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 October 31, 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 December  8, 2016,there were  17,460,032  shares of the registrant’s common stock outstanding.

ARI Network Services, Inc.

FORM 10-Q

FOR THE THREE MONTHS ENDEDOCTOBER 31, 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	17
Item 3	Quantitative and Qualitative Disclosures about Market Risk	27
Item 4	Controls and Procedures	27
PART II           OTHER INFORMATION
Item 1	Legal Proceedings	28
Item 1A	Risk Factors	28
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3	Defaults upon Senior Securities	28
Item 4	Mine Safety Disclosures	28
Item 5	Other Information	28
Item 6	Exhibits	28
Signatures		29

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PART I.   FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

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ARI Network Services, Inc.
Consolidated Balance Sheets
(Dollars in Thousands, Except per Share Data)
	(Unaudited)		(Audited)
	October 31		July 31
	2016		2016
ASSETS
Cash and cash equivalents	$	5,617	$	5,118
Trade receivables, less allowance for doubtful accounts of $175
and $211 at October 31, 2016 and July 31, 2016, respectively		1,817		1,942
Work in process		73		132
Prepaid expenses and other		682		781
Deferred income taxes		2,892		3,182
Total current assets		11,081		11,155
Equipment and leasehold improvements:
Computer equipment and software for internal use		3,579		3,575
Leasehold improvements		639		639
Furniture and equipment		2,591		2,544
Total equipment and leasehold improvements		6,809		6,758
Less accumulated depreciation and amortization		(4,437)		(4,237)
Net equipment and leasehold improvements		2,372		2,521
Capitalized software product costs:
Amounts capitalized for software product costs		25,384		24,774
Less accumulated amortization		(20,265)		(19,743)
Net capitalized software product costs		5,119		5,031
Deferred income taxes		1,123		1,112
Other intangible assets		7,518		7,890
Goodwill		21,634		21,634
Total non-current assets		37,766		38,188
Total assets	$	48,847	$	49,343
LIABILITIES
Current portion of long-term debt	$	2,510	$	2,417
Current portion of contingent liabilities		273		331
Accounts payable		785		718
Deferred revenue		5,818		6,763
Accrued payroll and related liabilities		2,327		1,817
Accrued sales, use and income taxes		252		297
Other accrued liabilities		707		677
Current portion of capital lease obligations		50		50
Total current liabilities		12,722		13,070
Long-term debt		6,031		6,658
Long-term portion of contingent liabilities		—		60
Capital lease obligations		51		63
Other long-term liabilities		155		166
Total non-current liabilities		6,237		6,947
Total liabilities		18,959		20,017
SHAREHOLDERS' EQUITY
Cumulative preferred stock, par value $.001 per share, 1,000,000 shares authorized; 0 shares issued and outstanding at October 31, 2016 and July 31, 2016, respectively		—		—
Junior preferred stock, par value $.001 per share, 100,000 shares authorized; 0 shares issued and outstanding at October 31, 2016 and July 31, 2016, respectively		—		—
Common stock, par value $.001 per share, 25,000,000 shares authorized; 17,445,532 and 17,310,763 shares issued and outstanding at October 31, 2016 and July 31, 2016, respectively		17		17
Additional paid-in capital		115,571		115,364
Accumulated deficit		(85,694)		(86,050)
Other accumulated comprehensive income		(6)		(5)
Total shareholders' equity		29,888		29,326
Total liabilities and shareholders' equity	$	48,847	$	49,343
See accompanying notes

4

ARI Network Services, Inc.
Consolidated Statements of Operations
(Dollars in Thousands, Except per Share Data)
(Unaudited)
	Three months ended October 31
	2016		2015
Net revenue	$	12,272	$	11,737
Cost of revenue		2,289		2,069
Gross profit		9,983		9,668
Operating expenses:
Sales and marketing		2,687		2,765
Customer operations and support		2,755		2,446
Software development and technical support (net of capitalized software product costs)		1,256		1,255
General and administrative		1,942		1,785
Depreciation and amortization (exclusive of amortization of software product costs included in cost of revenue)		575		609
Net operating expenses		9,215		8,860
Operating income		768		808
Other income (expense):
Interest expense		(108)		(112)
Other, net		1		(8)
Total other income (expense)		(107)		(120)
Income before provision for income tax		661		688
Income tax expense		(305)		(299)
Net income	$	356	$	389
Weighted average common shares outstanding:
Basic		17,424		17,152
Diluted		17,929		17,604
Net income per common share:
Basic	$	0.02	$	0.02
Diluted	$	0.02	$	0.02
See accompanying notes
Consolidated Statements of Comprehensive Income
(Dollars in Thousands)
(Unaudited)
	Three months ended October 31
	2016		2015
Net income	$	356	$	389
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		(1)		(2)
Total other comprehensive income (loss)		(1)		(2)
Comprehensive income	$	355	$	387

See accompanying notes

5

ARI Network Services, Inc.

Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

	Three months ended October 31
	2016		2015
Operating activities:
Net income	$	356	$	389
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of software products		522		496
Amortization of deferred loan fees and imputed interest expense		10		5
Depreciation and other amortization		575		610
Gain on change in fair value of earn-out receivable and payable		-		8
Provision for bad debt allowance		(6)		25
Deferred income taxes		279		293
Stock based compensation		149		115
Net change in assets and liabilities:
Trade receivables		131		(102)
Work in process, prepaid expenses and other		135		115
Accounts payable		67		71
Deferred revenue		(945)		(700)
Accrued payroll and related liabilities		519		435
Accrued taxes and other accrued liabilities		(26)		(25)
Net cash provided by operating activities	$	1,766	$	1,735
Investing activities:
Purchase of equipment, software and leasehold improvements		(51)		(167)
Cash paid for contingent liabilities related to acquisitions		(121)		(125)
Software development costs capitalized		(610)		(373)
Net cash used in investing activities	$	(782)	$	(665)
Financing activities:
Payments on long-term debt	$	(541)	$	(151)
Payments of capital lease obligations		(12)		(65)
Proceeds from exercise of common stock options and warrants		72		43
Net cash used in financing activities	$	(481)	$	(173)
Effect of foreign currency exchange rate changes on cash		(4)		(2)
Net change in cash and cash equivalents		499		895
Cash and cash equivalents at beginning of period		5,118		2,284
Cash and cash equivalents at end of period	$	5,617	$	3,179
Cash paid for interest	$	103	$	113
Cash paid for income taxes	$	123	$	13

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 Gurgaon, 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 other 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 2017, for example, refer to the fiscal year ending July 31, 2017, and references to fiscal 2016 refer to the fiscal year ended July 31, 2016.  

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.

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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 three months endedOctober 31, 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.

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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. 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 may periodically be 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, in accordance with GAAP. We had no legal provisions during the three months ended October 31, 2016 or 2015 and management believes that the results of any outstanding litigation will not have a material impact on the Company’s financial condition or results of operations. 

Supplemental Cash Flow Information

The following table shows cash flow information related to non-cash investing and financing activities (in thousands):

	Three months ended October 31
	2016		2015
Non-cash investing and financing activities
Issuance of common stock related to payment of contingent liabilities	$	-	$	60
Cashless exercise of common stock warrants		-		46
Current assets acquired in connection with acquisitions		-		32
Accrued liabilities assumed in connection with acquisitions		-		53
Contingent liabilities incurred in connection with acquisition		-		(62)

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 October 31
	2016		2015
Net income	$	356	$	389
Weighted-average common shares outstanding		17,424		17,152
Effect of dilutive stock options and warrants		505		452
Diluted weighted-average common shares outstanding		17,929		17,604
Net income per share
Basic	$	0.02	$	0.02
Diluted	$	0.02	$	0.02
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		-		-

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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 included credit facilities consisting of a $3,000,000 revolving credit facility with a maturity date of November 30, 2016 and a $6,050,000 term loan with a maturity date of September 30, 2019.  

On November 1, 2016, in connection with the Company’s acquisition of Auction123123, Inc. (“Auction123”), the Company entered into the Second Loan Modification Agreement with SVB.  See Note 8, Subsequent Events for details relating to the acquisition of Auction123and the SVB Second Loan Modification Agreement.

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 October 31, 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 was required to be paid in its entirety on or before November 30, 2016. Principal in respect of the term loan was 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 was 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 required 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 contained 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 1.04 and the Fixed Charge Ratio was 1.90 for the twelve months ended October 31, 2016.  The Modification Agreement also contained customary events of default that, if triggered, could result in an acceleration of the Company’s obligations under the Modification Agreement. All SVB 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

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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 were interest only payments, and payments of principal and interest commenced 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 October 31, 2016 and July 31, 2016 (in thousands): 

	October 31		July 31
	2016		2016
Notes payable principal	$	8,626	$	9,168
Less debt issuance costs		(85)		(93)
Less current maturities		(2,510)		(2,417)
Notes payable - non-current	$	6,031	$	6,658

Minimum principal payments due on the SVB Term Note, the TCS Notes and the DCi Note as of October 31, 2016were as follows for the fiscal years ending (in thousands): 

Fiscal year ending July 31:	SVB Term Note		TCS Notes			DCi Notes		Total Notes Payable
2017	$	681	$	728	$	467	$	1,876
2018		1,134		1,014		645		2,793
2019		1,210		261		671		2,142
2020		1,815		—		—		1,815
	$	4,840	$	2,003	$	1,783	$	8,626

4. Contingent Liabilities 

Consideration for the April 2015 TASCO acquisition included a $138,000 (as adjusted) holdback which was paid in April 2016. 

Consideration for the September 2014 TCS acquisition includes a contingent earn-out purchase price, originally 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 earn-out, whereas four quarterly payments of $120,905 commenced on December 31, 2015, followed by four quarterly payments of $70,000, commencing December 31, 2016. Payments for the quarter ended October 31, 2015 included the final earn-out payment related to the Ready2Ride acquisition, composed of $125,000 and 15,000 shares of common stock.

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

	Three months ended October 31
	2016		2015
Beginning balance	$	391	$	1,116
Adjustments		-		(62)
Payments		(121)		(186)
Imputed interest recognized		3		8
Gain on change in fair value of earn-out		-		8
Ending balance	$	273	$	884
Less current portion	$	(273)	$	(639)
Ending balance, long-term	$	0	$	245

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12

The following table shows the remaining estimated payments of contingent liabilities related to the TCS acquisition at October 31, 2016, (in thousands):

2017	$	210
2018		70
Total estimated payments		280
Less imputed interest		(7)
Present value of contingent liabilities	$	273

5. 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 October 31, 2016 and 2015 (in thousands): 

	Three months ended October 31, 2015						Wtd. avg.
	Cost		Accumulated		Net		remaining
Customer relationships	Basis		Amortization		Value		life
Beginning balance	$	11,947	$	(4,418)	$	7,529
Activity		-		(285)		(285)
Ending balance	$	11,947	$	(4,703)	$	7,244	11.84
Other intangibles
Beginning balance	$	3,203	$	(616)	$	2,587
Activity		-		(112)		(112)
Ending balance	$	3,203	$	(728)	$	2,475	3.09
Total intangibles
Beginning balance	$	15,150	$	(5,034)	$	10,116
Activity		-		(397)		(397)
Ending balance	$	15,150	$	(5,431)	$	9,719	11.13
	Three months ended October 31, 2016						Wtd. avg.
	Cost		Accumulated		Net		remaining
Customer relationships	Basis		Amortization		Value		life
Beginning balance	$	11,727	$	(5,558)	$	6,169
Activity		-		(263)		(263)
Ending balance	$	11,727	$	(5,821)	$	5,906	11.70
Other intangibles
Beginning balance	$	2,739	$	(1,018)	$	1,721
Activity		-		(109)		(109)
Ending balance	$	2,739	$	(1,127)	$	1,612	8.37
Total intangibles
Beginning balance	$	14,466	$	(6,576)	$	7,890
Activity		-		(372)		(372)
Ending balance	$	14,466	$	(6,948)	$	7,518	10.98

6. 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.

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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. The Company recognized a benefit for stock option compensation$5,000in the first quarter of fiscal 2017 due to forfeitures, and expense of $24,000 for the quarter ended October 31, 2015.There was approximately $22,000 and $112,000 of total unrecognized compensation costs related to non-vested options granted under the Company’s stock option plans as of October 31,  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:  

	Three months ended October 31,
	2016
Expected life (years)		n/a
Risk-free interest rate		n/a
Expected volatility		n/a
Expected forfeiture rate		11.1	%
Expected dividend yield		-
Weighted-average estimated fair value per
share of options granted during the year		n/a
Cash received from the exercise
of stock options	$	5,000

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 three months endedOctober 31, 2016 were as follows:

	Number of Options	Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Period (Years)	Aggregate Intrinsic Value
Outstanding at 7/31/2016	384,750	$	1.46	1.89	$	1,408,027
Granted	-		n/a	n/a		n/a
Exercised	-		n/a	n/a		n/a
Forfeited	-		n/a	n/a		n/a
Outstanding at 10/31/2016	384,750	$	1.46	1.64	$	1,350,314
Exercisable at 10/31/2016	384,750	$	1.46	1.64	$	1,350,314

The range of exercise prices for options outstanding under the 2000 Plan was $0.49 to $1.96 at October 31, 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.

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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 three months endedOctober 31, 2016 were as follows:

	Number of Options	Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Period (Years)	Aggregate Intrinsic Value
Outstanding at 7/31/2016	357,626	$	2.52	6.95	$	930,816
Granted	-		n/a	n/a		n/a
Exercised	(1,250)		3.61	n/a		n/a
Forfeited	(13,750)		3.31	n/a		n/a
Outstanding at 10/31/2016	342,626	$	2.48	6.25	$	852,672
Exercisable at 10/31/2016	292,626	$	2.34	6.25	$	768,884

The range of exercise prices for options outstanding under the 2010 Plan was $0.59 to $3.54 at October 31, 2016.

Changes in the 2010 Plan's non-vested option shares included in the outstanding shares above during the three months endedOctober 31, 2016 were as follows:

	Number of Options	Wtd. Avg. Exercise Price
Non-vested at 7/31/2016	70,000	$	3.29
Granted	-		n/a
Vested	(6,250)		3.20
Forfeited	(13,750)		3.31
Non-vested at 10/31/2016	50,000	$	3.29

The weighted average remaining vesting period was 0.96 years at October 31, 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 300,280and 263,974 of the shares have been issued as of October 31,  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 $13,000 and $20,000during the three months ended October 31, 2016, and 2015 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 $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

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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 2017 was valued using the market price on the date of grant. The Company recognized compensation expense of $142,000 and $73,000 during the three months ended October 31,  2016 and 2015, respectively,related to all restricted stock.The remaining balance of unrecognized compensation expense related to restricted stock was $750,000 and $462,000 at October 31, 2016 and 2015, respectively.

Changes in unvested restricted shares of common stock under the 2010 Plan during the three months endedOctober 31,  2016 and 2015 were as follows:

	Three months ended October 31
	2016	2015
Beginning balance unvested restricted stock	657,912	671,211
Granted	102,720	-
Vested	(6,474)	(6,474)
Forfeited	(2,534)	(5,460)
Ending balance unvested restricted stock	751,624	659,277

7. Income Taxes 

The provision for income taxes for the three months endedOctober 31, 2016 and 2015 is composed of the following (in thousands): 

	Three months ended October 31
	2016		2015
Current:
Federal	$	—	$	—
State		(25)		(6)
Deferred, net		(280)		(293)
Income tax expense	$	(305)	$	(299)

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 sheets. We have unused net operating loss carry forwards ("NOLs") for federal income tax purposes, and as a result, we generally only incur alternative minimum taxes at the federal level that are currently payable.

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 of $437,000 and $531,000 is recorded, resulting in $0 net deferred tax assets related to the Netherlands operation at October 31, 2016 and 2015.

The Company also has an NOL related to tax losses incurred by its India operation, which began operations in the second quarter of fiscal 2016. Under tax laws in India, NOLs are able to be carried forward for a period of eight years. The Company has determined that it is not likely that the net operating loss will be utilized by the Company primarily based on the start-up nature of this operation. Therefore, a full valuation allowance of $61,000 was recorded, resulting in $0 net deferred tax assets related to the India operation at October 31, 2016.

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As of October 31, 2016, the Company had accumulated NOLs for federal, state and international tax purposes of approximately $2,115,000,$8,377,000 and $1,918,000, 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 October 31, 2016 or 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 2012 remain open and subject to examination by state tax jurisdictions and the United States federal tax authorities.

8.  Subsequent Events

Acquisition of Auction123, Inc.

On November 1, 2016, the Company acquired substantially all of the assets of Auction123, Inc. (“Auction123”), a leading provider of software and services to help dealers in selected vertical markets manage and feed inventory information to online marketplaces to drive more sales and leads.  Auction123 serves several vertical markets including automotive dealers, powersports, recreational vehicles and marine.  Consideration for the acquisition (the "Company Purchase Price") included, (1) a cash payment equal to $10,500,000; and (2) a contingent earn-out purchase price payable in two installments and contingent upon the attainment of specific revenue goals related to a specific customer.  The earn-out has a maximum payout of $1,500,000.  The purchase price will be adjusted based on the net asset value on the closing balance sheet being above or below the targeted amount.

The acquisition was funded from cash on hand and an increase in our term loan.  Due to the timing of the acquisition, the opening balance sheet and pro-forma information is not complete as of the date of this report.

Loan Modification

On November 1, 2016, the Company entered into the Second Loan Modification Agreement, dated November 1, 2016, by and among SVB and the Company (the "Second Modification Agreement"). The Second Modification Agreement amends the Agreements with SVB dated April 26, 2013 and September 30, 2014.

The Second Modification Agreement includes credit facilities consisting of $3,000,000 revolving credit facility with a maturity date of September 30, 2018 and a $13,000,000 term loan with a maturity date of November 1, 2021. This term loan is an amendment to the existing $6,050,000 term loan with a maturity date of September 30, 2019.

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 determined based on the Total Leverage Ratio.

	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, 2018.  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:  $325,000 commencing on February 1, 2017 through November 1, 2018; $487,500 commencing on February 1, 2019 through November 1, 2019; and $650,000 commencing on February 1, 2020 through August 1, 2021.  All remaining principal in respect of the term loan is due and payable on November 1, 2021.  The Company is permitted to prepay all of, but not less than all of, the outstanding principal amount of the term loan upon certain notice to SVB and, in certain circumstances, the payment of a prepayment penalty of up to $260,000.  Following July 31, 2018, the Second Modification agreement requires the Company to make additional payments in the amount of 50% of excess cash flow until the Company’s Total Leverage Ratio is less than 2.00 to 1.00 and 25% of excess cash flow until the Company’s Total Leverage Ratio is less than 1.25 to 1.00.

The Second 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 through the period ending December 31, 2017 and 2.50 to 1.00 thereafter, and the maintenance of a Fixed Charge Coverage Ratio (as defined in the Agreement) equal to or greater than 1.25 to 1.00. The Agreement also contains customary events of default that, if triggered, could result in an acceleration of the Company’s

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obligations under the Agreement.  The loans are secured by a first priority security interest in substantially all assets of the Company. 

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 months ended October 31, 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 Lead Generation and eCommerce Websites, eCatalog Solutions, Business Management Systems and Digital Marketing Services that help dealers, equipment manufacturers and distributors in select vertical markets Sell More Stuff!™ – online and in-store. Our innovative products are powered by a proprietary library of enriched electronic product content including 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. More than 23,500 equipment dealers, distributors and manufacturers worldwide leverage our solutions to Sell More Stuff!™

We go to market under the “ARI Network Services, Inc.” brand name in the powersports, outdoor power equipment (OPE), marine, home medical equipment (HME), recreational vehicles (RV) and appliance industries. We service customers in the automotive tire and wheel aftermarket (ATW) under the “TCS Technologies, an ARI Company” brand name; and we service the automotive aftermarket parts and service (AAPS) market under the “DCi, an ARI Company” brand name.

Our Solutions

Our primary solutions include: (i) Lead Generation and eCommerce Websites, giving dealers and wholesalers an online presence optimized for today’s digital path to purchase and serving as a platform to drive in-bound lead generation and eCommerce sales; (ii) eCatalogs, offering access to our proprietary library of enriched electronic product content via a suite of SaaS and DaaS solutions to enable the sale of whole goods inventory and PG&A; (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 Services designed to generate leads and drive traffic both to the dealer’s website and brick-and-mortar location.

Our solutions also improve our dealers’ 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 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, more than 90% of our revenues are recurring.

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Lead Generation and eCommerce Websites

Our online solutions are tailored to each of the vertical markets we serve and are tightly integrated with our proprietary library of enriched electronic product content for major unit inventory and PG&A. Our website platform development teams continually innovate our platforms to keep up with the ever-evolving demands of our customers, online shoppers and search engines to ensure we can provide dealers with websites that perform well in search and convert online visits into leads, eCommerce sales and in-store visits. 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 leads through email campaigns, automated responses, sales team reminders and other lead generating activities, increasing conversion rates and ultimately revenues for our customers.

Lead Generation and eCommerce Websites are sold through our internal sales teams, which are aligned by vertical market. The sales process typically includes a live demo of the site and may include a free trial period (we refer to these as “test drives”). We typically charge monthly recurring subscription fees, and may charge a one-time set up 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 host and maintain more than 7,500 websites for dealers across all of our vertical markets.

eCatalog Platform Solutions

Our eCatalog solutions offer access to our proprietary library of enriched electronic product content via a suite of SaaS and DaaS solutions including dealer-facing manufacturer parts lookup portals and parts counter solutions; consumer-facing online parts lookup; and DaaS subscription access to our content library all designed to enable the sale of whole goods inventory and PG&A. 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 currently only offered in the ATW aftermarket under the “TCS Technologies, an ARI Company” brand name.

Digital Marketing Services

ARI complements our suite of data-driven SaaS and DaaS solutions with digital marketing services that deliver the engaging experiences that today’s consumers expect, as well as meet the demands of leading search engines like Google. ARI’s Digital Marketing Services include search engine optimization, email marketing, search engine marketing (PPC), online reputation management and online directory management to help dealers drive more online leads, eCommerce sales and in-store traffic. Digital marketing services are sold through our dedicated internal sales team.

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

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We also believe that 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:

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

· Differentiate our content;

· Enter new markets;

· Expand geographically;

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

· Lead the market with open integration to related platforms; and

· Successfully execute acquisitions that align with our core strategy.

These strategic foundations are primarily centered on enhancing the value 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 the Company’s 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 fees, support fees and hosting fees. We define churn as the percentage of RR that does not renew. RR increased 7.4%, or $789,000 to 93.7% of total revenue for the quarter ended October 31, 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 subscriber base of dealers and our average revenue per dealer (ARPD), an important measure for a subscription-based business. We have recently developed a number of new features, upgrades and products, including the following:

Lead Generation and eCommerce Website Platforms

o ARI Responsive Website Platform Development – we continued development and launched our next generation Responsive Design website platform, completing the first phase including advanced design capabilities, lead generation capabilities, and scalable website production tooling, among other market leading capabilities.

eCatalog Platforms

o Data Manager RT™ Development – We completed development and released to market our next generation of Data Manager™, our OEM parts product information management software. This next-generation platform provides OEMs with reduced publishing costs and time to market through real-time publishing, ensuring end users have access to the most accurate and rich part and service content across ARI’s software ecosystem.

o PartStream™ Development – We developed and released a comprehensive upgrade to PartStream™, our leading Business-to-Consumer OEM parts shopping application, that now makes the application fully Responsive – providing customers a beautiful and intuitive parts shopping experience across all devices.

Digital Marketing Services

º Extended Digital Marketing Services Packages Available – We developed and launched extended Digital Advertising and Email Marketing packages, providing our customers with additional curated service packages that meet the demands of their unique business.

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 the enrichment of our content and during fiscal 2017 have made the following enhancements:

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o PG&A Content Addition and Expansion – We’ve secured and authored product content for two market-leading distributor catalogs in our Marine and Home Medical Equipment markets, exponentially increasing the total number or e-commerce products available to sell in those markets.

Enter new markets.

ARI currently maintains a significant share in our core vertical markets of OPE, powersports, marine, RV 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 high single digit to low double digit organic growth rates. ARI currently has more than 3,000 dealer websites in the ATW market. We estimate that the total addressable market includes approximately 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 the early stages of eCommerce adoption.

On November 1, 2016, we acquired Auction123, Inc. (“Auction123”), which will accelerate ARI’s growth in our existing vertical markets, as well as introduce ARI into the automotive dealer market.  Auction123 has been a leader in online marketing solutions, inventory management and website development solutions for dealers in selected vertical markets. Their award-winning web-based software offers tight and seamless integration between the dealer management system (DMS), the dealer’s website, eBay Motors, Craigslist, Facebook and other third-party classified websites.

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 manufacturers outside the U.S. and make changes to our existing product suite 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. During fiscal 2015 and 2016, we added 15 new catalog content offerings in the international outdoor power equipment market. In September 2016, we hired a general manager in the Netherlands intended to expand our European presence.

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

In order to achieve sustained double-digit organic 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. Our customer churn improved from 15.8% during the twelve months ended October 31, 2015 to 14.5% during the same period this year. 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. We currently have integration capabilities with over 90 DMS (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 allow us to do one or more of the following: (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 cross-sell our existing products; and (v) can be integrated into our operations, thereby creating cost-saving synergies.

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From the program’s inception throughNovember 1, 2016, we have closed 17 acquisitions. A summary of some of our most recent acquisitions is as follows:

Acquisition	Date	Strategy
Auction123, LLC*	November 2016	▪	Expand our position in the automotive industry
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
--------------------------------------------------------
* Acquisition completed November 1, 2016 (see Note 8, Subsequent Events).

Summary of Operating Results

Total revenue increased 4.6%, or $535,000, to $12,272,000 for the three months ended October 31, 2016 from $11,737,000 for the same period last year.Recurring revenue increased 7.4% to $11,498,000 during the three months ended October 31, 2016, compared to $10,709,000 during the same period last year. Recurring revenue constituted 93.7% of our total revenue for the three months ended  October 31, 2016 compared to 91.2% for the same period last year. The growth in year-over-year revenue was entirely organic, primarily in the lead generation and eCommerce solutions and the digital marketing solutions.  

Operating income decreased 5.0%, or $40,000, from $808,000 for the three months ended October 31, 2015 to $768,000 for the same period this year. Net operating expenses increased 4.0% or $355,000during the three month period ended October 31, 2016, compared to the same period last year, primarily due to legal and accounting fees related to the Auction123 acquisition and operating expenses for the India operation, which began in the second quarter of fiscal 2016. Net income was $356,000, or $0.02 per share, for the three months ended October 31, 2016, compared to $389,000, or $0.02 per share, for the same period last year.

Cash provided by operations increased slightly from$1,735,000 for thethree months ended October 31, 2015 to $1,764,000 for the same period this year.

Revenue

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

	Three months ended October 31
	2016		% of Total		2015		% of Total		% Change
Lead Generation and eCommerce Websites	$	6,268	51.1	%	$	5,868	50.0	%	6.8	%
eCatalog Services		4,430	36.1	%		4,515	38.5	%	(1.9)	%
Business Management Software		675	5.5	%		809	6.9	%	(16.6)	%
Digital Marketing Solutions		708	5.8	%		356	3.0	%	98.9	%
Other Revenue		191	1.5	%		189	1.6	%	1.1	%
Total revenue	$	12,272	100.0	%	$	11,737	100.0	%	4.6	%
Recurring revenue		11,498	93.7	%		10,709	91.2	%	7.4	%
Non-recurring revenue		774	6.3	%		1,028	8.8	%	(24.7)	%
Total revenue	$	12,272	100.0	%	$	11,737	100.0	%	4.6	%

Total revenue increased 4.6% to $12,272,000 and RR increased 7.4% to $11,498,000 for the three months ended October 31, 2016, compared to the same period last year. RR represented 93.7% of total revenue for the first three months of fiscal 2017, versus 91.2% for the same period in fiscal 2016. We continue to focus on maintaining recurring revenue of over 90%.

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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 51.1% of total revenue during the three months ended October 31, 2016. Lead generation and eCommerce revenue increased 6.8%  from  $5,868,000 for the three months ended October 31, 2015, to $6,268,000 for the same period this year as a result of organic growth. 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 36.1% of total revenue during the three months ended October 31, 2016. eCatalog revenue decreased 1.9%  from $4,515,000 during the three months ended October 31, 2015 to $4,430,000 for the same period this year, primarily due to a decrease in non-recurring professional services revenue. 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.  Management expects eCatalog RR to increase at a low organic growth rate as the Company already has strong market share with this product.

Business Management Software Revenue

Business management software revenue is generated from perpetual one-time license and installation fees for the software, along with recurring maintenance, support and hosting fees for our SaaS version.  Revenue from business management software represented 5.5% of total revenue for the three months ended October 31, 2016. Business management software revenue decreased 16.6% from $809,000 for the three months ended October 31, 2015 to $675,000 for the same period this year. The decrease in business management software revenue was primarily due to a decline in non-recurring perpetual license and professional service fees. Management expects fluctuations in non-recurring business management software revenue due to the timing of sales and professional service contracts.

Digital Marketing Revenue

Revenues from our Digital Marketing Solutions are generated from set-up fees and subscription fees for our lead generation tools through search engine optimization, social media marketing and website enhancements. We derived 5.8% of our revenues from Digital Marketing Services for the three months ended October 31, 2016. Digital marketing revenue increased 98.9%, from $356,000 during the three months ended October 31, 2015 to $708,000 during the same period this year, primarily due to organic growth in RR. Management expects digital marketing revenue to continue to see high double digit growth in fiscal 2017 as this service offering is a relatively new offering and is complementary to our other products, allowing us to expand within our current markets and current customers.

Other Revenue

We also offer a suite of complementary solutions, which include software, professional services and hosting services. Other revenue, which is primarily non-recurring in nature, represented approximately 1.5% of total revenue for the three months ended October 31, 2016, and was relatively consistent with the same quarter last year. Revenue from non-recurring professional services will fluctuate from period to period based on the timing of custom projects,which the Company has intentionally de-emphasized these projects as it focuses more on RR.

Recurring Revenue

RR is one of the most important growth drivers of our business and represented 93.7% of total revenue for the three months ended October 31, 2016. 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

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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 7.4% from $10,709,000 during the three months ended October 31, 2015, to $11,498,000 during the same period this year, primarily due to organic growth in our Lead Generation and eCommerce Website and Digital Marketing solutions. We expect Lead Generation and eCommerce Website RR to continue to be our largest contributor to RR growth in fiscal 2017.

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 services, 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 decreased 24.7% from $1,028,000 during the three months ended October 31, 2015, to $774,000 during the same period this year, primarily due to decreased professional services and perpetual license revenue. Our goal is to maintain non-recurring revenue of less than 10% of total revenue, as the margins on this revenue tends to be lower than our RR products. Furthermore, non-recurring revenue must be resold each year.

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 October 31
			% of				% of
	2016		Revenue		2015		Revenue		% Change
Net revenues	$	12,272			$	11,737			4.6	%
Cost of revenues:
Amortization of capitalized software costs		522	4.3	%		496	4.2	%	5.2	%
Direct labor		785	6.4	%		642	5.5	%	22.3	%
Other direct costs		982	8.0	%		931	7.9	%	5.5	%
Total cost of revenues		2,289	18.7	%		2,069	17.6	%	10.6	%
Gross profit	$	9,983	81.3	%	$	9,668	82.4	%	3.3	%

Gross profit was $9,983,000 or 81.3% of revenue for the three months ended October 31, 2016, compared to $9,668,000 or 82.4% of revenue for the same period last year. Amortization of capitalized software costs as a percentage of revenue increasedslightly from 4.2% for the three months ended October 31, 2015, to 4.3% for the same period this year. Direct labor costs as a percentage of revenue increased 22.3% for the three months ended October 31, 2016, compared to the same period 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. Other direct costs as a percentage of revenue increasedslightly from 7.9% for the three months ended October 31, 2015,  to 8.0% for the same period this year,  primarily due to increased third party costs associated with our digital marketing offerings. 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.

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· 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.

· 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.

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

	Three months ended October 31
			% of				% of		%
	2016		Revenue		2015		Revenue		Change
Sales and marketing	$	2,687	21.9	%	$	2,765	23.6	%	(2.8)	%
Customer operations and support		2,755	22.4	%		2,446	20.8	%	12.6	%
Software development and technical support		1,256	10.3	%		1,255	10.7	%	0.1	%
General and administrative		1,942	15.8	%		1,785	15.2	%	8.8	%
Depreciation and amortization (1)		575	4.7	%		609	5.2	%	(5.6)	%
Net operating expenses	$	9,215	75.1	%	$	8,860	75.5	%	4.0	%
(1) Exclusive of amortization of software products of $522 and $496 for the three months ended October 31, 2016
and 2015, respectively, which are included in cost of revenue.

Net operating expenses increased 4.0%, or $355,000, for the three months ended October 31, 2016, compared to the same period last year. The increase in net operating expenses was primarily due to operating costs to support our growth in revenue, operating costs for the new India operation and acquisition costs for the Auction123 acquisition, which was completed November 1, 2016. Net operating expenses as a percentage of revenue decreased from 75.5% for the three months ended October 31,  2015, to 75.1% 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 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 decreased 2.8%, or $78,000, during the three months ended October 31, 2016,  compared to the same period last year. Sales and marketing expense as a percentage of revenue decreased from 23.6% of revenue for the three months ended October 31, 2015 to 21.9% for the same period in fiscal 2017. 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 be flat or down as RR continues to grow.

Customer Operations and Support

Customer operations and support expense increased 12.6%, or $309,000, during the three months ended October 31, 2016, compared to the same period last year, primarily due to the expenses associated with the India operation. Customer operations and support expense as a percentage of revenue increased from 20.8% of revenue for the three months ended October 31, 2015 to 22.4% during the same period this year. 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 decline as a percentage of revenue over time, to the extent we continue to integrate these areas into our operations and we supplement labor capacity in our India office, while RR continues to grow.

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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 lives 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.

Software development and technical support costs were relatively the same for the three months ended October 31, 2016 and 2015. During the first quarter of fiscal 2017, we capitalized $451,000 of software development labor, overhead and interest expense, versus

$258,000 during the first quarter of fiscal 2016.The increase was a result of two significant product initiatives that escalated in the second quarter of fiscal 2016 as well as the commencement of development work from resources in our India office. In addition to internal capitalized software costs, we had outsourced development costs of $159,000 during the first fiscal 2017 and $115,000 during the first quarter of fiscal 2016. We devoted much of these resources to a major upgrade of our website and e-Catalog publishing products during both fiscal 2016 and 2017.

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 8.8%, or $157,000, during the three months ended October 31, 2016, compared to the same period last year, primarily due to legal fees and accounting fees related to the Auction123 acquisition. General and administrative expense as a percentage of revenue increased from 15.2% of revenue for the first quarter of fiscal 2016 to 15.8% for the same period in fiscal 2017. 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 October 31
	2016		2015		% Change
Interest expense	$	(108)	$	(112)	(3.6)	%
Other, net		1		(8)	(112.5)	%
Total other income (expense)	$	(107)	$	(120)	(10.8)	%

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 decreased 10.8%, or $13,000,during the threemonths ended October 31, 2016,  compared to the same period last year, primarily due to payments on our debt obligations and contingent liabilities.

Income Taxes

The Company has net deferred tax assets of $4,015,000 as of October 31, 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 $305,000 during the three months ended October 31, 2016, compared to $299,000 during the same period last year. We paid income taxes of $123,000 and $13,000 during the three months ended October 31, 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.

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We also have NOLs related to tax losses incurred by our India and Netherlands operations. 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 our international operations at October 31, 2016 and 2015.

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 October 31
	2016			2015
Net income	$	356		$	389
Interest expense		108			112
Amortization included in cost of sales		522			496
Depreciation and amortization		575			609
Income tax expense		305			299
EBITDA	$	1,866		$	1,905
Stock-based compensation expense		149			115
Adjusted EBITDA	$	2,015		$	2,020
Revenue	$	12,272		$	11,737
Adjusted EBITDA as a % of revenue		16.4	%		17.2	%

Adjusted EBITDA decreased0.2%, from $2,020,000 during the first quarter of fiscal 2016, to $2,015,000 during the first quarter of fiscal 2017. Adjusted EBITDA as a percentage of revenue decreased from 17.2% during the three months ended October 31, 2015, to 16.4% during the same period this year. Management expects Adjusted EBITDA to increase in fiscal 2017, compared to the prior year, to the extent earnings increase as a result of RR growth.

Liquidity and Capital Resources

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

	Three months ended October 31
	2016		2015		Change
Net cash provided by operating activities	$	1,766	$	1,735	$	31
Net cash used in investing activities		(782)		(665)		(117)
Net cash provided by (used in) financing activities		(481)		(173)		(308)
Effect of foreign currency exchange rate changes on cash		(4)		(2)		(2)
Net change in cash	$	499	$	895	$	(396)
Cash at end of period	$	5,617	$	3,179	$	2,438

We generated $499,000 of net cash during the three months ended October 31, 2016, compared to $895,000 during the same period last year. We generated net cash from operating activities of $1,766,000 during the three months ended October 31, 2016, compared to $1,735,000 during the same period last year.

Cash used in investing activities increased $117,000 for the three months ended October 31, 2016, compared to the same period last year, primarily due to the increase in capitalized software costs related to the upgrades of our website platform and e-Catalog publishing product, partially offset by lower acquired technology equipment expenditures. We paid cash of $121,000 for contingent liabilities related to our acquisitions, capitalized $610,000 of software development costs, and acquired technology equipment of $51,000 during the three months ended October 31, 2016. We paid cash of $125,000 for contingent liabilities, capitalized $373,000 of software development costs, and acquired technology equipment of $167,000 during the three months ended October 31, 2015. We will continue to invest cash in the business to further our growth strategies previously discussed.

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Net cash used in financing activities was $481,000 during the three months ended October 31, 2016, primarily to pay down the SVB note, the TCS Notes, the DCi Note and our capital lease obligations. Net cash used in financing activities was $173,000 during the three months ended October 31, 2015, primarily to pay down the SVB note and capital lease obligations. 

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 November 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 theminimum principal payments due on the SVB Term Note, the TCS Notes and the DCi Note as of October 31, 2016(in thousands):

Fiscal year ending July 31:	SVB Term Note		TCS Notes			DCi Notes		Total Notes Payable
2017	$	681	$	728	$	467	$	1,876
2018		1,134		1,014		645		2,793
2019		1,210		261		671		2,142
2020		1,815		—		—		1,815
	$	4,840	$	2,003	$	1,783	$	8,626

In connection with the November 1, 2016 acquisition of Auction123123, the Company entered into the Second Loan Modification Agreement with SVB, which includes credit facilities consisting of $3,000,000 revolving credit facility with a maturity date of September 30, 2018 and a $13,000,000 term loan with a maturity date of November  1, 2021. This term loan is an amendment to the existing $6,050,000 term loan with a maturity date of September 30, 2019 (see Note 8, Subsequent Events).

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.

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 October 31, 2016 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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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 October 31, 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, 2016. 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

10.1Employment Agreement by and between Robert Ostermann and ARI Network Services, Inc., dated July 27, 2016.

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.

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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 15th day of December, 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

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EX-10.1

Exhibit 10.1

MASTER EMPLOYMENT AGREEMENT

THIS AGREEMENT, is entered into effective as of the 27th day of July, 2016, by and between ARI Network Services, Inc., a Wisconsin corporation, (“we”) and Robert Ostermann, our employee referred to in this Agreement as “you.”

RECITALS

A. We have made a substantial investment of time, effort and expense to establish and maintain favorable customer relationships in order to market our products and services and enhance our business. You have continued to be our employee because we believe you can make an important and meaningful contribution to our success. On and after the effective date, you accept the compensation set forth in Exhibit A hereto, ‘Employee Compensation’ and acknowledge such compensation reflects an increase over your previous level of compensation, and agree that such increase is fully adequate consideration for entering into this Agreement with us.

B. Your responsibility is to perform the duties of your position and to develop and maintain professional relationships with our Clients. It is essential that you continue to develop and maintain personal contacts and personal relationships with those Clients with whom you come in contact. Our business is not only judged by the quality of our products and services, but also by your attitude, the interest you take in your work and your overall performance as an individual. We expect all of these to have a positive effect on your co-workers and our Clients;

C. In the course of your employment, and to enable you to perform your duties with Clients and with other employees, we will continue to openly share certain valuable and confidential information with you. Such confidential information is protected by this Agreement and such disclosure does not alter or remove the confidential nature of this information;

D. We are willing to continue to employ you provided you agree not to compete with us and not to use or disclose our confidential information.

NOW, THEREFORE, in consideration of the premises, the mutual promises contained below and in consideration of your employment by us, it is agreed as follows:

1. Employment. We agree to continue to employ you, and you agree to accept employment with us, upon the following terms and conditions.

2. Duties. You shall continue to accept the responsibilities and perform the duties of your position and shall perform such additional duties as directed or assigned by your supervisor or members of our management. Your position description, performance objectives and duties may be revised from time to time at our sole discretion. You agree to devote your full time and energy to the furtherance of our business. Without our prior written consent, you shall not, while our employee, work or perform services in any advisory or other capacity for any individual, firm, company, or corporation other than us if such work or services (“Outside Work”) would violate the terms of this Agreement or interfere in any way with the performance of your job duties for us. If you are in doubt whether the performance by you of any particular Outside Work might violate the terms of this Agreement, we recommend that you discuss such matter with your Manager or an appropriate member of the Executive Team. It is not our intent or purpose to prevent you from performing Outside Work that would not violate the terms of this Agreement. To avoid difficulties, seeking such clarification in a particular instance may be the most advisable course of action.

3. Compensation. We shall pay you, as compensation for all the services to be rendered by you, the compensation described in Exhibit A, attached hereto (the “Employee Compensation”), and, except as modified to constitute the consideration to you for entering into this Agreement, as determined and modified by us in our sole discretion from time to time. Our obligation to pay you any Employee Compensation shall cease upon termination, for whatever reason, of your employment with us. Your annual salary shall be prorated for partial calendar years of service to us.

4. Terms, Conditions and Termination.

(a) Your employment with us is at will and may be terminated at any time, with or without cause and with or without notice, by either you or by us. After termination of your employment, the duties and obligations we have to each other thereafter are as set forth in certain sections in this Agreement which follow (“Post-Termination Duties and Obligations”). Whenever a Section refers to such Post-Termination Duties and Obligations, it is understood and agreed that all Post-Termination Duties and Obligations shall apply and be in force irrespective of the reason for termination. In other words, in such Sections, any reference to the word “termination” shall refer to “termination, for any reason,” without the need to include the words “for any reason” We may change the status, terms and conditions of your employment at any time with or without cause, except for the at-will nature of the employment relationship. These terms and conditions include, but are not limited to, continued employment, discipline, termination, demotion, promotion, transfer, compensation, benefits, duties, and locations of work. No employee of ours has the authority to enter into any agreement for employment for a specified period of time or to make any representation or agreements to the contrary, except in a written document signed by you and our President.

(b) In the event of your death, all of our obligations under this Agreement shall terminate immediately except with respect to benefits or payments to which you are entitled by law or contract after death.

(c) Upon termination of your employment, or at any time requested by us, you shall return immediately to us all of our documents, records and other property, and all copies thereof, within your possession, custody or control, including, but not limited to, any materials containing any Trade Secrets (defined below) or Confidential Information (defined below) or any portion thereof. Upon termination of Employment, or at any time requested by us, you further agree to destroy such records maintained by you on your own computer equipment. Notwithstanding the foregoing provisions, you will retain your personal employment records that we have provided to you during your employment by us.

d) Without limitation to the foregoing, you acknowledge and agree that any phone numbers (including, without limitation, telephone, cellular, mobile or facsimile numbers), e-mail accounts, or other means of contact you use primarily in the course of performing your duties for us, shall be owned by us and must be returned to us immediately upon termination of your employment or upon our request. If, notwithstanding the foregoing sentence, you are deemed to have any ownership interest in such numbers, accounts or means of contact, you hereby assign, and agree that the ownership of any current or future such numbers, accounts or means of contact shall be automatically assigned, without further consideration, to us. You agree to perform, during or after your employment, such further acts as may be necessary or desirable to transfer, perfect and defend our ownership of such numbers, accounts and means of contact that are reasonably requested by us. Notwithstanding the foregoing provisions, to the extent we so consent in writing at the time of termination, you may retain any such numbers, accounts or means of contact upon termination of your employment.

5. Business Ideas.

(a) We will own, and you hereby assign to us and agree to assign to us, all rights in all Business Ideas which you originate or develop whether alone or working with others while you are employed by us. All Business Ideas which are or form the basis for copyrightable works are hereby assigned to us and/or shall be assigned to us or shall be considered “works for hire” as that term is defined by United States copyright law.

(b) The term “Business Ideas” means all ideas, designs, modifications, formulations, specifications, concepts, know-how, trade secrets, discoveries, inventions, data, software, developments, and copyrightable works, whether or not patentable or registrable, which you originate or develop, either alone or jointly with others, while you are employed by us and which are: (i) related to any business that we are known to be engaged in (a “Current Business”), or related to a Current Business and contemplated by us; (ii) originated or developed during your working hours; or (iii) originated or developed, in whole or in part, using materials, labor, facilities, or equipment furnished by us.

(c) While employed by us, you will promptly disclose all Business Ideas to us. Such disclosure may be made by you to your Manager or to an appropriate Member of the Executive Team in a manner providing acknowledgement in writing of the substance thereof from the person to whom you make such disclosure.

(d) At any time during or after your employment by us, you will promptly execute all documents which we may reasonably require to perfect our patent, copyright and other rights to such Business Ideas throughout the world.

(e) This Paragraph 5 does not apply to any invention which qualifies as a nonassignable invention under Section 2870 of the California Labor Code, and you hereby represents that you have received and reviewed the Notification attached hereto as Exhibit B (Limited Exclusion Notification).

6. Need for Restrictions. You acknowledge and agree that (i) our business and client relationships are significant assets of ours which have been established and maintained by a substantial investment of time, effort and expense by us; (ii) you, by virtue of your employment with us, will have unique and extensive exposure to our most confidential business plans, strategies and operating techniques as well as to our Clients; and (iii) you would be able to compete unfairly with us which would cause a loss in revenue that could injure our business and cause other damages, unless you are subject to the restrictions contained in Sections 5 and 7 through 10, and such other restrictions as may be set forth in this Agreement. You agree that the restrictions set forth therein, including, but not limited to, the time period and client parameters of such restrictions, are fair and reasonably required for the protection of our interests. You also agree that your education and experience are such that the restrictions in Sections 5 and 7 through 10, and such other restrictions as may be set forth in this Agreement, will not unduly interfere with your ability to earn a livelihood.

7. Confidentiality.

(a) During your employment with the Company, you agree to not directly or indirectly, use or disclose any Confidential Information or Trade Secrets (as defined below) except in the interest and for the benefit of the Company. Upon termination of your employment, you will not either directly or indirectly, use or disclose any Trade Secrets of the Company. For a period of twenty-four (24) months following your termination, you will not, directly or indirectly, use or disclose any Confidential Information of the Company.

(b) For purposes of this Agreement, third-party information provided to the Company pursuant to the terms of a confidentiality arrangement or agreement is considered to be Confidential Information.

(c) The term “Trade Secret” has that meaning set forth under applicable law. The term includes, but is not limited to, all computer source, object or other code created by or us.

(d) The term “Confidential Information” means all of our non-Trade Secret or proprietary information which has value to us and which is not known to the public or our competitors, generally. Confidential Information includes, but is not limited to: (i) inventions, product specifications, information about products under development, research, development or business plans, production know-how and processes, manufacturing techniques, operational methods, equipment design and layout, test results, financial information, customer lists, information about orders and transactions with customers, sales and marketing strategies, plans and techniques, pricing strategies, information relating to sources of materials and production costs, purchasing and accounting

information, personnel information and all business records; (ii) information which is marked or otherwise designated or treated as confidential or proprietary by us; and (iii) information received by us from others which we have an obligation to treat as confidential.

(e) Notwithstanding the foregoing, the terms “Trade Secret” and “Confidential Information” shall not include, and the obligations set forth in this Agreement shall not apply to, any information which: (i) can be demonstrated by you to have been known by you prior to your employment by us; (ii) is or becomes generally available to the public through no act or omission of yours; (iii) is obtained by you in good faith from a third party who discloses such information to you on a non-confidential basis without violating any obligation of confidentiality or secrecy relating to the information disclosed; or (iv) is independently developed by you outside the scope of your employment without use of Confidential Information or Trade Secrets.

8. Confidential Information of Others. You warrant and represent to us that you are not subject to any employment, consulting or services agreement, or any restrictive covenants or agreements of any type, which would conflict with, or prohibit you from fully carrying out your duties as described under the terms of this Agreement. Further, you warrant and represent to us that you have not and will not retain or use, for our benefit, any confidential information, records, trade secrets, or other property of a former employer.

9. Restrictions on Competition during Employment. While we employ you, you shall not, directly or indirectly, compete against us, or, directly or indirectly, divert or attempt to divert business from us anywhere we do business.

10. Non-solicitation of Employees. During your employment by us and for twelve (12) months thereafter, you shall not, directly or indirectly, encourage any employee of ours to terminate his/her employment with us or solicit such an individual for employment away from us in any manner which would end or diminish that employee’s services to us.

11. Provisions Applicable if You Work for Us in Certain States. If appropriate, you may be required to accept a replacement Agreement based on our requirements for a new state which has become your place of work for us. Depending on your place of work, an updated Agreement may be applicable.

12. Equitable Relief. The parties to this Agreement acknowledge that a breach by you of any of the terms or conditions of this Agreement will result in irrevocable harm to us and that the remedies at law for such breach may not adequately compensate us for damages suffered. Accordingly, you agree that in the event of such breach, we shall be entitled to injunctive relief or such other equitable remedy as a court of competent jurisdiction may provide (without the necessity of posting bond or other security). Nothing contained herein will be construed to limit our right to any remedies at law, including the recovery of damages for breach of this Agreement. If we bring any action for injunctive relief or recovery of damages or to enforce any of the terms, covenants or conditions contained herein and are the prevailing party, we shall be entitled to recover reasonable attorney’s fees from you, in addition to costs and necessary disbursements, incurred in such action.

13. Modification. In the event any provision of this Agreement is determined by a court of law to be overbroad, unreasonable or unenforceable, the court may, as allowed by applicable law, revise the specific terms of this Agreement to the fullest extent permitted by law to make such terms reasonable and enforceable.

14. Non-Disparagement. Employee agrees to take no action which is intended, or would reasonably be expected, to reflect negatively on the Company or harm the Company or its or their reputation or which would reasonably be expected to lead to unwanted or unfavorable publicity to the Company

15. Miscellaneous.

(a) This Agreement shall not be amended or modified except by a writing executed by both parties, and, with respect to your at-will employment status, any modification must be signed by both you and our President.

(b) This Agreement shall be binding upon and inure to our benefit and our successors and assigns. We may assign this Agreement and any of our rights hereunder. Due to the personal nature of this Agreement, you shall not have the right to assign your rights or obligations under this Agreement without our prior written consent.

(c) You agree, during the term of any restriction contained in this Agreement, to disclose this Agreement to any entity which offers employment to you. You further agree that we may send a copy of this Agreement to, or otherwise make the provisions hereof known to, any of your potential or future employers.

(d) This Agreement and the attached Exhibit represent the entire understanding of the parties concerning the subject matter hereof, and supersede all prior communications, agreements and understandings, whether oral or written, relating to the subject matter hereof.

(e) All communications required or otherwise provided under this Agreement shall be in writing and hand delivered, or sent via email to your Manager or appropriate Member of the Executive Team. All notices shall be deemed effective when personally received by hand delivery or email by the recipient, or on the date of actual receipt, as evidenced by courier record, or by similar document.

If to ARI NETWORK SERVICES, INC: ARI NETWORK SERVICES, INC.

10850 West Park Place, Suite 1200

Milwaukee, WI 53224-3635

Attn: Human Resources

If to Employee: Robert Ostermann

7855 E. Garner Street

Long Beach, CA 90808

(f) Exhibit A, attached hereto, as we may modify it from time to time, is incorporated herein by this reference.

(g) Exhibit B (Limited Exclusion Notification), attached hereto, is incorporated herein by this reference.

16. Governing Law. This Agreement shall be governed by and construed in accordance with the substantive and procedural laws of the state in which you regularly and primarily perform your work for us.

17. Consideration. Execution of this Agreement is a condition of your employment with us, and your employment by us constitutes the consideration for your undertakings hereunder.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first indicated above.

ARI NETWORK SERVICES, INC. EMPLOYEE

By: /s/ Roy W. OlivierBy: /s/ Robert Ostermann

Roy W. Olivier Robert Ostermann

President & CEO Chief Technology Officer

[Exhibit A - Employee Compensation, Exhibit B – Limited Exclusion Notification and Exhibit C – Severance Agreement to follow]

Exhibit A

EMPLOYEE COMPENSATION

PAYROLL DATA: Robert Ostermann

X Full Time Part Time Temporary / Intern X Exempt Non-Exempt

Position/Title: Chief Technology Officer

Position Manager: Roy W. Olivier

Hourly $

Salary $ No change

Commission/Bonus $ No change

Department:

Dept. Number:

EXHIBIT B

LIMITED EXCLUSION NOTIFICATION

THIS IS TO NOTIFY you in accordance with Section 2872 of the California Labor Code that the foregoing Master Employment Agreement between you and ARI Network Services, Inc. (the “Company”) does not require you to assign, or offer to assign, to the Company any invention that you developed entirely on your own time without using the Company’s equipment, supplies, facilities, or trade secret information except for those inventions that either:

1. Relate at the time of conception or reduction to practice of the invention to the Company’s business, or actual or demonstrably anticipated research or development of the Company; or

2. Result from any work performed by you for the Company.

To the extent a provision in the foregoing Agreement purports to require you to assign an invention otherwise excluded from the preceding paragraph, the provision is against the public policy of the State of California and is unenforceable in California.

This limited exclusion does not apply to any patent or invention covered by a contract between the Company and the United States or any of its agencies requiring full title to such patent or invention to be in the United States.

I ACKNOWLEDGE RECEIPT of a copy of this Notification.

EMPLOYEE

By: /s/ Robert Ostermann

Robert Ostermann

Chief Technology Officer

July 27, 2016

ARI NETWORK SERVICES, INC.

By: /s/ Roy W. Olivier

Roy W. Olivier

President & CEO

July 27, 2016

EXHIBIT C

Employment Agreement Addendum

Termination

1.1 Termination Not In Connection With A Change In Control.  

(a) Termination Without Cause. Subject to Section 1.2, below, the President and/or CEO may terminate Executive’s employment and all of the Company’s obligations under this Agreement (except as provided in Section 2.1, below, and as required by law) at any time without Cause (defined below).

(b) Termination For Cause. Subject to Section 1.2, below, the President and/or CEO may terminate Executive’s employment and all of the Company’s obligations under this Agreement (except as provided in Section 2.1, below, and as required by law) at any time for Cause (defined below) by giving written notice to Executive stating the basis for such termination, effective immediately upon giving such notice or at such other time thereafter as the President and/or CEO may designate. “Cause” shall mean any of the following: (1) Executive has, in a material way, breached this Agreement or the fiduciary duty he owes to the Company or any other legal obligation or duty he owes to the Company, which breach remains uncured, if possible to cure, to the reasonable satisfaction of the President and/or CEO for thirty (30) calendar days after Executive receives written notice thereof from the President and/or CEO that specifies in reasonable detail the alleged breach; (2) Executive has committed gross negligence or willful misconduct in the performance of Executive’s duties for the Company; (3) Executive has failed in a material way to follow reasonable instructions from the President and/or CEO, consistent with this Agreement, concerning the operations or business of the Company, which failure remains uncured, if possible to cure, to the reasonable satisfaction of the President and/or CEO for thirty (30) calendar days after Executive receives written notice thereof from the President and/or CEO that specifies in reasonable detail the alleged failure; (4) Executive has committed a crime the circumstances of which substantially relate to Executive’s employment duties with the Company; (5) Executive has misappropriated or embezzled funds or property of the Company or engaged in any act of dishonesty that involves the business of the Company or causes material damage to the Company; and (6) Executive attempts to misappropriate or misappropriates a corporate opportunity of the Company, unless the transaction was approved in writing by the President and/or CEO after full disclosure of all details relating to such transaction.

(c) Termination by Death or Disability. Subject to Section 1.2, below, Executive’s employment and all of the Company’s obligations under this Agreement (except as provided in Section 2.1, below, and as required by law) shall terminate automatically, effective immediately and without any notice being necessary, upon Executive’s death or a determination of Disability of Executive. For purposes of this Agreement, “Disability” means the inability of Executive, due to a physical or mental impairment, to perform the essential functions of Executive’s job with the Company, with or without a reasonable accommodation, for ninety (90) consecutive business days or one hundred twenty (120) business days in the aggregate during any 365-day period. A determination of Disability shall be made by the President and/or CEO and/or the Board, which may, at their sole discretion, consult with a physician or physicians satisfactory to the President and/or CEO and/or the Board, and Executive shall cooperate with any efforts to make such determination. Any such determination shall be conclusive and binding on the Parties. Any determination of Disability under this Section 1.1(c) is not intended to alter any benefits any Party may be entitled to receive under any long-term disability insurance policy carried by either the Company or Executive with respect to Executive, which benefits shall be governed solely by the terms of any such insurance policy.

d) Termination by Retirement. Subject to Section 1.2, below, Executive’s employment and all of the Company’s obligations under this Agreement (except as provided in Section 2.1, below, and as required by law) shall terminate automatically, effective upon Executive’s retirement in accordance with the Company’s retirement plan or policy should a retirement plan or policy for senior executives of the Company be adopted.

(e) Termination by Resignation. Subject to Paragraph 1.2, below, Executive’s employment and all of the Company’s obligations under this Agreement (except as provided in Section 2.1, below, and as required by law)

shall terminate automatically, effective immediately upon Executive’s provision of thirty (30) days’ prior written notice to the President and/or CEO of resignation from employment with the Company or at such other time as may be mutually agreed between the Parties following the provision of such notice.

(f) Termination for Good Reason. Subject to Section 1.2, below, Executive may terminate his employment and all of the Company’s obligations under this Agreement (except as provided in Section 2.1, below, and as required by law) for Good Reason (defined below). A termination shall only be for Good Reason if: (1) within ninety (90) calendar days of the initial existence of Good Reason, Executive provides written notice of Good Reason to the President and/or CEO; (2) the Company does not remedy said Good Reason within thirty (30) calendar days of its receipt of such notice; and (3) Executive terminates his employment effective any time after the expiration of such 30-day remedy period prior to the date that is two (2) years after the initial existence of Good Reason. “Good Reason” shall mean the occurrence of any of the following without the written consent of Executive: (a) the Company has breached this Agreement in a material way, which breach remains uncured, if subject to cure, for thirty (30) calendar days after the President and/or CEO receives written notice thereof from Executive; (b) a material diminution in Executive’s Base Salary; ; or (c) a material change in the geographic location at which Executive must perform his services, provided such new location is more than fifty (50) miles from the location where Executive is required to perform services prior to the change.

1.2 Rights Upon Termination Not In Connection With A Change In Control.

(a) Section 1.1(a), Section 1.1(c) and Section 1.1(f) Termination. If Executive’s employment is terminated pursuant to Section 1.1(a), Section 1.1(c), or Section 1.1(f), above, Executive or Executive’s estate shall have no further rights against the Company hereunder, except for the right to receive the following: (1) any unpaid Base Salary with respect to the period prior to the effective date of termination and (2) any earned but unpaid bonus due to Executive as of the effective date of termination. With respect to a termination pursuant to Section 1.1(a) or Section 1.1(f), above, Executive shall also receive (1) Executive’s Base Salary, at the rate in effect at the time of termination, for six (6) months following the effective date of termination; and (2) acceleration of all outstanding unvested options and unvested restricted stock which has time based vesting and is not subject to market or performance based vesting conditions held by Executive as of the effective date of termination. Payment of the amounts specified in subsection (1) of the immediately preceding sentence shall be made in six (6) equal monthly installments following the effective date of termination. Notwithstanding the foregoing, the payment and receipt of the benefits specified in subsections (1), and (2), of that same sentence are contingent upon Executive’s execution of a written severance agreement (in a form satisfactory to the Company) containing, among other things, a general release of claims against the Company, and the rescission period of such agreement must expire, without revocation of such release, within sixty (60) days following the effective date of termination. To the extent that payments would otherwise be paid to Executive within the sixty (60) day period following the effective date of termination, such payment(s) shall be made following Executive’s execution of such general release and the expiration of the applicable rescission period, except where the sixty (60) day period following the effective date of termination spans two different calendar years, in which case such payment(s) or benefit(s) will not be paid until the later calendar year during the sixty (60) day period.

(b) Section 1.1(b) and Section 1.1(e) Terminations. If Executive’s employment is terminated pursuant to Section 1.1(b), above, or if Executive resigns pursuant to Section 1.1(e), above, Executive shall have no further rights against the Company hereunder, except for the right to receive any unpaid Base Salary with respect to the period prior to the effective date of termination.

(c) Section 1.1(d) Termination. If Executive retires pursuant to Section 1.1(d), above, Executive shall have no further rights against the Company hereunder, except for the right to receive: (1) any unpaid Base Salary with respect to the period prior to the effective date of termination; (2) any earned but unpaid bonus due to Executive as of the effective date of termination; and (3) any additional benefits provided for under the Company’s retirement plan or policy for senior executives, if any.

2.1 Survival. The covenants set forth in Sections 1 through 20 of this Agreement shall survive the termination of Executive’s employment hereunder.

The parties have executed this Addendum as of the date first indicated above.

ARI NETWORK SERVICES, INC. EMPLOYEE

By: /s/ Roy W. OlivierBy: /s/ Robert Ostermann

Roy W. Olivier Robert Ostermann

President and CEO Chief Technology Officer

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:  December 15, 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:  December 15, 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:  December 15, 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:  December 15, 2016

/s/ William A. Nurthen

William A. Nurthen
Vice President of Finance andChief Financial Officer

XML

Document And Entity Information - shares	3 Months Ended
	Oct. 31, 2016	Dec. 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	Q1
Document Period End Date	Oct. 31, 2016
Document Fiscal Year Focus	2017
Current Fiscal Year End Date	--07-31
Entity Common Stock, Shares Outstanding		17,460,032

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Oct. 31, 2016	Jul. 31, 2016
ASSETS
Cash and cash equivalents	$ 5,617	$ 5,118
Trade receivables, less allowance for doubtful accounts of $175 and $211 at October 31, 2016 and July 31, 2016, respectively	1,817	1,942
Work in process	73	132
Prepaid expenses and other	682	781
Deferred income taxes	2,892	3,182
Total current assets	11,081	11,155
Equipment and leasehold improvements:
Computer equipment and software for internal use	3,579	3,575
Leasehold improvements	639	639
Furniture and equipment	2,591	2,544
Total equipment and leasehold improvements	6,809	6,758
Less accumulated depreciation and amortization	(4,437)	(4,237)
Net equipment and leasehold improvements	2,372	2,521
Capitalized software product costs:
Amounts capitalized for software product costs	25,384	24,774
Less accumulated amortization	(20,265)	(19,743)
Net capitalized software product costs	5,119	5,031
Deferred income taxes	1,123	1,112
Other intangible assets	7,518	7,890
Goodwill	21,634	21,634
Total non-current assets	37,766	38,188
Total assets	48,847	49,343
LIABILITIES
Current portion of long-term debt	2,510	2,417
Current portion of contingent liabilities	273	331
Accounts payable	785	718
Deferred revenue	5,818	6,763
Accrued payroll and related liabilities	2,327	1,817
Accrued sales, use and income taxes	252	297
Other accrued liabilities	707	677
Current portion of capital lease obligations	50	50
Total current liabilities	12,722	13,070
Long-term debt	6,031	6,658
Long-term portion of contingent liabilities	0	60
Capital lease obligations	51	63
Other long-term liabilities	155	166
Total non-current liabilities	6,237	6,947
Total liabilities	18,959	20,017
SHAREHOLDERS' EQUITY
Common stock, par value $.001 per share, 25,000,000 shares authorized; 17,445,532 and 17,310,763 shares issued and outstanding at October 31, 2016 and July 31, 2016, respectively	17	17
Additional paid-in capital	115,571	115,364
Accumulated deficit	(85,694)	(86,050)
Other accumulated comprehensive income	(6)	(5)
Total shareholders' equity	29,888	29,326
Total liabilities and shareholders' equity	48,847	49,343
Cumulative Preferred Stock [Member]
SHAREHOLDERS' EQUITY
Preferred stock
Junior Preferred Stock [Member]
SHAREHOLDERS' EQUITY
Preferred stock

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Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Oct. 31, 2016	Jul. 31, 2016
ASSETS
Trade receivables, allowance for doubtful accounts	$ 175	$ 211
SHAREHOLDERS' EQUITY
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	25,000,000	25,000,000
Common stock, shares issued	17,445,532	17,310,763
Common stock, shares outstanding	17,445,532	17,310,763
Cumulative Preferred Stock [Member]
SHAREHOLDERS' EQUITY
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]
SHAREHOLDERS' EQUITY
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

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Consolidated Statements Of Operations - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Oct. 31, 2016	Oct. 31, 2015
Consolidated Statements Of Operations [Abstract]
Net revenue	$ 12,272	$ 11,737
Cost of revenue	2,289	2,069
Gross profit	9,983	9,668
Operating expenses:
Sales and marketing	2,687	2,765
Customer operations and support	2,755	2,446
Software development and technical support (net of capitalized software product costs)	1,256	1,255
General and administrative	1,942	1,785
Depreciation and amortization (exclusive of amortization of software product costs included in cost of revenue)	575	609
Net operating expenses	9,215	8,860
Operating income	768	808
Other income (expense):
Interest expense	(108)	(112)
Other, net	1	(8)
Total other income (expense)	(107)	(120)
Income before provision for income tax	661	688
Income tax expense	(305)	(299)
Net income	$ 356	$ 389
Weighted average common shares outstanding:
Basic	17,424	17,152
Diluted	17,929	17,604
Net income per common share:
Basic	$ 0.02	$ 0.02
Diluted	$ 0.02	$ 0.02

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Consolidated Statements Of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended
	Oct. 31, 2016	Oct. 31, 2015
Consolidated Statements Of Comprehensive Income (Loss) [Abstract]
Net income	$ 356	$ 389
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(1)	(2)
Total other comprehensive income (loss)	(1)	(2)
Comprehensive income	$ 355	$ 387

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Consolidated Statements Of Cash Flows - USD ($) $ in Thousands	3 Months Ended
	Oct. 31, 2016	Oct. 31, 2015
Operating activities:
Net income	$ 356	$ 389
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of software products	522	496
Amortization of deferred loan fees and imputed interest expense	10	5
Depreciation and other amortization	575	610
Gain on change in fair value of earn-out receivable and payable		8
Provision for bad debt allowance	(6)	25
Deferred income taxes	279	293
Stock based compensation	149	115
Net change in assets and liabilities:
Trade receivables	131	(102)
Work in process, prepaid expenses and other	135	115
Accounts payable	67	71
Deferred revenue	(945)	(700)
Accrued payroll and related liabilities	519	435
Accrued taxes and other accrued liabilities	(26)	(25)
Net cash provided by operating activities	1,766	1,735
Investing activities:
Purchase of equipment, software and leasehold improvements	(51)	(167)
Cash paid for contingent liabilities related to acquisitions	(121)	(125)
Software development costs capitalized	(610)	(373)
Net cash used in investing activities	(782)	(665)
Financing activities:
Payments on long-term debt	(541)	(151)
Payments of capital lease obligations	(12)	(65)
Proceeds from exercise of common stock options and warrants	72	43
Net cash used in financing activities	(481)	(173)
Effect of foreign currency exchange rate changes on cash	(4)	(2)
Net change in cash and cash equivalents	499	895
Cash and cash equivalents at beginning of period	5,118	2,284
Cash and cash equivalents at end of period	5,617	3,179
Cash paid for interest	103	113
Cash paid for income taxes	$ 123	$ 13

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Description Of The Business And Significant Accounting Policies

3 Months Ended

Oct. 31, 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 Gurgaon, 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 other 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 2017, for example, refer to the fiscal year ending July 31, 2017, and references to fiscal 2016 refer to the fiscal year ended July 31, 2016.

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 three months ended October 31, 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. 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 may periodically be 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, in accordance with GAAP. We had no legal provisions during the three months ended October 31, 2016 or 2015 and management believes that the results of any outstanding litigation will not have a material impact on the Company’s financial condition or results of operations. 

Supplemental Cash Flow Information

The following table shows cash flow information related to non-cash investing and financing activities (in thousands):

	Three months ended October 31
	2016		2015
Non-cash investing and financing activities
Issuance of common stock related to payment of contingent liabilities	$	-	$	60
Cashless exercise of common stock warrants		-		46
Current assets acquired in connection with acquisitions		-		32
Accrued liabilities assumed in connection with acquisitions		-		53
Contingent liabilities incurred in connection with acquisition		-		(62)

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Basic And Diluted Net Income Per Common Share

3 Months Ended

Oct. 31, 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 October 31
	2016		2015
Net income	$	356	$	389
Weighted-average common shares outstanding		17,424		17,152
Effect of dilutive stock options and warrants		505		452
Diluted weighted-average common shares outstanding		17,929		17,604
Net income per share
Basic	$	0.02	$	0.02
Diluted	$	0.02	$	0.02
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		-		-

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Debt

3 Months Ended

Oct. 31, 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 included credit facilities consisting of a $3,000,000 revolving credit facility with a maturity date of November 30, 2016 and a $6,050,000 term loan with a maturity date of September 30, 2019.  

On November 1, 2016, in connection with the Company’s acquisition of Auction123123, Inc. (“Auction123”), the Company entered into the Second Loan Modification Agreement with SVB.  See Note 8, Subsequent Events for details relating to the acquisition of Auction123and the SVB Second Loan Modification Agreement.

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 October 31, 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 was required to be paid in its entirety on or before November 30, 2016. Principal in respect of the term loan was 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 was 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 required 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 contained 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 1.04 and the Fixed Charge Ratio was 1.90 for the twelve months ended October 31, 2016. The Modification Agreement also contained customary events of default that, if triggered, could result in an acceleration of the Company’s obligations under the Modification Agreement. All SVB 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 were interest only payments, and payments of principal and interest commenced 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 October 31, 2016 and July 31, 2016 (in thousands): 

	October 31		July 31
	2016		2016
Notes payable principal	$	8,626	$	9,168
Less debt issuance costs		(85)		(93)
Less current maturities		(2,510)		(2,417)
Notes payable - non-current	$	6,031	$	6,658

Minimum principal payments due on the SVB Term Note, the TCS Notes and the DCi Note as of October 31, 2016were as follows for the fiscal years ending (in thousands): 

Fiscal year ending July 31:	SVB Term Note		TCS Notes			DCi Notes		Total Notes Payable
2017	$	681	$	728	$	467	$	1,876
2018		1,134		1,014		645		2,793
2019		1,210		261		671		2,142
2020		1,815		—		—		1,815
	$	4,840	$	2,003	$	1,783	$	8,626

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Contingent Liabilities

3 Months Ended

Oct. 31, 2016

Contingent Liabilities [Abstract]

Contingent Liabilities

4. Contingent Liabilities 

Consideration for the April 2015 TASCO acquisition included a $138,000 (as adjusted) holdback which was paid in April 2016. 

Consideration for the September 2014 TCS acquisition includes a contingent earn-out purchase price, originally 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 earn-out, whereas four quarterly payments of $120,905 commenced on December 31, 2015, followed by four quarterly payments of $70,000, commencing December 31, 2016. Payments for the quarter ended October 31, 2015 included the final earn-out payment related to the Ready2Ride acquisition, composed of $125,000 and 15,000 shares of common stock.

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

	Three months ended October 31
	2016		2015
Beginning balance	$	391	$	1,116
Adjustments		-		(62)
Payments		(121)		(186)
Imputed interest recognized		3		8
Gain on change in fair value of earn-out		-		8
Ending balance	$	273	$	884
Less current portion	$	(273)	$	(639)
Ending balance, long-term	$	0	$	245

The following table shows the remaining estimated payments of contingent liabilities related to the TCS acquisition at October 31, 2016, (in thousands):

2017	$	210
2018		70
Total estimated payments		280
Less imputed interest		(7)
Present value of contingent liabilities	$	273

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Other Intangible Assets

3 Months Ended

Oct. 31, 2016

Other Intangible Assets [Abstract]

Other Intangible Assets

5. 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 October 31, 2016 and 2015 (in thousands): 

	Three months ended October 31, 2015						Wtd. avg.
	Cost		Accumulated		Net		remaining
Customer relationships	Basis		Amortization		Value		life
Beginning balance	$	11,947	$	(4,418)	$	7,529
Activity		-		(285)		(285)
Ending balance	$	11,947	$	(4,703)	$	7,244	11.84
Other intangibles
Beginning balance	$	3,203	$	(616)	$	2,587
Activity		-		(112)		(112)
Ending balance	$	3,203	$	(728)	$	2,475	3.09
Total intangibles
Beginning balance	$	15,150	$	(5,034)	$	10,116
Activity		-		(397)		(397)
Ending balance	$	15,150	$	(5,431)	$	9,719	11.13
	Three months ended October 31, 2016						Wtd. avg.
	Cost		Accumulated		Net		remaining
Customer relationships	Basis		Amortization		Value		life
Beginning balance	$	11,727	$	(5,558)	$	6,169
Activity		-		(263)		(263)
Ending balance	$	11,727	$	(5,821)	$	5,906	11.70
Other intangibles
Beginning balance	$	2,739	$	(1,018)	$	1,721
Activity		-		(109)		(109)
Ending balance	$	2,739	$	(1,127)	$	1,612	8.37
Total intangibles
Beginning balance	$	14,466	$	(6,576)	$	7,890
Activity		-		(372)		(372)
Ending balance	$	14,466	$	(6,948)	$	7,518	10.98

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Stock-Based Compensation Plans

3 Months Ended

Oct. 31, 2016

Stock-Based Compensation Plans [Abstract]

Stock-Based Compensation Plans

6. 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. The Company recognized a benefit for stock option compensation$5,000in the first quarter of fiscal 2017 due to forfeitures, and expense of $24,000 for the quarter ended October 31, 2015. There was approximately $22,000 and $112,000 of total unrecognized compensation costs related to non-vested options granted under the Company’s stock option plans as of October 31, 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:  

	Three months ended October 31,
	2016
Expected life (years)		n/a
Risk-free interest rate		n/a
Expected volatility		n/a
Expected forfeiture rate		11.1	%
Expected dividend yield		-
Weighted-average estimated fair value per
share of options granted during the year		n/a
Cash received from the exercise
of stock options	$	5,000

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 three months ended October 31, 2016 were as follows:

	Number of Options	Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Period (Years)	Aggregate Intrinsic Value
Outstanding at 7/31/2016	384,750	$	1.46	1.89	$	1,408,027
Granted	-		n/a	n/a		n/a
Exercised	-		n/a	n/a		n/a
Forfeited	-		n/a	n/a		n/a
Outstanding at 10/31/2016	384,750	$	1.46	1.64	$	1,350,314
Exercisable at 10/31/2016	384,750	$	1.46	1.64	$	1,350,314

The range of exercise prices for options outstanding under the 2000 Plan was $0.49 to $1.96 at October 31, 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 three months ended October 31, 2016 were as follows:

	Number of Options	Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Period (Years)	Aggregate Intrinsic Value
Outstanding at 7/31/2016	357,626	$	2.52	6.95	$	930,816
Granted	-		n/a	n/a		n/a
Exercised	(1,250)		3.61	n/a		n/a
Forfeited	(13,750)		3.31	n/a		n/a
Outstanding at 10/31/2016	342,626	$	2.48	6.25	$	852,672
Exercisable at 10/31/2016	292,626	$	2.34	6.25	$	768,884

The range of exercise prices for options outstanding under the 2010 Plan was $0.59 to $3.54 at October 31, 2016.

Changes in the 2010 Plan's non-vested option shares included in the outstanding shares above during the three months ended October 31, 2016 were as follows:

	Number of Options	Wtd. Avg. Exercise Price
Non-vested at 7/31/2016	70,000	$	3.29
Granted	-		n/a
Vested	(6,250)		3.20
Forfeited	(13,750)		3.31
Non-vested at 10/31/2016	50,000	$	3.29

The weighted average remaining vesting period was 0.96 years at October 31, 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 October 31, 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 $13,000 and $20,000 during the three months ended October 31, 2016, and 2015 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 $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 2017 was valued using the market price on the date of grant. The Company recognized compensation expense of $142,000 and $73,000 during the three months ended October 31, 2016 and 2015, respectively,related to all restricted stock. The remaining balance of unrecognized compensation expense related to restricted stock was $750,000 and $462,000 at October 31, 2016 and 2015, respectively.

Changes in unvested restricted shares of common stock under the 2010 Plan during the three months ended October 31, 2016 and 2015 were as follows:

	Three months ended October 31
	2016	2015
Beginning balance unvested restricted stock	657,912	671,211
Granted	102,720	-
Vested	(6,474)	(6,474)
Forfeited	(2,534)	(5,460)
Ending balance unvested restricted stock	751,624	659,277

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Income Taxes

3 Months Ended

Oct. 31, 2016

Income Taxes [Abstract]

Income Taxes

7. Income Taxes 

The provision for income taxes for the three months ended October 31, 2016 and 2015 is composed of the following (in thousands): 

	Three months ended October 31
	2016		2015
Current:
Federal	$	—	$	—
State		(25)		(6)
Deferred, net		(280)		(293)
Income tax expense	$	(305)	$	(299)

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 sheets. We have unused net operating loss carry forwards ("NOLs") for federal income tax purposes, and as a result, we generally only incur alternative minimum taxes at the federal level that are currently payable.

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 of $437,000 and $531,000is recorded, resulting in $0 net deferred tax assets related to the Netherlands operation at October 31, 2016 and 2015.

The Company also has an NOL related to tax losses incurred by its India operation, which began operations in the second quarter of fiscal 2016. Under tax laws in India, NOLs are able to be carried forward for a period of eight years. The Company has determined that it is not likely that the net operating loss will be utilized by the Company primarily based on the start-up nature of this operation. Therefore, a full valuation allowance of $61,000 was recorded, resulting in $0 net deferred tax assets related to the India operation at October 31, 2016.

As of October 31, 2016, the Company had accumulated NOLs for federal, state and international tax purposes of approximately $2,115,000,$8,377,000 and $1,918,000, 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 October 31, 2016 or 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 2012 remain open and subject to examination by state tax jurisdictions and the United States federal tax authorities.

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Subsequent Events

3 Months Ended

Oct. 31, 2016

Subsequent Events [Abstract]

Subsequent Events

8.  Subsequent Events

Acquisition of Auction123, Inc.

On November 1, 2016, the Company acquired substantially all of the assets of Auction123, Inc. (“Auction123”), a leading provider of software and services to help dealers in selected vertical markets manage and feed inventory information to online marketplaces to drive more sales and leads.  Auction123 serves several vertical markets including automotive dealers, powersports, recreational vehicles and marine.  Consideration for the acquisition (the "Company Purchase Price") included, (1) a cash payment equal to $10,500,000; and (2) a contingent earn-out purchase price payable in two installments and contingent upon the attainment of specific revenue goals related to a specific customer.  The earn-out has a maximum payout of $1,500,000.  The purchase price will be adjusted based on the net asset value on the closing balance sheet being above or below the targeted amount.

The acquisition was funded from cash on hand and an increase in our term loan.  Due to the timing of the acquisition, the opening balance sheet and pro-forma information is not complete as of the date of this report.

Loan Modification

On November 1, 2016, the Company entered into the Second Loan Modification Agreement, dated November 1, 2016, by and among SVB and the Company (the "Second Modification Agreement"). The Second Modification Agreement amends the Agreements with SVB dated April 26, 2013 and September 30, 2014.

The Second Modification Agreement includes credit facilities consisting of $3,000,000 revolving credit facility with a maturity date of September 30, 2018 and a $13,000,000 term loan with a maturity date of November 1, 2021. This term loan is an amendment to the existing $6,050,000 term loan with a maturity date of September 30, 2019.

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 determined based on the Total Leverage Ratio.

	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, 2018.  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:  $325,000 commencing on February 1, 2017 through November 1, 2018; $487,500 commencing on February 1, 2019 through November 1, 2019; and $650,000 commencing on February 1, 2020 through August 1, 2021.  All remaining principal in respect of the term loan is due and payable on November 1, 2021.  The Company is permitted to prepay all of, but not less than all of, the outstanding principal amount of the term loan upon certain notice to SVB and, in certain circumstances, the payment of a prepayment penalty of up to $260,000.  Following July 31, 2018, the Second Modification agreement requires the Company to make additional payments in the amount of 50% of excess cash flow until the Company’s Total Leverage Ratio is less than 2.00 to 1.00 and 25% of excess cash flow until the Company’s Total Leverage Ratio is less than 1.25 to 1.00.

The Second 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 through the period ending December 31, 2017 and 2.50 to 1.00 thereafter, and the maintenance of a Fixed Charge Coverage Ratio (as defined in the Agreement) equal to or greater than 1.25 to 1.00. The Agreement also contains customary events of default that, if triggered, could result in an acceleration of the Company’s obligations under the Agreement.  The loans are secured by a first priority security interest in substantially all assets of the Company. 

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Description Of The Business And Significant Accounting Policies (Policies)

3 Months Ended

Oct. 31, 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 Gurgaon, 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 other 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 2017, for example, refer to the fiscal year ending July 31, 2017, and references to fiscal 2016 refer to the fiscal year ended July 31, 2016.

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 three months ended October 31, 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. 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 may periodically be 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, in accordance with GAAP. We had no legal provisions during the three months ended October 31, 2016 or 2015 and management believes that the results of any outstanding litigation will not have a material impact on the Company’s financial condition or results of operations. 

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Description Of The Business And Significant Accounting Policies (Tables)

3 Months Ended

Oct. 31, 2016

Description Of The Business And Significant Accounting Policies [Abstract]

Schedule Of Supplemental Cash Flow Information

	Three months ended October 31
	2016		2015
Non-cash investing and financing activities
Issuance of common stock related to payment of contingent liabilities	$	-	$	60
Cashless exercise of common stock warrants		-		46
Current assets acquired in connection with acquisitions		-		32
Accrued liabilities assumed in connection with acquisitions		-		53
Contingent liabilities incurred in connection with acquisition		-		(62)

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Basic And Diluted Net Income Per Common Share (Tables)

3 Months Ended

Oct. 31, 2016

Basic And Diluted Net Income Per Common Share [Abstract]

Schedule Of Basic And Diluted Net Income Per Common Share

	Three months ended October 31
	2016		2015
Net income	$	356	$	389
Weighted-average common shares outstanding		17,424		17,152
Effect of dilutive stock options and warrants		505		452
Diluted weighted-average common shares outstanding		17,929		17,604
Net income per share
Basic	$	0.02	$	0.02
Diluted	$	0.02	$	0.02
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		-		-

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Debt (Tables)

3 Months Ended

Oct. 31, 2016

Debt Instrument [Line Items]

Schedule Of Long-Term Debt

	October 31		July 31
	2016		2016
Notes payable principal	$	8,626	$	9,168
Less debt issuance costs		(85)		(93)
Less current maturities		(2,510)		(2,417)
Notes payable - non-current	$	6,031	$	6,658

Schedule Of Minimum Principal Payments

Fiscal year ending July 31:	SVB Term Note		TCS Notes			DCi Notes		Total Notes Payable
2017	$	681	$	728	$	467	$	1,876
2018		1,134		1,014		645		2,793
2019		1,210		261		671		2,142
2020		1,815		—		—		1,815
	$	4,840	$	2,003	$	1,783	$	8,626

SVB 2014 Modification Agreement [Member]

Debt Instrument [Line Items]

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	%

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Contingent Liabilities (Tables)

3 Months Ended

Oct. 31, 2016

Contingent Liabilities [Abstract]

Schedule Of Changes In Holdback And Earn-Out Payable

	Three months ended October 31
	2016		2015
Beginning balance	$	391	$	1,116
Adjustments		-		(62)
Payments		(121)		(186)
Imputed interest recognized		3		8
Gain on change in fair value of earn-out		-		8
Ending balance	$	273	$	884
Less current portion	$	(273)	$	(639)
Ending balance, long-term	$	0	$	245

Schedule Of Estimated Contingent Liability Payments

2017	$	210
2018		70
Total estimated payments		280
Less imputed interest		(7)
Present value of contingent liabilities	$	273

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Other Intangible Assets (Tables)

3 Months Ended

Oct. 31, 2016

Other Intangible Assets [Abstract]

Schedule Of Amortizable Intangible Assets

	Three months ended October 31, 2015						Wtd. avg.
	Cost		Accumulated		Net		remaining
Customer relationships	Basis		Amortization		Value		life
Beginning balance	$	11,947	$	(4,418)	$	7,529
Activity		-		(285)		(285)
Ending balance	$	11,947	$	(4,703)	$	7,244	11.84
Other intangibles
Beginning balance	$	3,203	$	(616)	$	2,587
Activity		-		(112)		(112)
Ending balance	$	3,203	$	(728)	$	2,475	3.09
Total intangibles
Beginning balance	$	15,150	$	(5,034)	$	10,116
Activity		-		(397)		(397)
Ending balance	$	15,150	$	(5,431)	$	9,719	11.13
	Three months ended October 31, 2016						Wtd. avg.
	Cost		Accumulated		Net		remaining
Customer relationships	Basis		Amortization		Value		life
Beginning balance	$	11,727	$	(5,558)	$	6,169
Activity		-		(263)		(263)
Ending balance	$	11,727	$	(5,821)	$	5,906	11.70
Other intangibles
Beginning balance	$	2,739	$	(1,018)	$	1,721
Activity		-		(109)		(109)
Ending balance	$	2,739	$	(1,127)	$	1,612	8.37
Total intangibles
Beginning balance	$	14,466	$	(6,576)	$	7,890
Activity		-		(372)		(372)
Ending balance	$	14,466	$	(6,948)	$	7,518	10.98

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Stock-Based Compensation Plans (Tables)

3 Months Ended

Oct. 31, 2016

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

Schedule Of Fair Value Weighted Average Assumptions Of Options Granted

	Three months ended October 31,
	2016
Expected life (years)		n/a
Risk-free interest rate		n/a
Expected volatility		n/a
Expected forfeiture rate		11.1	%
Expected dividend yield		-
Weighted-average estimated fair value per
share of options granted during the year		n/a
Cash received from the exercise
of stock options	$	5,000

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 7/31/2016	384,750	$	1.46	1.89	$	1,408,027
Granted	-		n/a	n/a		n/a
Exercised	-		n/a	n/a		n/a
Forfeited	-		n/a	n/a		n/a
Outstanding at 10/31/2016	384,750	$	1.46	1.64	$	1,350,314
Exercisable at 10/31/2016	384,750	$	1.46	1.64	$	1,350,314

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 7/31/2016	357,626	$	2.52	6.95	$	930,816
Granted	-		n/a	n/a		n/a
Exercised	(1,250)		3.61	n/a		n/a
Forfeited	(13,750)		3.31	n/a		n/a
Outstanding at 10/31/2016	342,626	$	2.48	6.25	$	852,672
Exercisable at 10/31/2016	292,626	$	2.34	6.25	$	768,884

Schedule Of Changes In Non-Vested Option Shares

	Number of Options	Wtd. Avg. Exercise Price
Non-vested at 7/31/2016	70,000	$	3.29
Granted	-		n/a
Vested	(6,250)		3.20
Forfeited	(13,750)		3.31
Non-vested at 10/31/2016	50,000	$	3.29

Schedule Of Changes In Unvested Restricted Shares

	Three months ended October 31
	2016	2015
Beginning balance unvested restricted stock	657,912	671,211
Granted	102,720	-
Vested	(6,474)	(6,474)
Forfeited	(2,534)	(5,460)
Ending balance unvested restricted stock	751,624	659,277

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Income Taxes (Tables)

3 Months Ended

Oct. 31, 2016

Income Taxes [Abstract]

Provision For Income Taxes

	Three months ended October 31
	2016		2015
Current:
Federal	$	—	$	—
State		(25)		(6)
Deferred, net		(280)		(293)
Income tax expense	$	(305)	$	(299)

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Subsequent Events (Tables)

3 Months Ended

Oct. 31, 2016

SVB 2016 Modification Agreement [Member]

Subsequent Event [Line Items]

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	%

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Description Of The Business And Significant Accounting Policies (Narrative) (Details)	3 Months Ended
	Oct. 31, 2016 USD ($) customer item	Oct. 31, 2015 USD ($) customer
Description Of Business And Significant Accounting Policies [Line Items]
Number of manufacturers	1,800
Number of equipment dealers, distributors and manufacturers	23,500
Estimated economic life	10 years 11 months 23 days	11 years 1 month 17 days
Legal provisions | $	$ 0	$ 0
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] | Revenue [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] | Revenue [Member]
Description Of Business And Significant Accounting Policies [Line Items]
Percentage of revenue	10.00%	10.00%

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Description Of The Business And Significant Accounting Policies (Schedule Of Supplemental Cash Flow Information) (Details) $ in Thousands	3 Months Ended
	Oct. 31, 2015 USD ($)
Description Of The Business And Significant Accounting Policies [Abstract]
Issuance of common stock related to payment of contingent liabilities	$ 60
Cashless exercise of common stock warrants	46
Current assets acquired in connection with acquisitions	32
Accrued liabilities assumed in connection with acquisitions	53
Contingent liabilities incurred in connection with acquisition	$ (62)

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Basic And Diluted Net Income Per Common Share (Schedule Of Basic And Diluted Net Income Per Common Share) (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended
	Oct. 31, 2016	Oct. 31, 2015
Basic And Diluted Net Income Per Common Share [Abstract]
Net income	$ 356	$ 389
Weighted-average common shares outstanding	17,424	17,152
Effect of dilutive stock options and warrants	505	452
Diluted weighted-average common shares outstanding	17,929	17,604
Basic	$ 0.02	$ 0.02
Diluted	$ 0.02	$ 0.02

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Debt (Narrative) (Details)				1 Months Ended	3 Months Ended	9 Months Ended	21 Months Ended
	Aug. 01, 2016 USD ($)	Jul. 13, 2015 USD ($)	Sep. 30, 2014 USD ($) loan	Feb. 28, 2015 USD ($)	Oct. 31, 2016 USD ($)	Aug. 01, 2017 USD ($)	Aug. 01, 2019 USD ($)	Jul. 31, 2016 USD ($)	Apr. 26, 2013 USD ($)
Debt Instrument [Line Items]
Aggregate principal amount					$ 8,626,000			$ 9,168,000
SVB Agreement [Member] | Term Loan [Member]
Debt Instrument [Line Items]
Term loan									$ 4,500,000
Maturity date					Apr. 26, 2018
SVB Agreement [Member] | Revolving Credit Facility [Member]
Debt Instrument [Line Items]
Issuance date					Apr. 26, 2013
Revolving credit facility									$ 3,000,000
Revolving credit facility maturity date					Apr. 26, 2015
SVB 2014 Modification Agreement [Member]
Debt Instrument [Line Items]
Effective interest rate					4.00%
Additional payments required as percentage of excess cash flow					25.00%
Total leverage ratio					1.04
Fixed charge coverage ratio					1.90
SVB 2014 Modification Agreement [Member] | Prime Rate [Member]
Debt Instrument [Line Items]
Effective interest rate					3.50%
SVB 2014 Modification Agreement [Member] | Term Loan [Member]
Debt Instrument [Line Items]
Term loan			$ 6,050,000		$ 6,050,000
Maturity date					Sep. 30, 2019
Term loan quarterly installments	$ 151,250
Term loan prepayment penalty					$ 61,000
Aggregate principal amount					$ 4,840,000
SVB 2014 Modification Agreement [Member] | Term Loan [Member] | Forecast [Member]
Debt Instrument [Line Items]
Term loan quarterly installments						$ 226,875	$ 302,500
SVB 2014 Modification Agreement [Member] | Revolving Credit Facility [Member]
Debt Instrument [Line Items]
Revolving credit facility			$ 3,000,000
Revolving credit facility maturity date					Nov. 30, 2016
Revolving credit facility outstanding					$ 0
TCS Notes [Member] | Promissory Note [Member]
Debt Instrument [Line Items]
Maturity date					Sep. 30, 2018
Aggregate principal amount					$ 2,003,000
Debt instrument valuation adjustment				$ (67,000)
Interest rate					5.00%
Default interest rate					7.50%
Payable quarterly commencement date					Dec. 29, 2014
DCi Notes [Member] | Promissory Note [Member]
Debt Instrument [Line Items]
Maturity date					Jul. 13, 2019
Aggregate principal amount					$ 1,783,000
Debt instrument valuation adjustment		$ (64,000)
Interest rate					4.00%
Payable quarterly commencement date					Oct. 13, 2015
Minimum [Member] | SVB 2014 Modification Agreement [Member]
Debt Instrument [Line Items]
Fixed charge coverage ratio					1.25
Maximum [Member] | SVB 2014 Modification Agreement [Member]
Debt Instrument [Line Items]
Total Leverage Ratio threshold					2.00
Total leverage ratio					3.00
TCS [Member]
Debt Instrument [Line Items]
Acquisition date					Sep. 30, 2014
Number of notes issued in connection with acquisition | loan			2
DCi [Member]
Debt Instrument [Line Items]
Acquisition date					Jul. 13, 2015

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Debt (Schedule Of Leverage Ratios And Applicable Margins) (Details)	3 Months Ended
	Oct. 31, 2016
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] | Prime Rate [Member]
Debt Instrument [Line Items]
Applicable Margin for Prime Rate Loans	0.50%
Minimum [Member] | Range 1 [Member]
Debt Instrument [Line Items]
Total Leverage Ratio	2.50
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
Maximum [Member] | Range 3 [Member]
Debt Instrument [Line Items]
Total Leverage Ratio	1.75

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Debt (Schedule Of Long-Term Debt) (Details) - USD ($) $ in Thousands	Oct. 31, 2016	Jul. 31, 2016
Debt [Abstract]
Notes payable principal	$ 8,626	$ 9,168
Less debt issuance costs	(85)	(93)
Less current maturities	(2,510)	(2,417)
Notes payable - non-current	$ 6,031	$ 6,658

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Debt (Schedule Of Minimum Principal Payments) (Details) - USD ($) $ in Thousands	Oct. 31, 2016	Jul. 31, 2016
Debt Instrument [Line Items]
2017	$ 1,876
2018	2,793
2019	2,142
2020	1,815
Notes payable principal	8,626	$ 9,168
Term Loan [Member] | SVB 2014 Modification Agreement [Member]
Debt Instrument [Line Items]
2017	681
2018	1,134
2019	1,210
2020	1,815
Notes payable principal	4,840
Promissory Note [Member] | TCS Notes [Member]
Debt Instrument [Line Items]
2017	728
2018	1,014
2019	261
Notes payable principal	2,003
Promissory Note [Member] | DCi Notes [Member]
Debt Instrument [Line Items]
2017	467
2018	645
2019	671
Notes payable principal	$ 1,783

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Contingent Liabilities (Narrative) (Details) - USD ($)	3 Months Ended
	Oct. 31, 2015	Oct. 31, 2016	Apr. 30, 2016	Sep. 30, 2014
TASCO [Member]
Business Acquisition, Contingent Consideration [Line Items]
Earn-out payment			$ 138,000
TCS [Member]
Business Acquisition, Contingent Consideration [Line Items]
Earnout payable				$ 711,000
TCS [Member] | Quarterly, Commencing December 31, 2015 [Member]
Business Acquisition, Contingent Consideration [Line Items]
Earn-out payment amount		$ 120,905
TCS [Member] | Quarterly, Commencing December 31, 2016 [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
Shares of common stock issued concurrent with earn-out payment	15,000

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Contingent Liabilities (Schedule Of Changes In Holdback And Earn-Out Payable) (Details) - USD ($) $ in Thousands	3 Months Ended
	Oct. 31, 2016	Oct. 31, 2015	Jul. 31, 2016
Contingent Liabilities [Abstract]
Beginning balance	$ 391	$ 1,116
Adjustments		(62)
Payments	(121)	(186)
Imputed interest recognized	3	8
Gain on change in fair value of contingent liabilities		8
Ending balance	273	884
Less current portion	(273)	(639)	$ (331)
Ending balance, long-term	$ 0	$ 245	$ 60

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Contingent Liabilities (Schedule Of Estimated Contingent Liability Payments) (Details) - USD ($) $ in Thousands	Oct. 31, 2016	Jul. 31, 2016	Oct. 31, 2015	Jul. 31, 2015
Contingent Liabilities [Abstract]
2017	$ 210
2018	70
Total estimated payments	280
Less imputed interest	(7)
Present value of contingent liabilities	$ 273	$ 391	$ 884	$ 1,116

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Other Intangible Assets (Schedule Of Amortizable Intangible Assets) (Details) - USD ($) $ in Thousands	3 Months Ended
	Oct. 31, 2016	Oct. 31, 2015	Jul. 31, 2016	Jul. 31, 2015
Finite-Lived Intangible Assets [Line Items]
Amortizable Intangible Assets, Cost Basis	$ 14,466	$ 15,150	$ 14,466	$ 15,150
Amortizable Intangible Assets, Accumulated Amortization	(6,948)	(5,431)	(6,576)	(5,034)
Amortizable Intangible Assets, Net Value	7,518	9,719	7,890	10,116
Activity, Cost Basis
Activity, Accumulated Amortization	(372)	(397)
Activity, Net Value	$ (372)	$ (397)
Weighted average remaining useful life	10 years 11 months 23 days	11 years 1 month 17 days
Customer Relationships [Member]
Finite-Lived Intangible Assets [Line Items]
Amortizable Intangible Assets, Cost Basis	$ 11,727	$ 11,947	11,727	11,947
Amortizable Intangible Assets, Accumulated Amortization	(5,821)	(4,703)	(5,558)	(4,418)
Amortizable Intangible Assets, Net Value	5,906	7,244	6,169	7,529
Activity, Cost Basis
Activity, Accumulated Amortization	(263)	(285)
Activity, Net Value	$ (263)	$ (285)
Weighted average remaining useful life	11 years 8 months 12 days	11 years 10 months 2 days
Other Intangibles [Member]
Finite-Lived Intangible Assets [Line Items]
Amortizable Intangible Assets, Cost Basis	$ 2,739	$ 3,203	2,739	3,203
Amortizable Intangible Assets, Accumulated Amortization	(1,127)	(728)	(1,018)	(616)
Amortizable Intangible Assets, Net Value	1,612	2,475	$ 1,721	$ 2,587
Activity, Cost Basis
Activity, Accumulated Amortization	(109)	(112)
Activity, Net Value	$ (109)	$ (112)
Weighted average remaining useful life	8 years 4 months 13 days	3 years 1 month 2 days

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Stock-Based Compensation Plans (Narrative) (Details) - USD ($)	1 Months Ended	3 Months Ended
	Mar. 31, 2015	Oct. 31, 2016	Oct. 31, 2015	Jul. 31, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Proceeds from exercise of common stock options and warrants		$ 72,000	$ 43,000
Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock compensation expense recognized		(5,000)	24,000
Unrecognized compensation costs		22,000	112,000
Capitalized stock-based compensation costs		$ 0	0
2000 Plan [Member] | Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options granted
Common stock authorized for issuance		1,950,000
Expiration term		5 years
Shareholder percent ownership of the company		10.00%
Exercise prices for options outstanding		$ 1.46		$ 1.46
2000 Plan [Member] | Maximum [Member] | Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expiration term		10 years
Exercise prices for options outstanding		$ 1.96
2000 Plan [Member] | Minimum [Member] | Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Exercise prices for options outstanding		$ 0.49
2010 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Common stock authorized for issuance		1,850,000
2010 Plan [Member] | Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options granted
Expiration term		10 years
Exercise prices for options outstanding		$ 2.48		$ 2.52
Weighted-average remaining vesting period		11 months 16 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
2010 Plan [Member] | Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock compensation expense recognized		$ 142,000	73,000
Unrecognized compensation expense		$ 750,000	462,000
2010 Plan [Member] | Maximum [Member] | Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Exercise prices for options outstanding		$ 3.54
2010 Plan [Member] | Minimum [Member] | Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Exercise prices for options outstanding		$ 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		$ 13,000	$ 20,000
Purchase price as percent of market value		85.00%
Common stock reserved for issuance		575,000
Shares issued		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		6 months
Tranche One [Member] | Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting percentage		25.00%
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
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%
Executive Officers [Member] | 2010 Plan [Member] | Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period		4 years
Shares of restricted stock	550,000
Common stock granted	$ 350,000
Volatility rate		46.00%
Risk-free interest rate		1.34%
Executive Officers [Member] | Tranche One [Member] | 2010 Plan [Member] | Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting percentage		30.00%
Market price threshold		$ 6.00
Executive Officers [Member] | Tranche Two [Member] | 2010 Plan [Member] | Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting percentage		20.00%
Market price threshold		$ 7.00
Executive Officers [Member] | Tranche Three [Member] | 2010 Plan [Member] | Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting percentage		20.00%
Market price threshold		$ 8.00
Executive Officers [Member] | Tranche Four [Member] | 2010 Plan [Member] | Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting percentage		30.00%
Market price threshold		$ 9.00

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Stock-Based Compensation Plans (Schedule Of Fair Value Weighted Average Assumptions Of Options Granted) (Details) - Stock Options [Member]	3 Months Ended
	Oct. 31, 2016 USD ($)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected life (years)	0 years
Expected forfeiture rate	11.10%
Expected dividend yield
Cash received from the exercise of stock options	$ 5,000

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Stock-Based Compensation Plans (Schedule Of Changes In Option Shares) (Details) - Stock Options [Member] - USD ($)	3 Months Ended	12 Months Ended
	Oct. 31, 2016	Jul. 31, 2016
2000 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Options, Outstanding, Beginning Balance	384,750
Number of Options, Granted
Number of Options, Exercised
Number of Options, Forfeited
Number of Options, Outstanding, Ending Balance	384,750	384,750
Number of Options, Exercisable	384,750
Weighted Average Exercise Price (per share), Outstanding, Beginning Balance	$ 1.46
Weighted Average Exercise Price (per share), Granted
Weighted Average Exercise Price (per share), Exercised
Weighted Average Exercise Price (per share), Forfeited
Weighted Average Exercise Price (per share), Outstanding, Ending Balance	1.46	$ 1.46
Weighted Average Exercise Price (per share), Exercisable	$ 1.46
Weighted Average Remaining Contractual Period (Years), Outstanding	1 year 7 months 21 days	1 year 10 months 21 days
Weighted Average Remaining Contractual Period (Years), Exercisable	1 year 7 months 21 days
Aggregate Intrinsic Value, Outstanding	$ 1,350,314	$ 1,408,027
Aggregate Intrinsic Value, Exercisable	$ 1,350,314
2010 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Options, Outstanding, Beginning Balance	357,626
Number of Options, Granted
Number of Options, Exercised	(1,250)
Number of Options, Forfeited	(13,750)
Number of Options, Outstanding, Ending Balance	342,626	357,626
Number of Options, Exercisable	292,626
Weighted Average Exercise Price (per share), Outstanding, Beginning Balance	$ 2.52
Weighted Average Exercise Price (per share), Granted
Weighted Average Exercise Price (per share), Exercised	3.61
Weighted Average Exercise Price (per share), Forfeited	3.31
Weighted Average Exercise Price (per share), Outstanding, Ending Balance	2.48	$ 2.52
Weighted Average Exercise Price (per share), Exercisable	$ 2.34
Weighted Average Remaining Contractual Period (Years), Outstanding	6 years 3 months	6 years 11 months 12 days
Weighted Average Remaining Contractual Period (Years), Exercisable	6 years 3 months
Aggregate Intrinsic Value, Outstanding	$ 852,672	$ 930,816
Aggregate Intrinsic Value, Exercisable	$ 768,884

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Stock-Based Compensation Plans (Schedule Of Changes In Non-Vested Option Shares) (Details) - 2010 Plan [Member] - Stock Options [Member]	3 Months Ended
	Oct. 31, 2016 $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Options, Non-vested, Beginning Balance | shares	70,000
Number of Options, Granted | shares
Number of Options, Vested | shares	(6,250)
Number of Options, Forfeited | shares	(13,750)
Number of Options, Non-vested, Ending Balance | shares	50,000
Weighted Average Exercise Price, Non-vested, Beginning Balance | $ / shares	$ 3.29
Weighted Average Exercise Price, Granted | $ / shares
Weighted Average Exercise Price, Vested | $ / shares	3.20
Weighted Average Exercise Price, Forfeited | $ / shares	3.31
Weighted Average Exercise Price, Non-vested, Ending Balance | $ / shares	$ 3.29

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Stock-Based Compensation Plans (Schedule Of Changes In Unvested Restricted Shares) (Details) - Restricted Stock [Member] - 2010 Plan [Member] - shares	3 Months Ended
	Oct. 31, 2016	Oct. 31, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Beginning balance unvested restricted stock	657,912	671,211
Granted	102,720
Vested	(6,474)	(6,474)
Forfeited	(2,534)	(5,460)
Ending balance unvested restricted stock	751,624	659,277

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Income Taxes (Narrative) (Details) - USD ($)	3 Months Ended
	Oct. 31, 2016	Oct. 31, 2015
Operating Loss Carryforwards [Line Items]
Reserve for uncertain tax positions	$ 0	$ 0
Federal [Member]
Operating Loss Carryforwards [Line Items]
Net operating loss carryforwards	2,115,000
State [Member]
Operating Loss Carryforwards [Line Items]
Net operating loss carryforwards	8,377,000
International [Member]
Operating Loss Carryforwards [Line Items]
Net operating loss carryforwards	$ 1,918,000
International [Member] | Netherlands [Member]
Operating Loss Carryforwards [Line Items]
Operating loss carryforwards expiration period	9 years
NOL valuation allowance	$ 437,000	531,000
Net deferred tax assets	0	$ 0
International [Member] | India [Member]
Operating Loss Carryforwards [Line Items]
NOL valuation allowance	61,000
Net deferred tax assets	$ 0

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Income Taxes (Provision For Income Taxes) (Details) - USD ($) $ in Thousands	3 Months Ended
	Oct. 31, 2016	Oct. 31, 2015
Income Taxes [Abstract]
Current: State	$ (25)	$ (6)
Deferred, net	(280)	(293)
Income tax expense	$ (305)	$ (299)

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Subsequent Events (Narrative) (Details)			3 Months Ended	9 Months Ended	12 Months Ended	18 Months Ended	21 Months Ended
	Nov. 01, 2016 USD ($) item	Aug. 01, 2016 USD ($)	Oct. 31, 2016 USD ($)	Aug. 01, 2017 USD ($)	Jul. 31, 2019	Aug. 01, 2021 USD ($)	Nov. 01, 2019 USD ($)	Aug. 01, 2019 USD ($)	Nov. 01, 2018 USD ($)	Jul. 31, 2018	Dec. 31, 2017	Sep. 30, 2014 USD ($)
Subsequent Event [Member] | Auction123 [Member]
Subsequent Event [Line Items]
Cash consideration	$ 10,500,000
Number of installments | item	2
Subsequent Event [Member] | Maximum [Member] | Auction123 [Member]
Subsequent Event [Line Items]
Earnout payable	$ 1,500,000
SVB 2014 Modification Agreement [Member]
Subsequent Event [Line Items]
Additional payments required as percentage of excess cash flow			25.00%
Total leverage ratio			1.04
Fixed charge coverage ratio			1.90
SVB 2014 Modification Agreement [Member] | Minimum [Member]
Subsequent Event [Line Items]
Fixed charge coverage ratio			1.25
SVB 2014 Modification Agreement [Member] | Maximum [Member]
Subsequent Event [Line Items]
Total leverage ratio			3.00
SVB 2016 Modification Agreement [Member] | Subsequent Event [Member] | Minimum [Member]
Subsequent Event [Line Items]
Fixed charge coverage ratio	1.25
Revolving Credit Facility [Member] | SVB 2016 Modification Agreement [Member] | Subsequent Event [Member]
Subsequent Event [Line Items]
Revolving credit facility	$ 3,000,000
Maturity date	Sep. 30, 2018
Term Loan [Member] | SVB 2014 Modification Agreement [Member]
Subsequent Event [Line Items]
Maturity date			Sep. 30, 2019
Term loan			$ 6,050,000									$ 6,050,000
Term loan quarterly installments		$ 151,250
Term loan prepayment penalty			$ 61,000
Term Loan [Member] | SVB 2016 Modification Agreement [Member] | Subsequent Event [Member]
Subsequent Event [Line Items]
Maturity date	Nov. 01, 2021
Term loan	$ 13,000,000
Term loan prepayment penalty	$ 260,000
Forecast [Member] | SVB 2016 Modification Agreement [Member]
Subsequent Event [Line Items]
Additional payments required as percentage of excess cash flow					50.00%
Additional payments at secondary threshold required as percentage of excess cash flow					25.00%
Forecast [Member] | SVB 2016 Modification Agreement [Member] | Minimum [Member]
Subsequent Event [Line Items]
Leverage ratio that requires 50% of excess cash flow be paid to reduce principal					200.00%
Leverage ratio that requires 25% of excess cash flow be paid to reduce principal					125.00%
Forecast [Member] | SVB 2016 Modification Agreement [Member] | Maximum [Member]
Subsequent Event [Line Items]
Total leverage ratio										2.50	3.00
Forecast [Member] | Term Loan [Member] | SVB 2014 Modification Agreement [Member]
Subsequent Event [Line Items]
Term loan quarterly installments				$ 226,875				$ 302,500
Forecast [Member] | Term Loan [Member] | SVB 2016 Modification Agreement [Member]
Subsequent Event [Line Items]
Term loan quarterly installments						$ 650,000	$ 487,500		$ 325,000

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Subsequent Events (Schedule Of Leverage Ratios And Applicable Margins) (Details) - Subsequent Event [Member] - SVB 2016 Modification Agreement [Member]	Nov. 01, 2016
Leverage Ratio Range One [Member]
Debt Instrument [Line Items]
Applicable Margin for Prime Rate Loans	1.50%
Leverage Ratio Range Two [Member]
Debt Instrument [Line Items]
Applicable Margin for Prime Rate Loans	1.00%
Leverage Ratio Range Three [Member]
Debt Instrument [Line Items]
Applicable Margin for Prime Rate Loans	0.50%
Minimum [Member] | Leverage Ratio Range One [Member]
Debt Instrument [Line Items]
Total Leverage Ratio	2.50
Minimum [Member] | Leverage Ratio Range Two [Member]
Debt Instrument [Line Items]
Total Leverage Ratio	1.75
Maximum [Member] | Leverage Ratio Range Two [Member]
Debt Instrument [Line Items]
Total Leverage Ratio	2.50
Maximum [Member] | Leverage Ratio Range Three [Member]
Debt Instrument [Line Items]
Total Leverage Ratio	1.75