Revenue		% Change
Net revenues	$	11,984			$	10,280			16.6	%	$	35,473			$	29,531			20.1	%
Cost of revenues:
Amortization of capitalized software costs		530	4.4	%		458	4.5	%	15.7	%		1,570	4.4	%		1,560	5.3	%	0.6	%
Direct labor		791	6.6	%		613	6.0	%	29.0	%		2,059	5.8	%		1,612	5.5	%	27.7	%
Other direct costs		1,013	8.5	%		709	6.9	%	42.9	%		2,838	8.0	%		2,219	7.5	%	27.9	%
Total cost of revenues		2,334	19.5	%		1,780	17.3	%	31.1	%		6,467	18.2	%		5,391	18.3	%	20.0	%
Gross profit	$	9,650	80.5	%	$	8,500	82.7	%	13.5	%	$	29,006	81.8	%	$	24,140	81.7	%	20.2	%

Gross profit was $9,650,000 or 80.5% of revenue for the three months ended April 30, 2016, compared to $8,500,000 or 82.7% of revenue for the same period last year. Amortization of capitalized software costs as a percentage of revenue decreased for the three and nine months ended April 30, 2016, compared to the same periods last year, primarily due to revenue increasing at a faster rate than software amortization costs. Direct labor costs as a percentage of revenue increased for the three and nine months ended April 30, 2016, compared to the same periods last year primarily due to:(i) an increase in our digital marketing revenue, which has higher direct costs than our other products; (ii) an increase in website implementations; and (iii) the migration of customer websites in an effort to consolidate our customers to the product most suited to their industry and consolidate our website platforms, which is not a recurring cost. Other direct costs as a percentage of revenue increased for the three and nine months ended April 30, 2016, compared to the same period last year,  primarily due to increased third party costs associated with our digital marketing offerings, increases in third party labor related to professional services, and fees paid to outside contractors for assistance with the website migrations. The Company expects fluctuations in gross margin from quarter to quarter and year over year based on the mix of products sold.

Operating Expenses

We categorize net operating expenses as follows:

· Sales and marketing expenses consist primarily of personnel and related costs, including commissions for our sales and marketing employees, and the cost of marketing programs and trade show attendance;

· Customer operations and support expenses are composed of our computer hosting operations, software maintenance agreements for our core network and personnel and related costs for operations and support employees;

· Software development and technical support expenses are composed primarily of personnel and related costs; we capitalize certain of these costs in accordance with GAAP, which is discussed below, while the remaining costs are primarily related to technical support and research and development;

· General and administrative expenses primarily consist of personnel and related costs for executive, finance, human resources and administrative personnel, legal and other professional fees and other corporate expenses and overhead;

· Depreciation and amortization expenses consist of depreciation on fixed assets, which are composed of leasehold improvements and information technology assets, and the amortization of acquisition-related intangible assets. Costs associated with the amortization of software products are a component of cost of revenue; and

· We allocate certain shared costs among the various net operating expense classifications. Allocated costs include facilities, insurance, internal software and telecommunications. These costs are generally allocated based on headcount, unless circumstances dictate otherwise. All public company costs, including legal and accounting fees, investor relations costs, board fees and directors and officers liability insurance, remain in general and administrative.

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The following table summarizes our operating expenses by expense category (in thousands):

	Three months ended April 30										Nine months ended April 30
			% of				% of		%				% of				% of		%
	2016		Revenue		2015		Revenue		Change		2016		Revenue		2015		Revenue		Change
Sales and marketing	$	2,801	23.4	%	$	2,718	26.4	%	3.1	%	$	8,314	23.4	%	$	7,928	26.8	%	4.9	%
Customer operations and support		2,374	19.8	%		1,831	17.8	%	29.7	%		7,248	20.4	%		5,392	18.3	%	34.4	%
Software development and technical support		1,221	10.2	%		1,102	10.7	%	10.8	%		3,795	10.7	%		3,046	10.3	%	24.6	%
General and administrative		1,732	14.5	%		1,709	16.6	%	1.3	%		5,247	14.8	%		4,901	16.6	%	7.1	%
Depreciation and amortization (1)		601	5.0	%		465	4.5	%	29.2	%		1,800	5.1	%		1,245	4.2	%	44.6	%
Net operating expenses	$	8,729	72.8	%	$	7,825	76.1	%	11.6	%	$	26,404	74.4	%	$	22,512	76.2	%	17.3	%

(1) Exclusive of amortization of software products of $531,  $458, $1,571 and $1,560 for the three and nine months endedApril 30, 2016 and 2015, respectively, which are included in cost of revenue.

Net operating expenses increased 11.6% or $904,000 and 17.3% or $3,892,000 for the three and nine months ended April 30, 2016, respectively, compared to the same period last year. The Company acquired the net assets of TCS in September 2014, TASCO in April 2015 and DCi in July 2015. The increase in net operating expenses was primarily due to the operating costs of these acquisitions during the first nine months of fiscal 2016, while there were no operating costs for TASCO and DCi, and only seven months of TCS operations during the same period in fiscal 2015. Net operating expenses as a percentage of revenue decreased from 76.2% for the nine months ended April 30, 2015 to 74.4% for the same period this year. Management expects net operating expenses to continue to decline as a percentage of total revenue to the extent the Company continues to make progress in its integration of the TCS, TASCO and DCi operations and, to the extent the Company can leverage growth in its core RR products, as incremental costs related to these products decrease for every dollar of new revenue.

Sales and Marketing

Sales and marketing expense increased 3.1%, or $83,000 and 4.9% or $386,000 during the three and nine months ended April 30, 2016, respectively, compared to the same periods last year. The increase was primarily a result of the expenses associated with the TCS and DCi operations. Sales and marketing expense as a percentage of revenue decreased from 26.8% of revenue for the nine months ended April 30, 2015 to 23.4% for the same period in fiscal 2016. This decrease is due to the growth in our RR base, which requires much less resources to renew. Management expects sales and marketing expense as a percentage of revenue to fluctuate quarter to quarter, based upon the timing of the Company’s marketing events and trade show schedule and its decision to add additional sales and marketing resources to drive organic revenue growth.

Customer Operations and Support

Customer operations and support expense increased 29.7% or $543,000 and 34.4%, or $1,856,000, during the three and nine months ended April 30, 2016, respectively, compared to the same periods last year. The increase was primarily a result of the expense associated with the TCS, TASCO and DCi operations. Customer operations and support expense as a percentage of revenue increased from 18.3% of revenue for the nine months ended April 30, 2015 to 20.4% during the nine months ended April 30, 2016. The customer operations and support functions of an acquired business typically take longer to fully integrate due to merging software platforms, help desks and customer hosting systems in order to operate more efficiently. Management expects customer operations and support expenses to continue to increase during fiscal 2016, compared to the prior year, due to the additional costs associated with the acquisitions, but to decline as a percentage of revenue over time, as we continue to integrate these areas into our operations, while RR continues to grow.

Software Development and Technical Support

Our software development and technical support staff have three essential responsibilities for which the accounting treatment varies depending upon the work performed: (i) costs associated with internal software development efforts (after technological feasibility is established) are capitalized as software product costs and amortized over the estimated useful life of the product; (ii) costs for professional services performed for customers related to software customization projects are classified as cost of revenue; and (iii) all other activities, including research and development, are considered operating expenses and included within the software development and technical support operating expense category.

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Software development and technical support costs increased 10.8%, or $119,000, during the three months ended April 30, 2016 versus the same period last year and 24.6%, or $749,000, during the nine months ended April 30, 2016 versus the same period last year. The increase was primarily a result of the additional development staff associated with the TCS acquisition and additional capacity related to the Company’s continued focus on developing features and enhancement to reduce churn.

During the three and nine months ended April 30, 2016, we capitalized $370,000 and $928,000, respectively, of software development labor, overhead and interest expense, versus $248,000 and $761,000 during the same periods last year. In addition to internal capitalized software costs, we had outsourced capitalized development costs of $113,000 and $382,000 during the three and nine months ended April 30, 2016, respectively, and $32,000 and $234,000 during the same periods last year. During the three and nine months ended April 30, 2016, we devoted resources to several new enhancements of our website and eCatalog products.

We expect fluctuations in the percentage of software development and technical support costs classified as operating expenses from period to period, based on the mix of research and prototype work versus capitalized software development and professional services activities. 

General and Administrative

General and administrative expense increased 1.3%, or $23,000, and 7.1%, or $346,000, during the three and nine months ended April 30, 2016, respectively, compared to the same periods last year. The increase was primarily a result of the additional headcount from the TCS and DCi acquisitions. General and administrative expense as a percentage of revenue decreased from 16.6% of revenue for the nine months ended April 30, 2015 to 14.8% for the same period in fiscal 2016. Management expects general and administrative expense as a percentage of revenue to decrease over time as we continue to scale the business, although additional acquisitions or other transactions could result in elevated general and administrative expense in future periods.

Other Income and Expense

The table below summarizes the components of other income and expenses (in thousands):

	Three months ended April 30						Nine months ended April 30
	2016		2015		% Change		2016		2015		% Change
Interest expense	$	(118)	$	(123)	(4.1)	%	$	(350)	$	(352)	(0.6)	%
Other, net		13		30	(56.7)	%		5		33	(84.8)	%
Total other income (expense)	$	(105)	$	(93)	12.9	%	$	(345)	$	(319)	8.2	%

Interest expense is composed of both interest paid on the Company’s debt financing arrangements and amortization of non-cash interest charges related to deferred finance costs and imputed interest on contingent liabilities. Interest and other expense increased 12.9% or $12,000, and 8.2% or $26,000 during the three and nine months ended April 30, 2016, respectively, compared to the same periods last year, primarily as a result of additional debt obligations and contingent liabilities to partially fund the TCS and DCi acquisitions.

Income Taxes

The Company has net deferred tax assets of $4,630,000 as of April 30, 2016, primarily consisting of net operating loss carryforwards (“NOLs”) and book to tax temporary differences. Income tax expense is provided for at the applicable statutory tax rate applied to current U.S. income before taxes, plus or minus any adjustments to the deferred tax assets and to the estimated valuation allowance against deferred tax assets. Income tax expense, if any, does not represent a significant current cash obligation, as we continue to have NOLs to offset substantially all of the taxable income. 

We had income tax expense of $368,000 and $972,000 during the three and nine months ended April 30, 2016, respectively, compared to $243,000 and $606,000 during the same periods last year. We paid income taxes of $45,000 and $25,000 during the nine months ended April 30, 2016 and 2015, respectively, primarily related to statutory alternative minimum taxes. Income tax expense may vary from period to period as we continue to evaluate the valuation allowance against net deferred tax assets.

We also have NOLs related to tax losses incurred by our Netherlands operation. We have determined that, consistent with prior periods, it is not likely that the net operating losses will be utilized and therefore, a full valuation allowance is recorded, resulting in $0 net deferred tax assets related to the Netherlands operation at April 30, 2016 and 2015.

31

Adjusted EBITDA

EBITDA is calculated as net income adjusted to exclude interest, amortization, depreciation and income tax expense. Adjusted EBITDA further eliminates non-cash, stock-based compensation expense. Management believes Adjusted EBITDA is helpful in understanding period-over-period operating results separate and apart from non-operating expenses and expenses pertaining to prior period investing activities, particularly given the Company’s significant investments in capitalized software and its continuing efforts in completing acquisitions, which typically result in significant non-cash depreciation and amortization expense in subsequent periods. However, Adjusted EBITDA has significant limitations as an analytical tool and should only be used cautiously in addition to, and never as a substitute for, operating income, cash flows or other measures of financial performance prepared in accordance with generally accepted accounting principles and may not necessarily be comparable to similarly titled measures of other companies.

The table below presents the reconciliation of net income to EBITDA and Adjusted EBITDA (in thousands):

	Three months ended April 30						Nine months ended April 30
	2016			2015			2016			2015
Net income (loss)	$	448		$	339		$	1,285		$	703
Interest		118			123			350			352
Amortization included in cost of sales		531			458			1,571			1,560
Depreciation and amortization		601			465			1,800			1,245
Loss on impairment of long-lived assets		-			-			-			-
Income taxes		368			243			972			606
EBITDA	$	2,066		$	1,628		$	5,978		$	4,466
Stock-based compensation expense		113			95			316			305
Adjusted EBITDA	$	2,179		$	1,723		$	6,294		$	4,771
Revenue	$	11,984		$	10,280		$	35,473		$	29,531
Adjusted EBITDA as a % of revenue		18.2	%		16.8	%		17.7	%		16.2	%

Adjusted EBITDA increased 26.5%, from $1,723,000 during the third quarter of fiscal 2015, to $2,179,000 during the third quarter of fiscal 2016. Adjusted EBITDA increased 31.9%, from $4,771,000 during the nine months ended April 30, 2015, to $6,294,000 during the same period this year. Adjusted EBITDA as a percentage of revenue increased from 16.2% during the nine months ended April 30, 2015, to 17.7% during the same period this year. The increase was primarily due to the improvement in operating income. Management expects adjusted EBITDA as a percentage of revenue to increase during fiscal 2016, versus fiscal 2015, to the extent earnings continue to increase as a result of RR growth and as the Company recognizes a full year of earnings related to its recent acquisitions and an increase in the add back for depreciation and amortization expense. 

Liquidity and Capital Resources

The following table sets forth certain cash flow information derived from our unaudited financial statements (in thousands):

	Nine months ended April 30
	2016		2015		Change
Net cash provided by operating activities	$	5,543	$	4,595	$	948
Net cash used in investing activities		(2,372)		(7,558)		5,186
Net cash provided by (used in) financing activities		(1,011)		3,339		(4,350)
Effect of foreign currency exchange rate changes on cash		(4)		(23)		19
Net change in cash	$	2,156	$	353	$	1,803
Cash at end of period	$	4,440	$	2,161	$	2,279

We generated $2,156,000 of net cash during the nine months ended April 30, 2016, compared to $353,000 during the same period last year. We generated net cash from operating activities of $5,543,000 during the nine months ended April 30, 2016 compared to $4,595,000 during the same period last year. This increase in cash generated from operations was primarily due to increased pre-tax profitability.

32

Cash used in investing activities decreased $5,186,000 for the nine months ended April 30, 2016, compared to the same period last year, primarily due to the businesses we acquired in fiscal 2015. We paid cash of $505,000 for contingent liabilities related to our acquisitions, capitalized $1,310,000 of software development costs, and acquired technology equipment of $557,000 during the nine months ended April 30, 2016. We paid cash of $5,950,000 as consideration for the TCS and TASCO acquisitions, paid $250,000 for contingent liabilities, capitalized $1,000,000 of software development costs, acquired technology equipment of $469,000, and received $111,000 from an earn-out receivable during the nine months ended April 30, 2015. We will continue to invest cash in the business to further our growth strategies previously discussed.

Net cash used in financing activities was $1,011,000 during the nine months ended April 30, 2016, primarily to pay down the SVB note, the TCS notes and our capital lease obligations. Net cash provided from financing activities was $3,339,000 during the nine months ended April 30, 2015, as the Company increased its senior debt, as described below, by $3,000,000 to partially fund the TCS acquisition in September 2014. 

Management believes that current cash balances and its ability to generate cash from operations are sufficient to fund our needs over the next twelve months, although additional financing may be necessary if the Company were to complete a material acquisition or to make a large investment in its business.

Debt

The Company has a Loan and Security Agreement (the “Agreement”) with Silicon Valley Bank (“SVB”), pursuant to which SVB extended to the Company credit facilities consisting of a $3,000,000 revolving credit facility with a maturity date of September 30, 2016 and a $6,050,000 term loan with a maturity date of September 30, 2019. In addition to this, the Company has issued several promissory notes in connection with its acquisitions. See Note 3 to the consolidated financial statements for further details. The following table summarizes the Company’s outstanding debt obligations as of April 30, 2016 (in thousands):

	SVB Term Note		TCS Notes			DCi Notes		Total Notes Payable
2016	$	151	$	234	$	—	$	385
2017		832		965		620		2,417
2018		1,134		1,014		645		2,793
2019		1,211		261		671		2,143
2020		1,815		—		—		1,815
	$	5,143	$	2,474	$	1,936	$	9,553

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Not Applicable.

Item 4.  Controls and Procedures

The Company has established disclosure controls and procedures to ensure that material information relating to it, including its consolidated subsidiaries, is made known on a timely basis to the officers who certify our financial reports and to other members of senior management and the Board of Directors.

The Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, the Company’s disclosure controls and procedures are effective (1) in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and (2) to ensure that information required to be disclosed in the reports it files or submits under the Exchange Act is accumulated and communicated to its management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

33

There have not been any changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the quarter ended April 30, 2016 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

From time to time, the Company may be involved in litigation relating to claims arising out of its operations in the usual course of business. No material legal proceedings to which the Company is a party exist at April 30, 2016. 

Item 1A.  Risk Factors

The Company’s risks and uncertainties are described in Part I, Item 1A of the Company’s annual report on Form 10-K for the fiscal year ended July 31, 2015. There have been no significant changes to the risks described in our Form 10-K.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.  Defaults upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

Not applicable.

Item 6.  Exhibits

31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

32.1 Section 1350 Certification of Chief Executive Officer.

32.2 Section 1350 Certification of Chief Financial Officer.

34

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 14th day of June, 2016.

ARI NETWORK SERVICES, INC.

(Registrant)

By:	/s/ Roy W. Olivier_
	Roy W. Olivier
	President and Chief Executive Officer
By:	/s/ William A. Nurthen _
	William A. Nurthen
	Vice President of Finance and Chief Financial Officer

35

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Roy W. Olivier, certify that:

1.I have reviewed this quarterly report on Form 10-Q of ARI Network Services, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of anannual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:  June 14, 2016

/s/ Roy W. Olivier

Roy W. Olivier
President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, William A. Nurthen, certify that:

1.I have reviewed this quarterly report on Form 10-Q of ARI Network Services, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:  June 14, 2016

/s/ William A. Nurthen

William A. Nurthen
Vice President of Finance and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATIONS

I, Roy W. Olivier, certify that:

1.I have reviewed this quarterly report on Form 10-Q of ARI Network Services, Inc. (the “Company”);

2.Based on my knowledge, this quarterly report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

Dated:  June 14, 2016

/s/ Roy W. Olivier

Roy W. Olivier
President and Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATIONS

I, William A. Nurthen, certify that:

1.I have reviewed this quarterly report on Form 10-Q of ARI Network Services, Inc. (the “Company”);

2.Based on my knowledge, this quarterly report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

Dated:  June 14, 2016

/s/ William A. Nurthen

William A. Nurthen
Vice President of Finance andChief Financial Officer

XML

Document And Entity Information - shares	9 Months Ended
	Apr. 30, 2016	Jun. 08, 2016
Document And Entity Information [Abstract]
Entity Registrant Name	ARI NETWORK SERVICES INC /WI
Entity Filer Category	Smaller Reporting Company
Entity Central Index Key	0000879796
Trading Symbol	aris
Amendment Flag	false
Document Type	10-Q
Document Fiscal Period Focus	Q3
Document Period End Date	Apr. 30, 2016
Document Fiscal Year Focus	2016
Current Fiscal Year End Date	--07-31
Entity Common Stock, Shares Outstanding		17,265,315

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Apr. 30, 2016	Jul. 31, 2015
ASSETS
Cash and cash equivalents	$ 4,440	$ 2,284
Trade receivables, less allowance for doubtful accounts of $392 and $372 at April 30, 2016 and July 31,2015, respectively	2,294	2,046
Work in process	185	165
Prepaid expenses and other	851	820
Deferred income taxes	3,495	3,092
Total current assets	11,265	8,407
Equipment and leasehold improvements:
Computer equipment and software for internal use	3,502	2,800
Leasehold improvements	629	629
Furniture and equipment	2,716	2,981
Total equipment and leasehold improvements	6,847	6,410
Less accumulated depreciation and amortization	(4,637)	(3,989)
Net equipment and leasehold improvements	2,210	2,421
Capitalized software product costs:
Amounts capitalized for software product costs	27,006	25,463
Less accumulated amortization	(21,908)	(20,337)
Net capitalized software product costs	5,098	5,126
Deferred income taxes	1,135	2,398
Other intangible assets	8,275	10,116
Goodwill	21,639	21,168
Total non-current assets	38,357	41,229
Total assets	49,622	49,636
LIABILITIES
Current portion of long-term debt	2,172	1,338
Current portion of contingent liabilities	382	754
Accounts payable	574	708
Deferred revenue	7,135	7,327
Accrued payroll and related liabilities	1,979	1,752
Accrued sales, use and income taxes	182	140
Other accrued liabilities	736	748
Current portion of capital lease obligations	56	174
Total current liabilities	13,216	12,941
Long-term debt	7,281	9,079
Long-term portion of contingent liabilities	124	362
Capital lease obligations	68	106
Other long-term liabilities	176	199
Total non-current liabilities	7,649	9,746
Total liabilities	20,865	22,687
SHAREHOLDERS' EQUITY
Common stock, par value $.001 per share, 25,000,000 shares authorized; 17,262,940 and 17,097,426 shares issued and outstanding at April 30, 2016 and July 31, 2015, respectively	17	17
Additional paid-in capital	115,243	114,700
Accumulated deficit	(86,508)	(87,793)
Other accumulated comprehensive income	5	25
Total shareholders' equity	28,757	26,949
Total liabilities and shareholders' equity	$ 49,622	$ 49,636
Cumulative Preferred Stock [Member]
SHAREHOLDERS' EQUITY
Preferred stock
Junior Preferred Stock [Member]
SHAREHOLDERS' EQUITY
Preferred stock

XML

Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Apr. 30, 2016	Jul. 31, 2015
Trade receivables, allowance for doubtful accounts	$ 392	$ 372
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	25,000,000	25,000,000
Common stock, shares issued	17,262,940	17,097,426
Common stock, shares outstanding	17,262,940	17,097,426
Cumulative Preferred Stock [Member]
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	1,000,000	1,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Junior Preferred Stock [Member]
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	100,000	100,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0

XML

Consolidated Statements Of Operations - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Apr. 30, 2016	Apr. 30, 2015	Apr. 30, 2016	Apr. 30, 2015
Consolidated Statements Of Operations [Abstract]
Net revenue	$ 11,984	$ 10,280	$ 35,473	$ 29,531
Cost of revenue	2,334	1,780	6,467	5,391
Gross profit	9,650	8,500	29,006	24,140
Operating expenses:
Sales and marketing	2,801	2,718	8,314	7,928
Customer operations and support	2,374	1,831	7,248	5,392
Software development and technical support (net of capitalized software product costs)	1,221	1,102	3,795	3,046
General and administrative	1,732	1,709	5,247	4,901
Depreciation and amortization (exclusive of amortization of software product costs included in cost of revenue)	601	465	1,800	1,245
Net operating expenses	8,729	7,825	26,404	22,512
Operating income	921	675	2,602	1,628
Other income (expense):
Interest expense	(118)	(123)	(350)	(352)
Other, net	13	30	5	33
Total other income (expense)	(105)	(93)	(345)	(319)
Income before provision for income tax	816	582	2,257	1,309
Income tax expense	(368)	(243)	(972)	(606)
Net income	$ 448	$ 339	$ 1,285	$ 703
Weighted average common shares outstanding:
Basic	17,258	14,362	17,199	14,100
Diluted	17,769	14,786	17,689	14,536
Net income per common share:
Basic	$ 0.03	$ 0.02	$ 0.07	$ 0.05
Diluted	$ 0.03	$ 0.02	$ 0.07	$ 0.05

XML

Consolidated Statements Of Comprehensive Income (Loss) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Apr. 30, 2016	Apr. 30, 2015	Apr. 30, 2016	Apr. 30, 2015
Consolidated Statements Of Comprehensive Income (Loss) [Abstract]
Net income	$ 448	$ 339	$ 1,285	$ 703
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(18)	6	(20)	44
Total other comprehensive income (loss)	(18)	6	(20)	44
Comprehensive income	$ 430	$ 345	$ 1,265	$ 747

XML

Consolidated Statements Of Cash Flows - USD ($) $ in Thousands	9 Months Ended
	Apr. 30, 2016	Apr. 30, 2015
Operating activities:
Net income	$ 1,285	$ 703
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of software products	1,571	1,560
Non-cash interest expense	34	55
Depreciation and other amortization	1,800	1,245
(Gain) loss on change in fair value of earn-out receivable and payable	(5)	(28)
Provision for bad debt allowance	80	131
Deferred income taxes	860	531
Stock based compensation	316	305
Net change in assets and liabilities:
Trade receivables	(308)	(594)
Work in process, prepaid expenses and other	(51)	(16)
Other long-term assets		(139)
Accounts payable	(145)	69
Deferred revenue	(252)	142
Accrued payroll and related liabilities	342	349
Accrued taxes and other accrued liabilities	16	282
Net cash provided by operating activities	5,543	4,595
Investing activities:
Purchase of equipment, software and leasehold improvements	(557)	(469)
Cash received on earn-out from disposition of a component of the business		111
Cash paid for contingent liabilities related to acquisitions	(505)	(250)
Cash paid for net assets related to acquisitions		(5,950)
Software development costs capitalized	(1,310)	(1,000)
Net cash used in investing activities	(2,372)	(7,558)
Financing activities:
Borrowings under line of credit, net		1,750
Payments on long-term debt	(912)	(470)
Borrowings under long-term debt		2,168
Payments of capital lease obligations	(165)	(184)
Proceeds from exercise of common stock options	66	75
Net cash provided by (used in) financing activities	(1,011)	3,339
Effect of foreign currency exchange rate changes on cash	(4)	(23)
Net change in cash and cash equivalents	2,156	353
Cash and cash equivalents at beginning of period	2,284	1,808
Cash and cash equivalents at end of period	4,440	2,161
Cash paid for interest	338	256
Cash paid for income taxes	45	25
Non-cash investing and financing activities
Issuance of common stock in connection with acquisitions		2,780
Debt issued in connection with acquisition		2,933
Capital leases acquired in connection with acquisitions		105
Current assets acquired in connection with acquisitions	36	639
Accrued liabilities assumed in connection with acquisitions	58	623
Issuance of common stock related to payment of contingent liabilities	60	42
Tax benefit of stock options exercised		55
Cashless exercise of common stock warrants	46
Contingent liabilities incurred in connection with acquisition	$ 62	$ 911

XML

Description Of The Business And Significant Accounting Policies

9 Months Ended

Apr. 30, 2016

Description Of The Business And Significant Accounting Policies [Abstract]

Description Of The Business And Significant Accounting Policies

1. Description of the Business and Significant Accounting Policies

Description of the Business 

ARI Network Services, Inc. (“ARI” or “the Company”) creates software-as-a-service (“SaaS”), data-as-a-service (“DaaS”) and other solutions that help equipment manufacturers, distributors and dealers in selected vertical markets to Sell More Stuff!™ – online and in-store. We remove the complexity of selling and servicing new and used whole goods inventory and PG&A for customers in the automotive tire and wheel aftermarket (“ATW”), automotive aftermarket parts and service (“AAPS”), powersports, outdoor power equipment (“OPE”), marine, home medical equipment (“HME”), recreational vehicles (“RV”) and appliance industries. Our innovative products are powered by a proprietary library of enriched original equipment and aftermarket content from over 1,800 manufacturers. More than 23,500 equipment dealers, distributors and manufacturers worldwide leverage our web and eCatalog platforms to Sell More Stuff!™

We were incorporated in Wisconsin in 1981. Our principal executive office and headquarters is located in Milwaukee, Wisconsin. The office address is 10850 West Park Place, Suite 1200, Milwaukee, WI 53224, and our telephone number at that location is (414) 973-4300. Our principal website address is www.arinet.com. ARI also maintains operations in Cypress, California; Floyds Knobs, Indiana; Des Moines, Iowa; Duluth, Minnesota; Wexford, Pennsylvania; Cookeville, Tennessee; Salt Lake City, Utah; Leiden, The Netherlands; and New Delhi, India.

Basis of Presentation

These consolidated financial statements include the consolidated financial statements of ARI and its wholly-owned subsidiaries, ARI Europe B.V. and ARI Network Services Pvt. Ltd. and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). We eliminated all significant intercompany balances and transactions in consolidation. All adjustments that, in the opinion of management, are necessary for a fair presentation of the periods presented have been reflected as required by Regulation S-X, Rule 10-01.

Fiscal Year

Our fiscal year ends on July 31. References to fiscal 2016, for example, refer to the fiscal year ending July 31, 2016, and references to fiscal 2015 refer to the fiscal year ended July 31, 2015.

Revenue Recognition

Revenues from subscription fees for use of our software, access to our catalog content, and software maintenance and support fees are all recognized ratably over the contractual term of the arrangement. The Company has customer contracts with multiple services or elements, which may be delivered at different times. 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. Revenue on undelivered elements is recognized when the elements are delivered. ARI considers all arrangements with payment terms extending beyond 12 months not to be fixed or determinable and evaluates other arrangements with payment terms longer than normal to determine whether the arrangement is fixed or determinable. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer. Arrangements that include acceptance terms beyond the standard terms are not recognized until acceptance has occurred. If collectability is not considered probable, revenue is recognized when the fee is collected.

For software license arrangements that do not require significant modification or customization of the underlying software, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable.

Revenues for professional services to customize complex features and functionality in a product’s base software code or develop complex interfaces within a customer’s environment are recognized as the services are performed if they are determined to have standalone value to the customer or if all of the following conditions are met i) the customer has a contractual right to take possession of the software; ii) the customer will not incur significant penalty if it exercises this right; and iii) it is feasible for the customer to either run the software on its own hardware or contract with another unrelated party to host the software. When the current estimates of total contract revenue for professional services and the total related costs indicate a loss, a provision for the entire loss on the contract is made in the period the amount is determined. Professional service revenues for set-up and integration of hosted websites, or other services considered essential to the functionality of other elements of the arrangement, are amortized over the term of the contract.

Revenue for variable transaction fees, primarily for use of the shopping cart feature of our websites, is recognized as it is earned.

Amounts received for shipping and handling fees are reflected in revenue. Costs incurred for shipping and handling are reported in cost of revenue.

Amounts invoiced to customers prior to recognition as revenue, as discussed above, are reflected in the accompanying balance sheets as deferred revenue.

No single customer accounted for 10% or more of ARI’s revenue during the nine months ended April 30, 2016 or 2015.

Trade Receivables, Credit Policy and Allowance for Doubtful Accounts

Trade receivables are uncollateralized customer obligations due on normal trade terms, most of which require payment within thirty (30) days from the invoice date. Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.

The carrying amount of trade receivables is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews receivable balances that exceed ninety (90) days from the invoice date and, based on an assessment of current creditworthiness, estimates the portion of the balance that will not be collected. The allowance for potential doubtful accounts is reflected as an offset to trade receivables in the accompanying consolidated balance sheets.

Capitalized and Purchased Software Product Costs

Certain software development and acquisition costs are capitalized when incurred. Capitalization of these costs begins upon the establishment of technological feasibility. The establishment of technological feasibility and the on-going assessment of recoverability of software costs require considerable judgment by management with respect to certain external factors, including, but not limited to, the determination of technological feasibility, anticipated future gross revenue, estimated economic life and changes in software and hardware technologies. The Company capitalizes software enhancements on an on-going basis and all other software development and support expenditures are charged to expense in the period incurred.

The annual amortization of software products is computed using the straight-line method over the estimated economic life of the product, which currently ranges from2 to 14 years. Amortization starts when the product is available for general release to customers.

Deferred Loan Fees and Debt Discounts

Fees associated with securing debt are capitalized and shown as contra-debt, reducing the carrying amount of long-term debt on the consolidated balance sheet. Deferred loan fees and debt discounts are amortized to interest expense over the life of the debt using the effective interest method.

Deferred Income Taxes

The tax effect of the temporary differences between the book and tax bases of assets and liabilities and the estimated tax benefit from tax net operating losses is reported as deferred tax assets and liabilities in the consolidated balance sheets. An assessment of the likelihood that net deferred tax assets will be realized from future taxable income is performed at each reporting date or when events or changes in circumstances indicate that there may be a change in the valuation allowance. Because the ultimate realizability of deferred tax assets is highly subject to the outcome of future events, the amount established as a valuation allowance is considered to be a significant estimate that is subject to change in the near term. To the extent a valuation allowance is established or there is a change in the allowance during a period, the change is reflected with a corresponding increase or decrease in income tax expense in the consolidated statements of operations. 

Legal Provisions

ARI is periodically involved in legal proceedings arising from contracts, patents or other matters in the normal course of business. We reserve for any material estimated losses if the outcome is probable and reasonably estimable. We had no provisions for legal proceedings during the nine months ended April 30, 2016 or 2015.

Recently Adopted Accounting Standards

On August 1, 2015, the Company retrospectively adopted Accounting Standards Update (“ASU”) 2015-03 related to the presentation of debt issuance costs. Debt issuance costs of $29,000, previously recorded to prepaid expenses and other, and $84,000, previously recorded to other long-term assets as of July 31, 2015, are now presented as a direct deduction from the carrying amount of long-term debt on the balance sheet.

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Basic And Diluted Net Income Per Common Share

9 Months Ended

Apr. 30, 2016

Basic And Diluted Net Income Per Common Share [Abstract]

Basic And Diluted Net Income Per Common Share

2. Basic and Diluted Net Income per Common Share 

Basic net income per common share is computed by dividing net income by the basic weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period and reflects the potential dilution that could occur if all of ARI’s outstanding stock options and warrants that are in the money were exercised (calculated using the treasury stock method).

The following table is a reconciliation of basic and diluted net income per common share (in thousands, except per share data): 

	Three months ended April 30				Nine months ended April 30
	2016		2015		2016		2015
Net income	$	448	$	339	$	1,285		$	703
Weighted-average common shares outstanding		17,258		14,362		17,199			14,100
Effect of dilutive stock options and warrants		511		424		490			436
Diluted weighted-average common shares outstanding		17,769		14,786		17,689			14,536
Net income per share
Basic	$	0.03	$	0.02	$	0.07		$	0.05
Diluted	$	0.03	$	0.02	$	0.07		$	0.05
Options and warrants that could potentially dilute net income per share in the future that are not included in the computation of diluted net income per share, as their impact is anti-dilutive		-		10		-			10

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Debt

9 Months Ended

Apr. 30, 2016

Debt [Abstract]

Debt

3. Debt 

Silicon Valley Bank

On April 26, 2013, the Company entered into a Loan and Security Agreement (the “Agreement”) with Silicon Valley Bank (“SVB”), pursuant to which SVB extended to the Company credit facilities consisting of a $3,000,000 revolving credit facility with a maturity date of April 26, 2015 and a $4,500,000 term loan with a maturity date of April 26, 2018. 

On September 30, 2014, in connection with the Company’s acquisition of Tire Company Solutions, LLC (“TCS”), the Company entered into the First Loan Modification Agreement (the “Modification Agreement”) with SVB, which contained substantial amendments to the terms of the Agreement.

The Modification Agreement includes credit facilities consisting of a $3,000,000 revolving credit facility with a maturity date of September 30, 2016 and a $6,050,000 term loan with a maturity date of September 30, 2019. This term loan is an amendment to the existing $4,500,000 term loan with an original maturity date of April 26, 2018.

The term loan and any loans made under the SVB revolving credit facility accrue interest at a per annum rate equal to the Prime Rate plus the Applicable Margin for Prime Rate Loans set forth in the chart below based on the Total Leverage Ratio, as defined in the Modification Agreement. The Company had $0 outstanding on the revolving credit facility and the effective interest rate was 4.00% at April 30, 2016, based upon a prime rate of 3.50%.

	Applicable Margin
Total Leverage Ratio	for Prime Rate Loans
>= 2.50 to 1.0:	1.50	%
>  1.75 to 1.00 but <2.50 to 1.00:	1.00	%
<= 1.75 to 1.00:	0.50	%

Principal in respect of any loans made under the revolving facility is required to be paid in its entirety on or before September 30, 2016. Principal in respect of the term loan is required to be paid in quarterly installments on the first day of each fiscal quarter of the Company as follows:$151,250 commenced on November 1, 2014 through August 1, 2016; $226,875 commencing on November 1, 2016 through August 1, 2017; and $302,500 commencing on November 1, 2017 through August 1, 2019. All remaining principal in respect of the term loan is due and payable on September 30, 2019. The Company is permitted to prepay all of, but not less than all of, the outstanding principal amount of the term loan upon notice to SVB and, in certain circumstances, the payment of a prepayment penalty of up to $61,000. Following July 31, 2015, the Modification Agreement requires the Company to make additional payments in the amount of 25% of excess cash flow, as defined in the agreement, until the Company’s Total Leverage Ratio is less than 2.00 to 1.00.

The Modification Agreement contains covenants that restrict, among other things and subject to certain conditions, the ability of the Company to permit a change of control, incur debt, create liens on its assets, make certain investments, enter into merger or acquisition transactions and make distributions to its shareholders. Financial covenants include the maintenance of a minimum Total Leverage Ratio equal to or less than 3.00 to 1.00 and the maintenance of a Fixed Charge Coverage Ratio (as defined in the Modification Agreement) equal to or greater than 1.25 to 1.00. The Total Leverage Ratio was 1.18 and the Fixed Charge Ratio was 2.71 for the twelve months ended April 30, 2016. The Modification Agreement also contains customary events of default that, if triggered, could result in an acceleration of the Company’s obligations under the Modification Agreement. The loans are secured by a first priority security interest in substantially all assets of the Company.

TCS Promissory Notes

In connection with the acquisition of TCS, on September 30, 2014, the Company issued two promissory notes (the “TCS Notes”) in the aggregate principal amount of $3,000,000 to the former owners of TCS. In February 2015, the principal amount of the TCS Notes was reduced by approximately $67,000 as a result of post-closing adjustments to the valuation of the net assets acquired, pursuant to the terms of the asset purchase agreement.The TCS Notes initially accrue interest on the outstanding unpaid principal balance at a rate per annum equal to 5.0%; however, if any amount payable under a TCS Note is not paid when due, such overdue amount will bear interest at the default rate of 7.5% from the date of such non-payment until such amount is paid in full. Accrued interest on the TCS Notes is due and payable quarterly commencing on December 29, 2014 and continuing on each 90th calendar day thereafter, until September 30, 2018, at which time all accrued interest and outstanding principal balance will be due and payable in full. The first four payments due and payable under the TCS Notes were interest-only payments, and payments of principal and interest commenced on December 29, 2015. The payments are subject to acceleration upon certain Events of Default, as defined in the TCS Notes.

DCi Promissory Note

In connection with the acquisition of Direct Communications Inc. (“DCi”), on July 13, 2015, the Company issued a promissory note (the “DCi Note”) in the aggregate principal amount of $2,000,000 to the former owners of DCi. The principal amount of the DCi Note was reduced by approximately $64,000 as a result of post-closing adjustments to the estimated valuation of the net assets acquired, pursuant to the terms of the asset purchase agreement. The DCi Note initially accrues interest on the outstanding unpaid principal balance at a rate per annum equal to 4.0%. Accrued interest on the DCi Note is due and payable quarterly commencing on October 13, 2015 and continuing on each 90th calendar day thereafter, until July 13, 2019, at which time all accrued interest and outstanding principal balance will be due and payable in full. The first four payments due and payable under the DCi Note are interest only payments, and payments of principal and interest shall not commence until the payment due on October 13, 2016. The payments are subject to acceleration upon certain Events of Default, as defined in the DCi Note.

The following table sets forth certain information related to the Company’s long-term debt as of April 30, 2016 and July 31, 2015 (in thousands): 

	April 30		July 31
	2016		2015
Notes payable principal	$	9,553	$	10,529
Less debt issuance costs		(100)		(112)
Less current maturities		(2,172)		(1,338)
Notes payable - non-current	$	7,281	$	9,079

Minimum principal payments due on the SVB Term Note, the TCS Notes and the DCi Note are as follows for the fiscal years ending (in thousands): 

	SVB Term Note		TCS Notes			DCi Notes		Total Notes Payable
2016 remaining	$	151	$	234	$	—	$	385
2017		832		965		620		2,417
2018		1,134		1,014		645		2,793
2019		1,211		261		671		2,143
2020		1,815		—		—		1,815
	$	5,143	$	2,474	$	1,936	$	9,553

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Business Combinations

9 Months Ended

Apr. 30, 2016

Business Combinations [Abstract]

Business Combinations

4. Business Combinations

DCi Acquisition

On July 13, 2015, the Company acquired substantially all of the assets of DCi, a leading provider of differentiated product content and electronic catalog software serving manufacturers, distributors, jobbers and independent retailers in the AAPS. Consideration for the acquisition included: (1) a cash payment equal to $3,750,000; (2) 159,795 shares of the Company’s common stock; and (3) the issuance of a promissory note in principal amount of $2,000,000 to DCi.  The principal amount of the DCi Note was reduced by approximately $64,000 as a result of post-closing adjustments to the estimated valuation of the net assets acquired, pursuant to the terms of the asset purchase agreement.

The Company expects the DCi acquisition to accelerate its growth in the AAPS and provide a platform to further expand the reach of ARI’s data-driven eCommerce websites and automotive point-of-sale software. The combined customer benefits and operational efficiencies are expected to result in a stronger organization that can create more value for our customers, shareholders and employees.

The DCi acquisition was funded from cash on hand, seller financing and the Company’s common stock. The following tables show the preliminary allocation of the preliminary DCi purchase price (in thousands):

	Preliminary
	Purchase
	Price
Cash	$	3,750
Financed by note payable		1,936
Issuance of common stock		500
Purchase price	$	6,186
	Preliminary
	Purchase
	Allocation
Trade receivables	$	422
Prepaid expense and other		38
Assumed liabilities		(260)
Furniture and equipment		387
Software product costs		698
Intangible assets		1,830
Goodwill		3,071
Purchase price allocation	$	6,186

Intangible assets include the fair value of tradenames, customer relationships, and non-competition agreements. Estimated goodwill represents the additional benefits provided to the Company by the acquisition of DCi operational synergies. The Company acquired approximately $3,300,000 of tax deductible goodwill related to the DCi acquisition. The final purchase price, as well as the purchase price allocation, is subject to the completion of the final valuation of the acquired net assets. The final valuation is expected to be completed as soon as is practicable but no later than July 13, 2016 and could have a material impact on the preliminary purchase price allocation disclosed above.

TASCO Acquisition

On April 27, 2015, the Company acquired substantially all of the assets of TASCO Corporation and its affiliated company Signal Extraprise Corporation (collectively “TASCO”), a leading provider of business management software designed exclusively for the automotive tire and wheel aftermarket industry. Consideration for the acquisition included: (1) a cash payment at the closing of the transaction equal to $1,750,000, which was funded through a borrowing on the Company’s revolving credit facility; (2) 242,424 shares of the Company’s common stock; and (3) a $200,000 holdback payable on April 27, 2016.In October 2015, the holdback amount was reduced by approximately $62,000 as a result of post-closing adjustments to the valuation of the net assets acquired, pursuant to the terms of the asset purchase agreement. The Company acquired approximately $1,500,000 of tax deductible goodwill related to the TASCO acquisition. The Company determined that the TASCO assets acquired did not constitute a business that is “significant” as defined in the applicable SEC regulations.

The following tables show the allocation of the purchase price (in thousands):

	Purchase
	Price
Cash	$	1,750
Issuance of common stock		800
Contingent holdback		138
Purchase price	$	2,688
	Purchase
	Allocation
Trade receivables	$	120
Assumed liabilities		(227)
Software product costs		434
Intangible assets		1,000
Goodwill		1,361
Purchase price allocation	$	2,688

TCS Acquisition

On September 30, 2014, the Company acquired substantially all of the assets of TCS, a leading provider of software, websites and digital marketing solutions designed exclusively for dealers, wholesalers, retreaders and manufacturers within the automotive tire and wheel industries. Consideration for the acquisition included (1) a cash payment equal to $4,200,000; (2) 618,744 shares of the Company's common stock; (3) the issuance of two promissory notes in aggregate principal amount of $2,933,000 (as adjusted) to the former owners of TCS; and (4) a contingent earn-out purchase price contingent upon the attainment of specific revenue goals over the first three years following the acquisition. The earn-out, with an original fair value of $711,000, was amended in March 2016 to four quarterly payments of $120,905, which commenced in December 2016, followed by four quarterly payments of $70,000.

The TCS acquisition increased the Company’s portfolio of ATW dealer websites by more than 30%.  The acquisition is expected to accelerate ARI’s opportunity to drive organic growth through the cross‐selling of new products. It also provides solutions for the entire ATW supply chain, including wholesalers, retreaders and manufacturers. The TCS business offers a business management solution for ATW dealers as well as for auto repair shops. The combined customer benefits and operational efficiencies are expected to result in a stronger organization that can create more value for our customers, shareholders and employees. 

The acquisition was funded from cash on hand, an increase in our SVB Term Loan, funds available on our revolving credit facility seller financing and the Company’s common stock. The following tables show the allocation of the purchase price (in thousands):

	Purchase
	Price
Cash	$	4,200
Financed by note payable		2,933
Issuance of common stock		1,980
Contingent earn-out		711
Purchase price	$	9,824
	Purchase
	Allocation
Trade receivables	$	606
Prepaid expense and other		33
Assumed liabilities		(668)
Furniture and equipment		117
Software product costs		820
Intangible assets		4,080
Goodwill		4,836
Purchase price allocation	$	9,824

Intangible assets include the fair value of tradenames, customer relationships and non-competition agreements. Goodwill represents the additional benefits provided to the Company by the acquisition of TCS operational synergies. The Company acquired approximately $5,200,000 of tax deductible goodwill related to the TCS acquisition. 

Pro Forma Information

The following unaudited pro forma combined financial information presents the Company's results as if the Company had acquired TCS and DCi on August 1, 2014. The unaudited pro forma information has been prepared with the following considerations:

i. The unaudited pro forma condensed consolidated financial information has been prepared using the acquisition method of accounting under existing GAAP. The Company is the acquirer for accounting purposes.

ii. The pro forma combined financial information does not reflect any operating cost synergy savings that the combined company may achieve as a result of the acquisition, the costs necessary to achieve these operating synergy savings or additional charges necessary as a result of the acquisition.

The unaudited pro forma financial information presented is for informational purposes only and does not purport to represent what the Company's, TCS’s or DCi’s financial position or results of operations would have been had the acquisition in fact occurred on such date or at the beginning of the period indicated, nor does it project the financial position or results of operation for any future date or period of the Company, TCS or DCi.

	Three months ended April 30				Nine months ended April 30
	2016		2015		2016		2015
Revenue	$	11,984	$	11,223	$	35,473	$	33,354
Net income	$	448	$	355	$	1,285	$	818
Net income per common share:
Basic	$	0.03	$	0.02	$	0.07	$	0.05
Diluted	$	0.03	$	0.02	$	0.07	$	0.05

Pro forma adjustments to net income include amortization costs related to the acquired intangible assets, acquisition-related professional fees, interest expense on the debt incurred to acquire the assets of TCS and DCi, the tax effect of the historical TCS and DCi results of operations and the pro forma adjustments at an estimated tax rate of 40% as follows:

	Three months ended April 30				Nine months ended April 30
	2016		2015		2016		2015
Amortization of intangible assets		-		72		-		271
Acquisition-related professional fees		-		(38)		-		(256)
Interest expense		-		20		-		105
Income tax benefit (expense)		-		10		-		77
Total adjustments		-		64		-		197

The Company increased goodwill by approximately $471,000 during the nine months ended April 30, 2016, as a result of adjustments to the preliminary purchase price allocation of the TCS, TASCO and DCi acquisitions. The Company cannot determine revenue and expenses specifically related to its acquisitions since the date of acquisition, as we begin integrating these operations into our business upon closing of the acquisitions.

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Contingent Liabilities

9 Months Ended

Apr. 30, 2016

Contingent Liabilities [Abstract]

Contingent Liabilities

5. Contingent Liabilities 

Consideration for the April 2015 TASCO acquisition included a $138,000 (as adjusted) holdback payable, which has been paid in full as of April 30, 2016. 

Consideration for the September 2014 TCS acquisition includes a contingent earn-out purchase price, originally payable in three potential payments and contingent upon the attainment of specific revenue goals. The fair value of the earn-out was originally estimated at $711,000. On March 7, 2016 the TCS Asset Purchase Agreement was amended in relation to the contingent earnout, whereas four quarterly payments of $120,905 commenced on December 31, 2015, followed by four quarterly payments of $70,000, commencing December 31, 2016.  The Company recorded a gain of $13,000 as a result of the Amendment during the nine months ended April 30, 2016.

Consideration for the 2012 Ready2Ride acquisition included a contingent hold-back purchase price of up to $250,000 and contingent earn-out payments as follows: (i) the first earn-out payment, composed of $125,000 was paid in October 2013 and 10,000 shares of common stock issued in November 2013; (ii) the second earn-out payment, composed of $125,000 and 15,000 shares of common stock, was paid in September 2014; and (iii) the third earn-out payment, composed of $125,000 and 15,000 shares of common stock, was paid in August 2015. The Company recorded a loss of $8,000 as a result of a change in estimate related to an increase in the market price of the Company’s common stock during the nine months ended April 30, 2016.

The following table shows changes in the holdback and earn-out payable related to the TCS and TASCO acquisition (in thousands):

	Nine months ended April 30
	2016		2015
Beginning balance	$	1,116	$	448
Additions		-		911
Adjustments		(62)		-
Payments		(565)		(292)
Imputed interest recognized		22		37
Gain on change in fair value of earn-out		(5)		-
Ending balance	$	506	$	1,104
Less current portion	$	(382)	$	(627)
Ending balance, long-term	$	124	$	477

The following table shows the remaining estimated payments of contingent liabilities related to the TCS acquisition at April 30, 2016, (in thousands):

2016	$	121
2017		331
2018		70
Total estimated payments		522
Less imputed interest		(16)
Present value of contingent liabilities	$	506

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Other Intangible Assets

9 Months Ended

Apr. 30, 2016

Other Intangible Assets [Abstract]

Other Intangible Assets

6. Other Intangible Assets

Amortizable intangible assets include customer relationships and other intangibles including trade names and non-compete agreements. Amortizable intangible assets are composed of the following at April 30, 2016 and 2015 (in thousands): 

	Nine months ended April 30, 2015						Wtd. avg.
	Cost		Accumulated		Net		remaining
Customer relationships	Basis		Amortization		Value		life
Beginning balance	$	7,174	$	(3,584)	$	3,590
Activity		3,838		(598)		3,240
Ending balance	$	11,012	$	(4,182)	$	6,830	11.46
Other intangibles
Beginning balance	$	383	$	(361)	$	22
Activity		1,399		(159)		1,240
Ending balance	$	1,782	$	(520)	$	1,262	1.66
Total intangibles
Beginning balance	$	7,557	$	(3,945)	$	3,612
Activity		5,237		(757)		4,480
Ending balance	$	12,794	$	(4,702)	$	8,092	11.07
	Nine months ended April 30, 2016						Wtd. avg.
	Cost		Accumulated		Net		remaining
Customer relationships	Basis		Amortization		Value		life
Beginning balance	$	11,947	$	(4,418)	$	7,529
Activity		(220)		(853)		(1,073)
Ending balance	$	11,727	$	(5,271)	$	6,456	11.98
Other intangibles
Beginning balance	$	3,203	$	(616)	$	2,587
Activity		(467)		(301)		(768)
Ending balance	$	2,736	$	(917)	$	1,819	8.73
Total intangibles
Beginning balance	$	15,150	$	(5,034)	$	10,116
Activity		(688)		(1,154)		(1,841)
Ending balance	$	14,463	$	(6,188)	$	8,275	11.26

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Stock-Based Compensation Plans

9 Months Ended

Apr. 30, 2016

Stock-Based Compensation Plans [Abstract]

Stock-Based Compensation Plans

7. Stock-based Compensation Plans 

The Company uses the Black-Scholes model to value stock options granted. Volatility is calculated as management’s estimate of future volatility over the expected term of the option based on historical volatility of the Company’s stock. The expected life of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual term of the options is based on the United States Treasury yields in effect at the time of grant.  

Stock options granted to employees under the Company’s stock option plan typically vest 25% on the first anniversary of the grant and 25% on the one year anniversary of each of the three following years. Stock options granted to non-employee directors under the Company’s stock option plan typically vest 50% on the first anniversary of the grant and 50% on the next one year anniversary. The Company recognizes stock option expense over the vesting period for each vesting tranche.

As recognizing stock-based compensation expense is based on awards ultimately expected to vest, the amount of recognized expense has been reduced for estimated forfeitures based on the Company’s historical experience. Total stock option compensation expense recognized by the Company was approximately $19,000 and $41,000 during the three month periods ended April 30, 2016 and 2015, respectively, and approximately $59,000 and $110,000 for the nine month periods ended April 30, 2016 and 2015, respectively. There was approximately $61,000 and $193,000 of total unrecognized compensation costs related to non-vested options granted under the Company’s stock option plans as of April 30, 2016 and 2015, respectively. Total unrecognized compensation cost will be adjusted for any future changes in estimated and actual forfeitures. There were no capitalized stock-based compensation costs during the periods presented.   

The following table shows the weighted average assumptions used to estimate the fair value of options granted:  

	Nine months ended April 30
	2016			2015
Expected life (years)		n/a			5.0
Risk-free interest rate		n/a			1.7	%
Expected volatility		n/a			63.6	%
Expected forfeiture rate		10.1	%		9.1	%
Expected dividend yield		-			-
Weighted-average estimated
fair value per share of options
granted during the year		n/a		$	1.8
Cash received from the exercise
of stock options	$	67,000		$	83,000

2000 Stock Option Plan 

The Company’s 2000 Stock Option Plan (the “2000 Plan”) had 1,950,000 shares of common stock authorized for issuance. Each incentive stock option that was granted under the 2000 Plan is exercisable for a period of not more than ten years from the date of grant (five years in the case of a participant who is a 10% shareholder of the Company, unless the stock options are nonqualified), or such shorter period as determined by the Compensation Committee, and shall lapse upon the expiration of said period, or earlier upon termination of the participant’s employment with the Company. The 2000 Plan expired on December 13, 2010, at which time it was terminated except for outstanding options. While options previously granted under the 2000 Plan will continue to be effective through the remainder of their terms or until exercised, no new options may be granted under the 2000 Plan. 

Changes in option shares under the 2000 Plan during the nine months ended April 30, 2016 were as follows:

	Number of Options	Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Period (Years)	Aggregate Intrinsic Value
Outstanding at 7/31/15	472,250	$	1.52	2.52	$	783,174
Granted	-		n/a	n/a		n/a
Exercised	(36,000)		1.35	n/a		n/a
Forfeited	(1,000)		2.15	n/a		n/a
Outstanding at 4/30/2016	435,250	$	1.53	1.94	$	1,129,764
Exercisable at 4/30/2016	435,250	$	1.53	1.94	$	1,129,764

The range of exercise prices for options outstanding under the 2000 Plan was $0.49 to $2.10 at April 30, 2016.

2010 Equity Incentive Plan 

The Board of Directors adopted the ARI Network Services, Inc. 2010 Equity Incentive Plan (as amended, the “2010 Plan”) on November 9, 2010. The plan was approved by the Company's shareholders in December 2010, and amendments to the 2010 Plan were approved by the Company’s shareholders in January 2014. The 2010 Plan is the successor to the Company’s 2000 Plan. There are 1,850,000 shares of Company common stock authorized for issuance under the 2010 Plan. Potential awards under the 2010 Plan include incentive stock options and non-statutory stock options, shares of restricted stock or restricted stock units, stock appreciation rights (“SARs), and shares of common stock. Up to 1,525,000 of the shares authorized for issuance under the 2010 Plan may be used for common stock, restricted stock or restricted stock unit awards.

The exercise price for options and SARs under the 2010 Plan cannot be less than 100% of the fair market value of the Company’s common stock on the date of grant, and the exercise prices for options and SARs cannot be repriced without shareholder approval, except to reflect changes to the capital structure of the Company as described in the 2010 Plan. The maximum term of options and SARs under the 2010 Plan is 10 years. The 2010 Plan does not have liberal share counting provisions (such as provisions that would permit shares withheld for payment of taxes or the exercise price of stock options to be re-granted under the plan).

Changes in option shares under the 2010 Plan during the nine months ended April 30, 2016 were as follows:

	Number of Options	Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Period (Years)	Aggregate Intrinsic Value
Outstanding at 7/31/15	434,751	$	2.34	7.47	$	387,964
Granted	-		n/a	n/a		n/a
Exercised	(38,750)		1.39	n/a		n/a
Forfeited	(19,625)		1.86	n/a		n/a
Outstanding at 4/30/2016	376,376	$	2.46	7.14	$	627,665
Exercisable at 4/30/2016	237,003	$	2.15	6.78	$	469,414

The range of exercise prices for options outstanding under the 2010 Plan was $0.59 to $3.61 at April 30, 2016.

Changes in the 2010 Plan's non-vested option shares included in the outstanding shares above during the nine months ended April 30, 2016 were as follows:

	Number of Options	Wtd. Avg. Exercise Price
Non-vested at 7/31/15	161,498	$	2.99
Granted	-		n/a
Vested	(11,250)		3.28
Forfeited	(10,875)		2.54
Non-vested at 4/30/16	139,373	$	2.99

The weighted average remaining vesting period was 1.58 years at April 30, 2016.

Employee Stock Purchase Plan 

The Company’s 2000 Employee Stock Purchase Plan, as amended, (“ESPP”) has 575,000 shares of common stock reserved for issuance, of which 300,280 and 263,974 of the shares have been issued as of April 30, 2016 and 2015, respectively. All employees with at least six months of service are eligible to participate. Shares may be purchased at the end of a specified period at the lower of 85% of the market value at the beginning or end of the specified period through accumulation of payroll deductions, not to exceed 5,000 shares per employee per year. The Company expensed $15,000 and $29,000 during the three and nine months ended April 30, 2016, and $0 during the same periods last year related to the ESPP discount.

Restricted Stock

Up to 1,525,000 of the shares authorized for issuance under the 2010 Plan may be granted in the form of shares of common stock, restricted stock or restricted stock units. The Company grants restricted stock to its directors as an annual retainer, and from time to time to directors, officers or employees as incentive compensation or as discretionary compensation in place of cash. 

The Compensation Committee adopted the Long-Term Executive Bonus Plan (“LTEB”) for eligible executive officers of the Company beginning in fiscal 2013.

In March 2015, the Compensation Committee issued 550,000 shares of restricted stock under the LTEB, which will vest according to the following schedule:

· 30% when the volume weighted average price of the Company’s common stock for the previous 30-day trading period (the “30-day VWAP”) equals or exceeds trades at or above $6.00

· 20% when the 30-day VWAPequals or exceeds $7.00

· 20% when the 30-day VWAPequals or exceeds $8.00

· 30% when the 30-day VWAPequals or exceeds $9.00

Under the plan described above, a target price must be reached within a four-year period starting on the date of grant for any restricted stock to vest. All unvested restricted stock will be forfeited when the four-year period expires. The initial value of the common stock granted under the LTEB was approximately $350,000, valued using a Monte Carlo Simulation with a 46% volatility rate and a 1.34% risk-free interest rate, and is expensed over the vesting period.

Restricted stock granted under the 2010 plan during fiscal 2016 was valued using the market price on the date of grant. The Company recognized compensation expense of $79,000 and $54,000 during the three months ended April 30, 2016 and 2015, respectively, and $227,000 and $195,000 during the nine months ended April 30, 2016 and 2015, respectively,related to all restricted stock. The remaining balance of unrecognized compensation expense related to restricted stock was $467,000 and $526,000 at April 30, 2016 and 2015, respectively.

Changes in unvested restricted shares of common stock under the 2010 Plan during the nine months ended April 30, 2016 and 2015 were as follows:

	Nine months ended April 30
	2016	2015
Beginning balance unvested restricted stock	671,211	93,704
Granted	42,359	621,471
Vested	(33,060)	(28,610)
Forfeited	(10,292)	-
Ending balance unvested restricted stock	670,218	686,565

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Income Taxes

9 Months Ended

Apr. 30, 2016

Income Taxes [Abstract]

Income Taxes

8. Income Taxes 

The provision for income taxes for the three and nine months ended April 30, 2016 and 2015 is composed of the following (in thousands): 

	Three months ended April 30				Nine months ended April 30
	2016		2015		2016		2015
Current:
Federal	$	(40)	$	(18)	$	(40)	$	(28)
State		(64)		(11)		(76)		(47)
Change in valuation allowance		—		—		—		17
Deferred, net		(264)		(214)		(856)		(548)
Income tax expense	$	(368)	$	(243)	$	(972)	$	(606)

The provision for income taxes is based on taxes payable under currently enacted tax laws and an analysis of temporary differences between the book and tax bases of the Company’s assets and liabilities, including various accruals, allowances, depreciation and amortization, and does not represent current taxes due. The tax effect of these temporary differences and the estimated benefit from tax net operating losses are reported as deferred tax assets and liabilities in the consolidated balance sheet. We have unused net operating loss carry forwards ("NOLs") for federal income tax purposes and, as a result, we generally only pay alternative minimum taxes at the federal level. We have unused NOLs for state income tax purposes of $12,226,000, most of which have a valuation allowance.

The Company also has NOLs related to tax losses incurred by its Netherlands operation. Under tax laws in the Netherlands, NOLs are able to be carried forward for a period of nine years. The Company has determined that, consistent with prior periods, it is not likely that the net operating losses will be utilized by the Company. This conclusion was primarily based on the negative evidence of a history of losses and expired NOLs related to this entity. In the opinion of the management of the Company, there is not enough positive evidence to overcome this negative evidence. Therefore, a full valuation allowance is recorded, resulting in $0 net deferred tax assets related to the Netherlands operation at April 30, 2016 and 2015.

As of April 30, 2016, the Company had accumulated NOLs for federal, state and international tax purposes of approximately $2,493,000,$12,226,000 and $2,294,000, respectively.

We perform an evaluation of uncertain tax positions as a component of income tax expense on an annual basis. We determined that ARI did not have any significant risk related to income tax expense and therefore no amounts were reserved for uncertain tax positions as of April 30, 2016 and 2015. We will accrue and recognize interest and penalties related to uncertain tax positions as a component of income tax expense if it becomes necessary. Fiscal years subsequent to 2011 remain open and subject to examination by state tax jurisdictions and the United States federal tax authorities.

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Description Of The Business And Significant Accounting Policies (Policies)

9 Months Ended

Apr. 30, 2016

Description Of The Business And Significant Accounting Policies [Abstract]

Description Of The Business

Description of the Business 

ARI Network Services, Inc. (“ARI” or “the Company”) creates software-as-a-service (“SaaS”), data-as-a-service (“DaaS”) and other solutions that help equipment manufacturers, distributors and dealers in selected vertical markets to Sell More Stuff!™ – online and in-store. We remove the complexity of selling and servicing new and used whole goods inventory and PG&A for customers in the automotive tire and wheel aftermarket (“ATW”), automotive aftermarket parts and service (“AAPS”), powersports, outdoor power equipment (“OPE”), marine, home medical equipment (“HME”), recreational vehicles (“RV”) and appliance industries. Our innovative products are powered by a proprietary library of enriched original equipment and aftermarket content from over 1,800 manufacturers. More than 23,500 equipment dealers, distributors and manufacturers worldwide leverage our web and eCatalog platforms to Sell More Stuff!™

We were incorporated in Wisconsin in 1981. Our principal executive office and headquarters is located in Milwaukee, Wisconsin. The office address is 10850 West Park Place, Suite 1200, Milwaukee, WI 53224, and our telephone number at that location is (414) 973-4300. Our principal website address is www.arinet.com. ARI also maintains operations in Cypress, California; Floyds Knobs, Indiana; Des Moines, Iowa; Duluth, Minnesota; Wexford, Pennsylvania; Cookeville, Tennessee; Salt Lake City, Utah; Leiden, The Netherlands; and New Delhi, India.

Basis Of Presentation

Basis of Presentation

These consolidated financial statements include the consolidated financial statements of ARI and its wholly-owned subsidiaries, ARI Europe B.V. and ARI Network Services Pvt. Ltd. and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). We eliminated all significant intercompany balances and transactions in consolidation. All adjustments that, in the opinion of management, are necessary for a fair presentation of the periods presented have been reflected as required by Regulation S-X, Rule 10-01.

Fiscal Year

Fiscal Year

Our fiscal year ends on July 31. References to fiscal 2016, for example, refer to the fiscal year ending July 31, 2016, and references to fiscal 2015 refer to the fiscal year ended July 31, 2015.

Revenue Recognition

Revenue Recognition

Revenues from subscription fees for use of our software, access to our catalog content, and software maintenance and support fees are all recognized ratably over the contractual term of the arrangement. The Company has customer contracts with multiple services or elements, which may be delivered at different times. 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. Revenue on undelivered elements is recognized when the elements are delivered. ARI considers all arrangements with payment terms extending beyond 12 months not to be fixed or determinable and evaluates other arrangements with payment terms longer than normal to determine whether the arrangement is fixed or determinable. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer. Arrangements that include acceptance terms beyond the standard terms are not recognized until acceptance has occurred. If collectability is not considered probable, revenue is recognized when the fee is collected.

For software license arrangements that do not require significant modification or customization of the underlying software, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable.

Revenues for professional services to customize complex features and functionality in a product’s base software code or develop complex interfaces within a customer’s environment are recognized as the services are performed if they are determined to have standalone value to the customer or if all of the following conditions are met i) the customer has a contractual right to take possession of the software; ii) the customer will not incur significant penalty if it exercises this right; and iii) it is feasible for the customer to either run the software on its own hardware or contract with another unrelated party to host the software. When the current estimates of total contract revenue for professional services and the total related costs indicate a loss, a provision for the entire loss on the contract is made in the period the amount is determined. Professional service revenues for set-up and integration of hosted websites, or other services considered essential to the functionality of other elements of the arrangement, are amortized over the term of the contract.

Revenue for variable transaction fees, primarily for use of the shopping cart feature of our websites, is recognized as it is earned.

Amounts received for shipping and handling fees are reflected in revenue. Costs incurred for shipping and handling are reported in cost of revenue.

Amounts invoiced to customers prior to recognition as revenue, as discussed above, are reflected in the accompanying balance sheets as deferred revenue.

No single customer accounted for 10% or more of ARI’s revenue during the nine months ended April 30, 2016 or 2015.

Trade Receivables, Credit Policy And Allowance For Doubtful Accounts

Trade Receivables, Credit Policy and Allowance for Doubtful Accounts

Trade receivables are uncollateralized customer obligations due on normal trade terms, most of which require payment within thirty (30) days from the invoice date. Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.

The carrying amount of trade receivables is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews receivable balances that exceed ninety (90) days from the invoice date and, based on an assessment of current creditworthiness, estimates the portion of the balance that will not be collected. The allowance for potential doubtful accounts is reflected as an offset to trade receivables in the accompanying consolidated balance sheets.

Capitalized And Purchased Software Product Costs

Capitalized and Purchased Software Product Costs

Certain software development and acquisition costs are capitalized when incurred. Capitalization of these costs begins upon the establishment of technological feasibility. The establishment of technological feasibility and the on-going assessment of recoverability of software costs require considerable judgment by management with respect to certain external factors, including, but not limited to, the determination of technological feasibility, anticipated future gross revenue, estimated economic life and changes in software and hardware technologies. The Company capitalizes software enhancements on an on-going basis and all other software development and support expenditures are charged to expense in the period incurred.

The annual amortization of software products is computed using the straight-line method over the estimated economic life of the product, which currently ranges from2 to 14 years. Amortization starts when the product is available for general release to customers.

Deferred Loan Fees And Debt Discounts

Deferred Loan Fees and Debt Discounts

Fees associated with securing debt are capitalized and shown as contra-debt, reducing the carrying amount of long-term debt on the consolidated balance sheet. Deferred loan fees and debt discounts are amortized to interest expense over the life of the debt using the effective interest method.

Deferred Income Taxes

Deferred Income Taxes

The tax effect of the temporary differences between the book and tax bases of assets and liabilities and the estimated tax benefit from tax net operating losses is reported as deferred tax assets and liabilities in the consolidated balance sheets. An assessment of the likelihood that net deferred tax assets will be realized from future taxable income is performed at each reporting date or when events or changes in circumstances indicate that there may be a change in the valuation allowance. Because the ultimate realizability of deferred tax assets is highly subject to the outcome of future events, the amount established as a valuation allowance is considered to be a significant estimate that is subject to change in the near term. To the extent a valuation allowance is established or there is a change in the allowance during a period, the change is reflected with a corresponding increase or decrease in income tax expense in the consolidated statements of operations

Legal Provisions

Legal Provisions

ARI is periodically involved in legal proceedings arising from contracts, patents or other matters in the normal course of business. We reserve for any material estimated losses if the outcome is probable and reasonably estimable. We had no provisions for legal proceedings during the nine months ended April 30, 2016 or 2015.

Recently Adopted Accounting Standards

Recently Adopted Accounting Standards

On August 1, 2015, the Company retrospectively adopted Accounting Standards Update (“ASU”) 2015-03 related to the presentation of debt issuance costs. Debt issuance costs of $29,000, previously recorded to prepaid expenses and other, and $84,000, previously recorded to other long-term assets as of July 31, 2015, are now presented as a direct deduction from the carrying amount of long-term debt on the balance sheet.

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Basic And Diluted Net Income Per Common Share (Tables)

9 Months Ended

Apr. 30, 2016

Basic And Diluted Net Income Per Common Share [Abstract]

Basic And Diluted Net Income Per Common Share

	Three months ended April 30				Nine months ended April 30
	2016		2015		2016		2015
Net income	$	448	$	339	$	1,285		$	703
Weighted-average common shares outstanding		17,258		14,362		17,199			14,100
Effect of dilutive stock options and warrants		511		424		490			436
Diluted weighted-average common shares outstanding		17,769		14,786		17,689			14,536
Net income per share
Basic	$	0.03	$	0.02	$	0.07		$	0.05
Diluted	$	0.03	$	0.02	$	0.07		$	0.05
Options and warrants that could potentially dilute net income per share in the future that are not included in the computation of diluted net income per share, as their impact is anti-dilutive		-		10		-			10

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Debt (Tables)

9 Months Ended

Apr. 30, 2016

Debt [Abstract]

Schedule Of Leverage Ratios And Applicable Margins

	Applicable Margin
Total Leverage Ratio	for Prime Rate Loans
>= 2.50 to 1.0:	1.50	%
>  1.75 to 1.00 but <2.50 to 1.00:	1.00	%
<= 1.75 to 1.00:	0.50	%

Schedule Of Long-Term Debt

	April 30		July 31
	2016		2015
Notes payable principal	$	9,553	$	10,529
Less debt issuance costs		(100)		(112)
Less current maturities		(2,172)		(1,338)
Notes payable - non-current	$	7,281	$	9,079

Schedule Of Minimum Principal Payments

	SVB Term Note		TCS Notes			DCi Notes		Total Notes Payable
2016 remaining	$	151	$	234	$	—	$	385
2017		832		965		620		2,417
2018		1,134		1,014		645		2,793
2019		1,211		261		671		2,143
2020		1,815		—		—		1,815
	$	5,143	$	2,474	$	1,936	$	9,553

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Business Combinations (Tables)

9 Months Ended

Apr. 30, 2016

Business Acquisition [Line Items]

Schedule Of Unaudited Pro Forma Financial Information

	Three months ended April 30				Nine months ended April 30
	2016		2015		2016		2015
Revenue	$	11,984	$	11,223	$	35,473	$	33,354
Net income	$	448	$	355	$	1,285	$	818
Net income per common share:
Basic	$	0.03	$	0.02	$	0.07	$	0.05
Diluted	$	0.03	$	0.02	$	0.07	$	0.05

Schedule Of Pro Forma Adjustments

	Three months ended April 30				Nine months ended April 30
	2016		2015		2016		2015
Amortization of intangible assets		-		72		-		271
Acquisition-related professional fees		-		(38)		-		(256)
Interest expense		-		20		-		105
Income tax benefit (expense)		-		10		-		77
Total adjustments		-		64		-		197

DCi [Member]

Business Acquisition [Line Items]

Schedule Of Purchase Price Allocation

	Preliminary
	Purchase
	Price
Cash	$	3,750
Financed by note payable		1,936
Issuance of common stock		500
Purchase price	$	6,186
	Preliminary
	Purchase
	Allocation
Trade receivables	$	422
Prepaid expense and other		38
Assumed liabilities		(260)
Furniture and equipment		387
Software product costs		698
Intangible assets		1,830
Goodwill		3,071
Purchase price allocation	$	6,186

TASCO [Member]

Business Acquisition [Line Items]

Schedule Of Purchase Price Allocation

	Purchase
	Price
Cash	$	1,750
Issuance of common stock		800
Contingent holdback		138
Purchase price	$	2,688
	Purchase
	Allocation
Trade receivables	$	120
Assumed liabilities		(227)
Software product costs		434
Intangible assets		1,000
Goodwill		1,361
Purchase price allocation	$	2,688

TCS [Member]

Business Acquisition [Line Items]

Schedule Of Purchase Price Allocation

	Purchase
	Price
Cash	$	4,200
Financed by note payable		2,933
Issuance of common stock		1,980
Contingent earn-out		711
Purchase price	$	9,824
	Purchase
	Allocation
Trade receivables	$	606
Prepaid expense and other		33
Assumed liabilities		(668)
Furniture and equipment		117
Software product costs		820
Intangible assets		4,080
Goodwill		4,836
Purchase price allocation	$	9,824

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Contingent Liabilities (Tables)

9 Months Ended

Apr. 30, 2016

Contingent Liabilities [Abstract]

Schedule Of Changes In Holdback And Earn-Out Payable

	Nine months ended April 30
	2016		2015
Beginning balance	$	1,116	$	448
Additions		-		911
Adjustments		(62)		-
Payments		(565)		(292)
Imputed interest recognized		22		37
Gain on change in fair value of earn-out		(5)		-
Ending balance	$	506	$	1,104
Less current portion	$	(382)	$	(627)
Ending balance, long-term	$	124	$	477

Schedule Of Estimated Contingent Liability Payments

2016	$	121
2017		331
2018		70
Total estimated payments		522
Less imputed interest		(16)
Present value of contingent liabilities	$	506

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Other Intangible Assets (Tables)

9 Months Ended

Apr. 30, 2016

Other Intangible Assets [Abstract]

Schedule Of Amortizable Intangible Assets

	Nine months ended April 30, 2015						Wtd. avg.
	Cost		Accumulated		Net		remaining
Customer relationships	Basis		Amortization		Value		life
Beginning balance	$	7,174	$	(3,584)	$	3,590
Activity		3,838		(598)		3,240
Ending balance	$	11,012	$	(4,182)	$	6,830	11.46
Other intangibles
Beginning balance	$	383	$	(361)	$	22
Activity		1,399		(159)		1,240
Ending balance	$	1,782	$	(520)	$	1,262	1.66
Total intangibles
Beginning balance	$	7,557	$	(3,945)	$	3,612
Activity		5,237		(757)		4,480
Ending balance	$	12,794	$	(4,702)	$	8,092	11.07
	Nine months ended April 30, 2016						Wtd. avg.
	Cost		Accumulated		Net		remaining
Customer relationships	Basis		Amortization		Value		life
Beginning balance	$	11,947	$	(4,418)	$	7,529
Activity		(220)		(853)		(1,073)
Ending balance	$	11,727	$	(5,271)	$	6,456	11.98
Other intangibles
Beginning balance	$	3,203	$	(616)	$	2,587
Activity		(467)		(301)		(768)
Ending balance	$	2,736	$	(917)	$	1,819	8.73
Total intangibles
Beginning balance	$	15,150	$	(5,034)	$	10,116
Activity		(688)		(1,154)		(1,841)
Ending balance	$	14,463	$	(6,188)	$	8,275	11.26

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Stock-Based Compensation Plans (Tables)

9 Months Ended

Apr. 30, 2016

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Schedule Of Fair Value Weighted Average Assumptions Of Options Granted

	Nine months ended April 30
	2016			2015
Expected life (years)		n/a			5.0
Risk-free interest rate		n/a			1.7	%
Expected volatility		n/a			63.6	%
Expected forfeiture rate		10.1	%		9.1	%
Expected dividend yield		-			-
Weighted-average estimated
fair value per share of options
granted during the year		n/a		$	1.8
Cash received from the exercise
of stock options	$	67,000		$	83,000

2000 Plan [Member]

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Schedule Of Changes In Option Shares

	Number of Options	Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Period (Years)	Aggregate Intrinsic Value
Outstanding at 7/31/15	472,250	$	1.52	2.52	$	783,174
Granted	-		n/a	n/a		n/a
Exercised	(36,000)		1.35	n/a		n/a
Forfeited	(1,000)		2.15	n/a		n/a
Outstanding at 4/30/2016	435,250	$	1.53	1.94	$	1,129,764
Exercisable at 4/30/2016	435,250	$	1.53	1.94	$	1,129,764

2010 Plan [Member]

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Schedule Of Changes In Option Shares

	Number of Options	Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Period (Years)	Aggregate Intrinsic Value
Outstanding at 7/31/15	434,751	$	2.34	7.47	$	387,964
Granted	-		n/a	n/a		n/a
Exercised	(38,750)		1.39	n/a		n/a
Forfeited	(19,625)		1.86	n/a		n/a
Outstanding at 4/30/2016	376,376	$	2.46	7.14	$	627,665
Exercisable at 4/30/2016	237,003	$	2.15	6.78	$	469,414

Schedule Of Changes In Non-Vested Option Shares

	Number of Options	Wtd. Avg. Exercise Price
Non-vested at 7/31/15	161,498	$	2.99
Granted	-		n/a
Vested	(11,250)		3.28
Forfeited	(10,875)		2.54
Non-vested at 4/30/16	139,373	$	2.99

Schedule Of Changes In Unvested Restricted Shares

	Nine months ended April 30
	2016	2015
Beginning balance unvested restricted stock	671,211	93,704
Granted	42,359	621,471
Vested	(33,060)	(28,610)
Forfeited	(10,292)	-
Ending balance unvested restricted stock	670,218	686,565

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Income Taxes (Tables)

9 Months Ended

Apr. 30, 2016

Income Taxes [Abstract]

Provision For Income Taxes

	Three months ended April 30				Nine months ended April 30
	2016		2015		2016		2015
Current:
Federal	$	(40)	$	(18)	$	(40)	$	(28)
State		(64)		(11)		(76)		(47)
Change in valuation allowance		—		—		—		17
Deferred, net		(264)		(214)		(856)		(548)
Income tax expense	$	(368)	$	(243)	$	(972)	$	(606)

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Description Of The Business And Significant Accounting Policies (Details)		9 Months Ended
	Aug. 01, 2015 USD ($)	Apr. 30, 2016 USD ($) customer item	Apr. 30, 2015 USD ($) customer
Description Of Business And Significant Accounting Policies [Line Items]
Number of manufacturers | item		1,800
Equipment dealers, distributors and manufacturers | item		23,500
Estimated economic life		11 years 3 months 4 days	11 years 26 days
Provisions for legal proceedings		$ 0	$ 0
Restatement Adjustment [Member]
Description Of Business And Significant Accounting Policies [Line Items]
Previously recorded to prepaid expenses and other	$ 29,000
Previously recorded to other long-term assets	$ 84,000
Minimum [Member] | Software Products [Member]
Description Of Business And Significant Accounting Policies [Line Items]
Estimated economic life		2 years
Maximum [Member] | Software Products [Member]
Description Of Business And Significant Accounting Policies [Line Items]
Estimated economic life		14 years
Customer Concentration Risk [Member] | Sales Revenue, Net [Member]
Description Of Business And Significant Accounting Policies [Line Items]
Number of customers accounting for ten percent or more of revenue | customer		0	0
Customer Concentration Risk [Member] | Minimum [Member] | Sales Revenue, Net [Member]
Description Of Business And Significant Accounting Policies [Line Items]
Percentage of revenue		10.00%	10.00%

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Basic And Diluted Net Income Per Common Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Apr. 30, 2016	Apr. 30, 2015	Apr. 30, 2016	Apr. 30, 2015
Basic And Diluted Net Income Per Common Share [Abstract]
Net income	$ 448	$ 339	$ 1,285	$ 703
Weighted-average common shares outstanding	17,258	14,362	17,199	14,100
Effect of dilutive stock options and warrants	511	424	490	436
Diluted weighted-average common shares	17,769	14,786	17,689	14,536
Basic	$ 0.03	$ 0.02	$ 0.07	$ 0.05
Diluted	$ 0.03	$ 0.02	$ 0.07	$ 0.05
Options and warrants that could potentially dilute net income per share in the future that are not included in the computation of diluted net income per share, as their impact is anti-dilutive		10		10

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Debt (Narrative) (Details)			1 Months Ended	9 Months Ended	12 Months Ended
	Jul. 13, 2015 USD ($)	Sep. 30, 2014 USD ($) loan	Feb. 28, 2015 USD ($)	Apr. 30, 2016 USD ($)	Apr. 30, 2016 USD ($)	Apr. 26, 2013 USD ($)
SVB Agreement [Member]
Debt Instrument [Line Items]
Revolving credit facility						$ 3,000,000
Revolving credit facility maturity date				Apr. 26, 2015
Term loan						$ 4,500,000
Maturity date				Apr. 26, 2018
SVB Modification Agreement [Member]
Debt Instrument [Line Items]
Revolving credit facility		$ 3,000,000
Revolving credit facility maturity date				Sep. 30, 2016
Term loan		$ 6,050,000
Maturity date				Sep. 30, 2019
Revolving credit facility outstanding				$ 0	$ 0
Effective interest rate				4.00%	4.00%
Term loan prepayment penalty				$ 61,000
Additional payments required as percentage of excess cash flow				25.00%
Total Leverage Ratio					1.18
Fixed Charge Coverage Ratio					2.71
SVB Modification Agreement [Member] | Prime Rate [Member]
Debt Instrument [Line Items]
Applicable margin				3.50%
SVB Modification Agreement [Member] | November 1, 2014 through August 1, 2016 [Member]
Debt Instrument [Line Items]
Term loan quarterly installments				$ 151,250
SVB Modification Agreement [Member] | November 1, 2016 through August 1, 2017 [Member]
Debt Instrument [Line Items]
Term loan quarterly installments				226,875
SVB Modification Agreement [Member] | November 1, 2017 through August 1, 2019 [Member]
Debt Instrument [Line Items]
Term loan quarterly installments				$ 302,500
Minimum [Member] | SVB Modification Agreement [Member]
Debt Instrument [Line Items]
Fixed Charge Coverage Ratio				1.25
Maximum [Member] | SVB Modification Agreement [Member]
Debt Instrument [Line Items]
Total Leverage Ratio threshold				2.00
Total Leverage Ratio				3.00
TCS [Member]
Debt Instrument [Line Items]
Maturity date				Sep. 30, 2018
Number of notes issued in connection with acquisition | loan		2
Liabilities incurred		$ 2,933,000
Debt instrument valuation adjustment			$ (67,000)
Interest rate		5.00%
Default interest rate		7.50%
DCi [Member]
Debt Instrument [Line Items]
Maturity date				Jul. 13, 2019
Liabilities incurred	$ 1,936,000
Debt instrument valuation adjustment	$ (64,000)
Interest rate	4.00%

XML

Debt (Schedule Of Leverage Ratios And Applicable Margins) (Details)	9 Months Ended
	Apr. 30, 2016
Range 1 [Member]
Debt Instrument [Line Items]
Total Leverage Ratio	2.50
Range 1 [Member] | Prime Rate [Member]
Debt Instrument [Line Items]
Applicable Margin for Prime Rate Loans	1.50%
Range 2 [Member] | Prime Rate [Member]
Debt Instrument [Line Items]
Applicable Margin for Prime Rate Loans	1.00%
Range 3 [Member]
Debt Instrument [Line Items]
Total Leverage Ratio	1.75
Range 3 [Member] | Prime Rate [Member]
Debt Instrument [Line Items]
Applicable Margin for Prime Rate Loans	0.50%
Minimum [Member] | Range 2 [Member]
Debt Instrument [Line Items]
Total Leverage Ratio	1.75
Maximum [Member] | Range 2 [Member]
Debt Instrument [Line Items]
Total Leverage Ratio	2.50

XML

Debt (Schedule Of Long-Term Debt) (Details) - USD ($) $ in Thousands	Apr. 30, 2016	Jul. 31, 2015
Debt [Abstract]
Notes payable principal	$ 9,553	$ 10,529
Less debt issuance costs	(100)	(112)
Less current maturities	(2,172)	(1,338)
Notes payable - non-current	$ 7,281	$ 9,079

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Debt (Schedule Of Minimum Principal Payments) (Details) - USD ($) $ in Thousands	Apr. 30, 2016	Jul. 31, 2015
Debt Instrument [Line Items]
2016 remaining	$ 385
2017	2,417
2018	2,793
2019	2,143
2020	1,815
Notes payable principal	9,553	$ 10,529
SVB Term Note [Member]
Debt Instrument [Line Items]
2016 remaining	151
2017	832
2018	1,134
2019	1,211
2020	1,815
Notes payable principal	5,143
TCS Notes [Member]
Debt Instrument [Line Items]
2016 remaining	234
2017	965
2018	1,014
2019	261
Notes payable principal	2,474
DCi Notes [Member]
Debt Instrument [Line Items]
2017	620
2018	645
2019	671
Notes payable principal	$ 1,936

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Business Combinations (Narrative) (Details)					1 Months Ended		9 Months Ended
	Apr. 27, 2016 USD ($)	Jul. 13, 2015 USD ($) shares	Apr. 27, 2015 USD ($) shares	Sep. 30, 2014 USD ($) loan shares	Oct. 31, 2015 USD ($)	Feb. 28, 2015 USD ($)	Apr. 30, 2016 USD ($)	Dec. 31, 2016 USD ($)	Dec. 31, 2015 USD ($)
Business Acquisition [Line Items]
Goodwill increase							$ 471,000
DCi [Member]
Business Acquisition [Line Items]
Cash consideration		$ 3,750,000
Shares consideration | shares		159,795
Liabilities incurred		$ 1,936,000
Debt instrument valuation adjustment		(64,000)
Tax deductible goodwill		$ 3,300,000
Estimated tax rate							40.00%
TASCO [Member]
Business Acquisition [Line Items]
Cash consideration			$ 1,750,000
Shares consideration | shares			242,424
Debt instrument valuation adjustment					$ (62,000)
Tax deductible goodwill			$ 1,500,000
Holdback payable consideration	$ 200,000		$ 138,000
TCS [Member]
Business Acquisition [Line Items]
Cash consideration				$ 4,200,000
Shares consideration | shares				618,744
Liabilities incurred				$ 2,933,000
Debt instrument valuation adjustment						$ (67,000)
Tax deductible goodwill				$ 5,200,000
Number of notes issued in connection with acquisition | loan				2
Earn-out period							3 years
Contingent earn-out				$ 711,000
Earn-out payment									$ 120,905
Percentage increase in equipment dealer websites portfolio				30.00%
Estimated tax rate							40.00%
TCS [Member] | Forecast [Member]
Business Acquisition [Line Items]
Earn-out payment								$ 70,000

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Business Combinations (Schedule Of Purchase Price Allocation) (Details) - USD ($)					9 Months Ended
	Apr. 27, 2016	Jul. 13, 2015	Apr. 27, 2015	Sep. 30, 2014	Apr. 30, 2015	Apr. 30, 2016	Jul. 31, 2015
Business Acquisition [Line Items]
Issuance of common stock					$ 2,780,000
Goodwill						$ 21,639,000	$ 21,168,000
DCi [Member]
Business Acquisition [Line Items]
Cash		$ 3,750,000
Financed by note payable		1,936,000
Issuance of common stock		500,000
Purchase price		6,186,000
Trade receivables		422,000
Prepaid expense and other		38,000
Assumed liabilities		(260,000)
Furniture and equipment		387,000
Software product costs		698,000
Intangible assets		1,830,000
Goodwill		3,071,000
Purchase price allocation		$ 6,186,000
TASCO [Member]
Business Acquisition [Line Items]
Cash			$ 1,750,000
Issuance of common stock			800,000
Contingent holdback	$ 200,000		138,000
Purchase price			2,688,000
Trade receivables			120,000
Assumed liabilities			(227,000)
Software product costs			434,000
Intangible assets			1,000,000
Goodwill			1,361,000
Purchase price allocation			$ 2,688,000
TCS [Member]
Business Acquisition [Line Items]
Cash				$ 4,200,000
Financed by note payable				2,933,000
Issuance of common stock				1,980,000
Contingent earn-out				711,000
Purchase price				9,824,000
Trade receivables				606,000
Prepaid expense and other				33,000
Assumed liabilities				(668,000)
Furniture and equipment				117,000
Software product costs				820,000
Intangible assets				4,080,000
Goodwill				4,836,000
Purchase price allocation				$ 9,824,000

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Business Combinations (Schedule Of Unaudited Pro Forma Financial Information) (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Apr. 30, 2016	Apr. 30, 2015	Apr. 30, 2016	Apr. 30, 2015
Business Combinations [Abstract]
Revenue	$ 11,984	$ 11,223	$ 35,473	$ 33,354
Net income	$ 448	$ 355	$ 1,285	$ 818
Basic	$ 0.03	$ 0.02	$ 0.07	$ 0.05
Diluted	$ 0.03	$ 0.02	$ 0.07	$ 0.05

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Business Combinations (Schedule Of Pro Forma Adjustments) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Apr. 30, 2016	Apr. 30, 2015	Apr. 30, 2016	Apr. 30, 2015
Business Combinations [Abstract]
Amortization of intangible assets		$ 72		$ 271
Acquisition-related professional fees		(38)		(256)
Interest expense		20		105
Income tax benefit (expense )		10		77
Total adjustments		$ 64		$ 197

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Contingent Liabilities (Narrative) (Details) - USD ($)				1 Months Ended			9 Months Ended
	Apr. 27, 2016	Apr. 27, 2015	Sep. 30, 2014	Aug. 31, 2015	Sep. 30, 2014	Nov. 30, 2013	Apr. 30, 2016	Dec. 31, 2016	Dec. 31, 2015	Oct. 31, 2013	Jul. 31, 2012
TASCO [Member]
Business Acquisition, Contingent Consideration [Line Items]
Holdback payable consideration	$ 200,000	$ 138,000
Shares of common stock issued concurrent with earn-out payment		242,424
TCS [Member]
Business Acquisition, Contingent Consideration [Line Items]
Contingent earn-out			$ 711,000
Earn-out payment									$ 120,905
Business combination contingent consideration gain							$ 13,000
Shares of common stock issued concurrent with earn-out payment			618,744
TCS [Member] | Forecast [Member]
Business Acquisition, Contingent Consideration [Line Items]
Earn-out payment								$ 70,000
Ready2Ride [Member]
Business Acquisition, Contingent Consideration [Line Items]
Earn-out payment			$ 125,000	$ 125,000	$ 125,000					$ 125,000
Shares of common stock issued concurrent with earn-out payment				15,000	15,000	10,000
Loss contingency							$ 8,000
Maximum [Member] | Ready2Ride [Member]
Business Acquisition, Contingent Consideration [Line Items]
Contingent hold-back purchase price											$ 250,000

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Contingent Liabilities (Schedule Of Changes In Holdback And Earn-Out Payable) (Details) - USD ($) $ in Thousands	9 Months Ended
	Apr. 30, 2016	Apr. 30, 2015	Jul. 31, 2015
Contingent Liabilities [Abstract]
Beginning balance	$ 1,116	$ 448
Additions		$ 911
Adjustments	$ (62)
Payments	(565)	$ (292)
Imputed interest recognized	22	$ 37
Gain on change in fair value of earn-out	(5)
Ending balance	506	$ 1,104
Less current portion	(382)	(627)	$ (754)
Ending balance, long-term	$ 124	$ 477	$ 362

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Contingent Liabilities (Schedule Of Estimated Contingent Liability Payments) (Details) - USD ($) $ in Thousands	Apr. 30, 2016	Jul. 31, 2015	Apr. 30, 2015	Jul. 31, 2014
Contingent Liabilities [Abstract]
2016	$ 121
2017	331
2018	70
Total estimated payments	522
Less imputed interest	(16)
Present value of contingent liabilities	$ 506	$ 1,116	$ 1,104	$ 448

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Other Intangible Assets (Details) - USD ($) $ in Thousands	9 Months Ended
	Apr. 30, 2016	Apr. 30, 2015	Jul. 31, 2015	Jul. 31, 2014
Finite-Lived Intangible Assets [Line Items]
Amortizable Intangible Assets, Cost Basis	$ 14,463	$ 12,794	$ 15,150	$ 7,557
Amortizable Intangible Assets, Accumulated Amortization	(6,188)	(4,702)	(5,034)	(3,945)
Amortizable Intangible Assets, Net Value	8,275	8,092	10,116	3,612
Activity, Cost Basis	(688)	5,237
Activity, Accumulated Amortization	(1,154)	(757)
Activity, Net Value	$ (1,841)	$ 4,480
Weighted average remaining useful life	11 years 3 months 4 days	11 years 26 days
Customer Relationships [Member]
Finite-Lived Intangible Assets [Line Items]
Amortizable Intangible Assets, Cost Basis	$ 11,727	$ 11,012	11,947	7,174
Amortizable Intangible Assets, Accumulated Amortization	(5,271)	(4,182)	(4,418)	(3,584)
Amortizable Intangible Assets, Net Value	6,456	6,830	7,529	3,590
Activity, Cost Basis	(220)	3,838
Activity, Accumulated Amortization	(853)	(598)
Activity, Net Value	$ (1,073)	$ 3,240
Weighted average remaining useful life	11 years 11 months 23 days	11 years 5 months 16 days
Other Intangibles [Member]
Finite-Lived Intangible Assets [Line Items]
Amortizable Intangible Assets, Cost Basis	$ 2,736	$ 1,782	3,203	383
Amortizable Intangible Assets, Accumulated Amortization	(917)	(520)	(616)	(361)
Amortizable Intangible Assets, Net Value	1,819	1,262	$ 2,587	$ 22
Activity, Cost Basis	(467)	1,399
Activity, Accumulated Amortization	(301)	(159)
Activity, Net Value	$ (768)	$ 1,240
Weighted average remaining useful life	8 years 8 months 23 days	1 year 7 months 28 days

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Stock-Based Compensation Plans (Narrative) (Details) - USD ($)	1 Months Ended	3 Months Ended		9 Months Ended
	Mar. 31, 2015	Apr. 30, 2016	Apr. 30, 2015	Apr. 30, 2016	Apr. 30, 2015	Jul. 31, 2015
Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock compensation expense recognized		$ 19,000	$ 41,000	$ 59,000	$ 110,000
Unrecognized compensation costs		61,000	193,000	61,000	193,000
Capitalized stock-based compensation costs				0	0
Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock compensation expense recognized		79,000	54,000	227,000	195,000
Unrecognized compensation expense		$ 467,000	526,000	$ 467,000	526,000
2000 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Common stock authorized for issuance		1,950,000		1,950,000
Expiration term				5 years
Shareholder percent ownership of the company				10.00%
Exercise prices for options outstanding		$ 1.53		$ 1.53		$ 1.52
2000 Plan [Member] | Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expiration term				10 years
Exercise prices for options outstanding		2.10		$ 2.10
2000 Plan [Member] | Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Exercise prices for options outstanding		$ 0.49		$ 0.49
2010 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Common stock authorized for issuance		1,850,000		1,850,000
Expiration term				10 years
Exercise prices for options outstanding		$ 2.46		$ 2.46		$ 2.34
Weighted-average remaining vesting period				1 year 6 months 29 days
2010 Plan [Member] | Common Stock, Restricted Stock And Restricted Stock Unit Awards [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Common stock authorized for issuance		1,525,000		1,525,000
2010 Plan [Member] | Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Exercise prices for options outstanding		$ 3.61		$ 3.61
2010 Plan [Member] | Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Exercise prices for options outstanding		$ 0.59		$ 0.59
Purchase price as percent of market value				100.00%
2000 ESPP [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock compensation expense recognized		$ 15,000	$ 0	$ 29,000	$ 0
Purchase price as percent of market value				85.00%
Employee Stock Purchase Plan common stock reserved for issuance		575,000		575,000
Employee Stock Purchase Plan shares issued		300,280	263,974	300,280	263,974
Maximum number of shares per employee per year				5,000
2000 ESPP [Member] | Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Service period to participate in employee stock purchase plan				6 months
Executive Bonus Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period				4 years
Shares of restricted stock under the LTEB	550,000
Common stock granted under the LTEB	$ 350,000
Volatility rate				46.00%
Risk-free interest rate				1.34%
Tranche One [Member] | Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting percentage				25.00%
Tranche One [Member] | Executive Bonus Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting percentage				30.00%
Market price threshold				$ 6.00
Tranche Two [Member] | Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting percentage				25.00%
Vesting period				3 years
Tranche Two [Member] | Executive Bonus Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting percentage				20.00%
Market price threshold				$ 7.00
Tranche Three [Member] | Executive Bonus Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting percentage				20.00%
Market price threshold				$ 8.00
Tranche Four [Member] | Executive Bonus Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting percentage				30.00%
Market price threshold				$ 9.00
Directors [Member] | Tranche One [Member] | Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting percentage				50.00%
Directors [Member] | Tranche Two [Member] | Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting percentage				50.00%

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Stock-Based Compensation Plans (Schedule Of Fair Value Weighted Average Assumptions Of Options Granted) (Details) - USD ($)	9 Months Ended
	Apr. 30, 2016	Apr. 30, 2015
Stock-Based Compensation Plans [Abstract]
Expected life (years)		5 years
Risk-free interest rate		1.70%
Expected volatility		63.60%
Expected forfeiture rate	10.10%	9.10%
Expected dividend yield
Weighted-average estimated fair value per share of options granted during the year		$ 1.80
Cash received from the exercise of stock options	$ 67,000	$ 83,000

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Stock-Based Compensation Plans (Schedule Of Changes In Option Shares) (Details) - USD ($)	9 Months Ended	12 Months Ended
	Apr. 30, 2016	Jul. 31, 2015
2000 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Options, Outstanding, Beginning Balance	472,250
Number of Options, Granted
Number of Options, Exercised	(36,000)
Number of Options, Forfeited	(1,000)
Number of Options, Outstanding, Ending Balance	435,250	472,250
Number of Options, Exercisable	435,250
Weighted Average Exercise Price, Outstanding, Beginning Balance	$ 1.52
Weighted Average Exercise Price, Granted
Weighted Average Exercise Price, Exercised	$ 1.35
Weighted Average Exercise Price, Forfeited	2.15
Weighted Average Exercise Price, Outstanding, Ending Balance	1.53	$ 1.52
Weighted Average Exercise Price, Exercisable	$ 1.53
Weighted Average Remaining Contractual Period (Years), Outstanding	1 year 11 months 9 days	2 years 6 months 7 days
Weighted Average Remaining Contractual Period (Years), Exercisable	1 year 11 months 9 days
Aggregate Intrinsic Value, Outstanding	$ 1,129,764	$ 783,174
Aggregate Intrinsic Value, Exercisable	$ 1,129,764
2010 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Options, Outstanding, Beginning Balance	434,751
Number of Options, Granted
Number of Options, Exercised	(38,750)
Number of Options, Forfeited	(19,625)
Number of Options, Outstanding, Ending Balance	376,376	434,751
Number of Options, Exercisable	237,003
Weighted Average Exercise Price, Outstanding, Beginning Balance	$ 2.34
Weighted Average Exercise Price, Granted
Weighted Average Exercise Price, Exercised	$ 1.39
Weighted Average Exercise Price, Forfeited	1.86
Weighted Average Exercise Price, Outstanding, Ending Balance	2.46	$ 2.34
Weighted Average Exercise Price, Exercisable	$ 2.15
Weighted Average Remaining Contractual Period (Years), Outstanding	7 years 1 month 21 days	7 years 5 months 19 days
Weighted Average Remaining Contractual Period (Years), Exercisable	6 years 9 months 11 days
Aggregate Intrinsic Value, Outstanding	$ 627,665	$ 387,964
Aggregate Intrinsic Value, Exercisable	$ 469,414

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Stock-Based Compensation Plans (Schedule Of Changes In Non-Vested Option Shares) (Details) - $ / shares	9 Months Ended
	Apr. 30, 2016	Apr. 30, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Weighted Average Exercise Price, Granted		$ 1.80
2010 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Options, Non-vested, Beginning Balance	161,498
Number of Options, Granted
Number of Options, Vested	(11,250)
Number of Options, Forfeited	(10,875)
Number of Options, Non-vested, Ending Balance	139,373
Weighted Average Exercise Price, Non-vested, Beginning Balance	$ 2.99
Weighted Average Exercise Price, Granted
Weighted Average Exercise Price, Vested	$ 3.28
Weighted Average Exercise Price, Forfeited	2.54
Weighted Average Exercise Price, Non-vested, Ending Balance	$ 2.99

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Stock-Based Compensation Plans (Schedule Of Changes In Unvested Restricted Shares) (Details) - Restricted Stock [Member] - shares	9 Months Ended
	Apr. 30, 2016	Apr. 30, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Beginning balance unvested restricted stock	671,211	93,704
Granted	42,359	621,471
Vested	(33,060)	(28,610)
Forfeited	(10,292)
Ending balance unvested restricted stock	670,218	686,565

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Income Taxes (Narrative) (Details) - USD ($)	9 Months Ended
	Apr. 30, 2016	Apr. 30, 2015
Operating Loss Carryforwards [Line Items]
Reserve for uncertain tax positions	$ 0	$ 0
Netherlands [Member]
Operating Loss Carryforwards [Line Items]
Net operating loss carryforwards period	9 years
Net deferred tax assets	$ 0	$ 0
Federal [Member]
Operating Loss Carryforwards [Line Items]
Net operating loss carryforwards	2,493,000
State [Member]
Operating Loss Carryforwards [Line Items]
Unused NOLs	12,226,000
Net operating loss carryforwards	12,226,000
International [Member]
Operating Loss Carryforwards [Line Items]
Net operating loss carryforwards	$ 2,294,000

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Income Taxes (Provision For Income Taxes) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Apr. 30, 2016	Apr. 30, 2015	Apr. 30, 2016	Apr. 30, 2015
Income Taxes [Abstract]
Current: Federal	$ (40)	$ (18)	$ (40)	$ (28)
Current: State	$ (64)	$ (11)	$ (76)	(47)
Change in valuation allowance				17
Deferred, net	$ (264)	$ (214)	$ (856)	(548)
Income tax expense	$ (368)	$ (243)	$ (972)	$ (606)