NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
MAM Software Group, Inc. ("MAM" or the "Company") is a leading provider of integrated information management solutions and services and a leading provider of cloud-based software solutions for the automotive aftermarket sector. The Company conducts its businesses through wholly owned subsidiaries with operations in Europe and North America. MAM Software Ltd. (“MAM Ltd.”) is based in Tankersley, Barnsley, United Kingdom (“UK”), Origin Software Solutions, Ltd. (“Origin”) is based in the UK (MAM Ltd. and Origin are collectively referred to as “MAM UK”), and MAM Software, Inc. (“MAM NA”) is based in the United States of America ("US") in Blue Bell, Pennsylvania.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.
Concentrations of Credit Risk
The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.
Cash and Cash Equivalents
In the US, the Company maintains cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation up to $250,000. At times deposits held with financial institutions in the US may exceed the $250,000 limit.
In the UK, the Company maintains cash balances at financial institutions that are insured by the Financial Services Compensation Scheme up to 85,000GBP. At times deposits held with financial institutions in the UK may exceed the 85,000GBP limit.
The Company maintains its cash accounts at financial institutions which it believes to be credit worthy. The Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes.
Customers
The Company performs periodic evaluations of its customers and maintains allowances for potential credit losses as deemed necessary. The Company generally does not require collateral to secure its accounts receivable. Credit risk is managed by discontinuing sales to customers who are delinquent. The Company estimates credit losses and returns based on management’s evaluation of historical experience and current industry trends. Although the Company expects to collect amounts due, actual collections may differ from the estimated amounts.
No customers accounted for more than 10% of the Company’s revenues for each of the years ended June 30, 2019 and 2018. One customer accounted for 11% of the Company’s accounts receivable at June 30, 2019. No customers accounted for more than 10% of the Company’s accounts receivable at June 30, 2018.
Segment Reporting
The Company operates in one reportable segment. Though the Company has two operational segments (MAM UK and MAM NA), the Company evaluated these segments in accordance with ASC 280-10-50, Segment Reporting, and determined that the segments have the same economic characteristics, are similar in the following areas and can therefore be aggregated into one reportable segment:
1.
|
The products and services are software and professional services
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2.
|
The products are produced through professional services
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3.
|
The customers for these products are primarily for the automotive aftermarket
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4.
|
The method to distribute these products are via software that the customer can host locally or the Company will host
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5.
|
They both operate in a non-regulatory environment
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Geographic Concentrations
The Company conducts business in the US and Canada (US and Canada are collectively referred to as the “NA Market”), and the UK and Ireland (UK and Ireland are collectively referred to as the “UK Market”). For customers headquartered in their respective countries, the Company derived approximately 63% of its revenues from the UK, 35% from the US, 1% from Ireland, and 1% from Canada during the year ended June 30, 2019, compared to 64% of its revenues from the UK, 34% from the US, 1% from Ireland, and 1% from Canada during the year ended June 30, 2018.
At June 30, 2019, the Company maintained 80% of its net property and equipment in the UK and the remaining 20% in the US. At June 30, 2018, the Company maintained 76% of its net property and equipment in the UK and the remaining 24% in the US.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the US requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by the Company’s management include, but are not limited to, determining the nature and timing of satisfaction of performance obligations, the standalone selling price of performance obligations, and the transaction prices and assessing transfer of control, measuring of variable consideration, the collectability of accounts receivable, the realizability of inventories, the determination of the fair value of acquired intangible assets, the recoverability of goodwill and other long-lived assets, valuation of deferred tax assets and liabilities and the estimated fair value of stock options, warrants and shares issued for compensation and non-cash consideration. Actual results could materially differ from those estimates.
Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and other liabilities, and long-term debt. Financial assets and liabilities that are remeasured and reported at fair value at each reporting period are classified and disclosed in one of the following three categories:
• Level 1 – Fair value based on quoted prices in active markets for identical assets or liabilities.
• Level 2 – Fair value based on significant directly observable data (other than Level 1 quoted prices) or significant indirectly observable data through corroboration with observable market data. Inputs would normally be (i) quoted prices in active markets for similar assets or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or liabilities or (iii) information derived from or corroborated by observable market data.
• Level 3 – Fair value based on prices or valuation techniques that require significant unobservable data inputs. Inputs would normally be a reporting entity’s own data and judgments about assumptions that market participants would use in pricing the asset or liability.
Determining which category an asset or liability falls within the hierarchy may require significant judgment. The Company evaluates its hierarchy disclosures each quarter. The Company believes that the carrying values of all financial instruments, except long-term debt, approximate their values due to their nature and respective durations. The carrying value of long-term debt approximates fair value based on borrowing rates currently available to the Company.
The Company classified its contingent acquisition consideration liability in connection with the acquisition of Origin within the Level 3 category, as factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity. At the time of the acquisition, the Company estimated the fair value of the contingent consideration liability, which consisted of net income based milestones, using assumptions including estimated revenues (based on internal budgets and long-range strategic plans), discount rates, probability of payment and projected payment dates. Any change in these assumptions could result in a significantly higher (lower) fair value measurement. The fair value of the contingent consideration was remeasured each reporting period. The contingent consideration liability totaled $0.4 million and $0.5 million as of June 30, 2019 and 2018, respectively.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is based on specific identification of customer accounts and its best estimate of the likelihood of potential loss, taking into account such factors as the financial condition and payment history of major customers. The Company evaluates the collectability of its receivables at least quarterly. The allowance for doubtful accounts is subject to estimates based on the historical actual costs of bad debt experienced, total accounts receivable amounts, age of accounts receivable and any knowledge of the customers’ ability or inability to pay outstanding balances. If the financial condition of the Company's customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required. The differences could be material and could significantly impact cash flows from operating activities.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. Inventories consist primarily of hardware that will be sold to customers. The Company periodically reviews its inventories and records a provision for excess and obsolete inventories based primarily on the Company’s estimated forecast of product demand. Once established, write-downs of inventories are considered permanent adjustments to the cost basis of the obsolete or excess inventories.
Property and Equipment
Property and equipment are stated at cost, and are depreciated using the straight-line method over the estimated useful lives of the related assets, ranging from three to five years. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives of the assets or the related lease terms. Equipment under capital lease obligations is depreciated over the shorter of the estimated useful lives of the related assets or the term of the lease. Maintenance and routine repairs are charged to expense as incurred. Significant renewals and betterments are capitalized. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the consolidated statements of comprehensive income.
Software Development Costs
Costs incurred to develop computer software products to be sold or otherwise marketed are charged to expense until technological feasibility of the product has been established. Once technological feasibility has been established, computer software development costs (consisting primarily of internal labor costs) are capitalized and reported at the lower of amortized cost or estimated realizable value. Purchased software development cost is capitalized and recorded at its estimated fair market value. When a product is ready for general release, its capitalized costs are amortized on a product-by-product basis. The annual amortization is the greater of the amounts of: the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product and, the straight-line method over the remaining estimated economic life (a period of three to ten years) of the product including the period being reported on. Amortization of capitalized software development costs are included in the cost of revenues line on the consolidated statements of comprehensive income. If the future market viability of a software product is less than anticipated, impairment of the related unamortized development costs could occur, which could significantly impact the Company’s results of operations.
Amortizable Intangible Assets
Amortizable intangible assets consist of completed software technology, customer contracts/relationships, automotive data services, and acquired intellectual property and are recorded at cost. Completed software technology and customer contracts/relationships are amortized using the straight-line method over their estimated useful lives of 9 to 10 years, automotive data services are amortized using the straight-line method over their estimated useful lives of 20 years and acquired intellectual property is amortized over the estimated useful life of 10 years.
Goodwill
Goodwill is not amortized, but rather is tested at least annually for impairment.
Goodwill is subject to impairment reviews by applying a fair-value-based test at the reporting unit level, which generally represents operations one level below the segments reported by the Company. As of June 30, 2019, the Company does not believe there is an impairment of its goodwill. There can be no assurance, however, that market conditions will not change or demand for the Company’s products and services will continue, which could result in impairment of goodwill in the future.
Goodwill activity for the years ended June 30, 2019 and 2018 was as follows (in thousands):
Balance, July 1, 2017
|
|
$
|
8,191
|
|
Effect of exchange rate changes
|
|
|
89
|
|
Balance, June 30, 2018
|
|
$
|
8,280
|
|
Effect of exchange rate changes
|
|
|
(227
|
)
|
Balance, June 30, 2019
|
|
$
|
8,053
|
|
Long-Lived Assets
The Company’s management assesses the recoverability of long-lived assets (other than goodwill discussed above) upon the occurrence of a triggering event by determining whether the carrying value of long-lived assets can be recovered through projected undiscounted future cash flows over their remaining useful lives. The amount of long-lived asset impairment, if any, is measured based on fair value and is charged to operations in the period in which long-lived asset impairment is determined by management. At June 30, 2019, the Company’s management believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change or demand for the Company’s products and services will continue, which could result in impairment of long-lived assets in the future.
Debt Issuance Costs
Debt issuance costs represent costs incurred in connection with the issuance of long-term debt. Debt issuance costs are amortized over the term of the financing instrument using the effective interest method. Debt issuance costs are presented in the consolidated balance sheets as an offset against the current and non-current portions of long-term debt.
Issuance of Equity Instruments to Non-Employees
All issuances of the Company’s equity instruments to non-employees are measured at fair value based upon either the fair value of the equity instruments issued or the fair value of consideration received, whichever is more readily determinable. The majority of stock issuances for non-cash consideration pertains to services rendered by consultants and others and has been valued at the fair value of the equity instruments on the dates issued.
The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. Assets acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments are not presented or classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes.
Stock-Based Compensation
The Company accounts for stock-based compensation under the provisions of ASC No. 718, Compensation - Stock Compensation (“ASC 718”). ASC 718 requires the recognition of the fair value of the stock-based compensation in net income. Compensation expense associated with market-based restricted stock is determined using a Monte-Carlo valuation model, and compensation expense associated with time-based restricted stock is determined based on the number of shares granted and the fair value on the date of grant. For valuing stock options awards, the Company has elected to use the Black-Scholes model. For the expected term, the Company uses a simple average of the vesting period and the contractual term of the option. Volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate during the expected term of the option. For volatility the Company considers its own volatility as applicable for valuing its options and warrants. Forfeitures are accounted for as they are incurred, rather than estimated at time of grant. The risk-free interest rate is based on the relevant US Treasury Bill Rate at the time of each grant. The dividend yield represents the dividend rate expected to be paid over the option’s expected term; the Company currently has no plans to pay dividends. The fair value of stock-based awards is amortized over the vesting period of the award or expected vesting date of the market-based restricted shares and the Company elected to use the straight-line method for awards granted.
Revenue Recognition
MAM offers its software using the same underlying technology via two primary models: a traditional on-premises licensing model and a cloud-based subscription model. The on-premises model involves the sale or license of software on a perpetual basis to customers who take possession of the software, and install and maintain the software on their own hardware. Under the cloud-based subscription delivery model, MAM provides access to its software on a hosted basis as a service and customers generally do not have the contractual right to take possession of the software.
The Company generates revenue through sales of licenses and support and maintenance provided to its on-premises customers, and through subscriptions of its cloud-based software. MAM offers professional services to both its on-premises and cloud customers to assist them with the customization, implementation, and training.
The Company determines revenue recognition through the following steps:
- Identification of the contract, or contracts, with a customer;
- Identification of the performance obligations in the contract;
- Determination of the transaction price;
- Allocation of the transaction price to the performance obligations in the contract; and
- Recognition of revenue when, or as, we satisfy a performance obligation.
The Company records the amount of revenue and related costs by considering whether the entity is a principal (gross presentation) or an agent (net presentation) by evaluating the nature of its promise to the customer. Revenue is presented net of sales, value-added and other taxes collected from customers and remitted to government authorities.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under Topic 606. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied by transferring the promised good or service to the customer. The Company identifies and tracks the performance obligations at contract inception so that the Company can monitor and account for the performance obligations over the life of the contract.
The Company’s contracts which contain multiple performance obligations generally consist of the initial purchase of subscription or licenses, a professional services engagement, and support and maintenance engagement. License purchases generally have multiple performance obligations as customers also purchase support and maintenance in addition to the licenses. The Company’s single performance obligation arrangements are typically support and maintenance renewals, subscription renewals, and professional services engagements.
For contracts with multiple performance obligations where the contracted price differs from the standalone selling price (“SSP”) for any distinct good or service, the Company may be required to allocate the contract’s transaction price to each performance obligation using its best estimate for the SSP. SSP is assessed annually using a historical analysis of contracts with customers executed in the most recently completed fiscal year to determine the range of selling prices applicable to a distinct good or service.
Subscription
Subscription revenue is recognized ratably over the initial subscription period committed to by the customer commencing when the cloud environment is made available to the customer. The initial subscription period is typically 36 to 60 months. The Company generally invoices its customers in monthly installments and typical payment terms provide that customers make payment within 30 days of invoice.
Software Licenses
Transfer of control for software is considered to have occurred upon electronic delivery of the license key that provides immediate availability of the product to the customer. The Company’s typical payment terms tend to vary but its standard payment terms are within 30 days of invoice.
Support and Maintenance
Revenue from support services and product updates, referred to as support and maintenance revenue, is recognized ratably over the term of the contract period, which is typically 12 to 36 months. Software license updates provide customers with rights to unspecified software product updates, maintenance releases and patches released during the term of the support period on a when-and-if available basis. Product support includes Internet access to technical content, as well as telephone access to technical support personnel. The Company’s customers purchase both product support and license updates when they acquire new software licenses. In addition, a majority of customers renew their support services contracts annually and typical payment terms provide that customers make payment within 30 days of invoice.
Professional Services
Revenue from professional services is typically comprised of implementation, development, training or other consulting services. Professional services are generally sold on an hourly/daily rate or fixed fee basis, and can include services ranging from software installation to data conversion, basic customizations, and building non-complex interfaces to allow the software to operate in integrated environments. For perpetual orders, the Company recognizes revenue for hourly arrangements as the services are performed. In fixed fee arrangements for perpetual orders, revenue is recognized as services are performed as measured by hours incurred to date, compared to total estimated hours to complete the services project. Management applies judgment when estimating project status and the time necessary to complete the services projects. A number of internal and external factors can affect these estimates, including changes to specifications, testing and training requirements. For SaaS orders, fees associated with professional services are deferred and recognized ratably over the estimated customer life. Services are generally invoiced upon milestones in the contract or upon consumption of the hourly resources and payments are typically due 30 days after invoice.
Funded Software Arrangements
The Company may enter into funded software arrangements from time to time. Under such arrangements, revenue recognition will not commence until final delivery and/or acceptance of the product. When a contract contains multiple performance obligations, if the performance obligations are distinct, revenue is recorded as each obligation has been fulfilled. If the performance obligations are not distinct, the Company will recognize the entire arrangement fee ratably commencing at the time of final delivery and/or acceptance through the end of the service period in the arrangement.
Disaggregated Revenue
The Company disaggregates revenue from contracts with customers by geography and type of the revenue arrangement, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
The Company’s revenue by geography and type is as follows (in thousands):
|
|
For the Years Ended June 30,
|
|
Net Revenues
|
|
2019
|
|
|
2018
|
|
MAM UK:
|
|
|
|
|
|
|
|
|
Recurring
|
|
$
|
21,058
|
|
|
$
|
20,497
|
|
Non-recurring
|
|
|
3,159
|
|
|
|
2,967
|
|
Total MAM UK Revenues
|
|
|
24,217
|
|
|
|
23,464
|
|
|
|
|
|
|
|
|
|
|
MAM NA:
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
10,154
|
|
|
|
9,306
|
|
Non-recurring
|
|
|
3,343
|
|
|
|
3,007
|
|
Total MAM NA Revenues
|
|
|
13,497
|
|
|
|
12,313
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenues
|
|
$
|
37,714
|
|
|
$
|
35,777
|
|
Significant Judgments
More judgments and estimates are required under Topic 606 than were required under Topic 605. Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.
Judgment is required to determine the SSP for each distinct performance obligation. The Company rarely licenses or sells products on a stand-alone basis, so the Company is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly observable because the Company does not sell the license, product or service separately, the Company determines the SSP using information that may include market conditions and other observable inputs. In making these judgments, the Company analyzes various factors, including its pricing methodology and consistency, size of the arrangement, length of term, customer demographics and overall market and economic conditions. Based on these results, the estimated SSP is set for each distinct product or service delivered to customers.
Revenue is recognized over time for the Company’s subscription, support and maintenance, and professional services that are separate performance obligations. For the Company’s professional services, revenue is recognized over time, generally using hours expended to measure progress. Judgment is required in estimating project status and the hours necessary to complete projects. A number of internal and external factors can affect these estimates, including changes to specifications, testing and training requirements.
If a group of agreements are entered at or near the same time and so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be combined as one arrangement for revenue recognition purposes. The Company exercises significant judgment to evaluate the relevant facts and circumstances in determining whether agreements should be accounted for separately or as a single arrangement. The Company’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.
Contract Balances
The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables, contract assets, or contract liabilities (deferred revenue) on the Company’s consolidated balance sheets. The Company records a contract asset when it has transferred goods or services but does not yet have the right to consideration, or deferred revenue when the Company has received or has the right to receive consideration but has not yet transferred goods or services to the customer.
The contract assets indicated below are presented as prepaid expenses and other current assets and other long-term assets in the consolidated balance sheets. These assets primarily relate to professional services and subscriptions, and consist of the Company’s rights to consideration for goods or services transferred but not billed as of June 30, 2019. The contract assets are transferred to receivables when the rights to consideration become unconditional, usually upon completion of a milestone.
The Company’s contract balances are as follows (in thousands):
|
|
As of
|
|
|
|
June 30, 2019
|
|
|
July 1, 2018
|
|
Contract assets, short-term
|
|
$
|
117
|
|
|
$
|
94
|
|
Contract assets, long-term
|
|
|
194
|
|
|
|
154
|
|
Total contract assets
|
|
$
|
311
|
|
|
$
|
248
|
|
Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted but unsatisfied performance obligations were approximately $21.8 million as of June 30, 2019, of which the Company expects to recognize approximately $11.7 million of the revenue over the next 12 months and the remainder thereafter. In instances where the timing of revenue recognition differs from the timing of invoicing, MAM has determined that its contracts generally do not include a significant financing component, except for its rental contracts with a term greater than 12 months. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements. In instances of rental contracts, the Customer pays a monthly fee for the use of a software license and monthly support for a specific term. For terms longer than 12 months, the Company determines the value of the software license using the residual approach and determines the present value of the software license payments to be made over the contract term, and records interest income for the financing component.
Deferred Revenue
MAM typically invoices its customers for subscription and support and maintenance fees on a monthly basis, with payment due 30 days from the date of the invoice. Unpaid invoice amounts for non-cancelable services starting in future periods are included in accounts receivable and deferred revenue. The portion of deferred revenue that MAM anticipates will be recognized after the succeeding twelve-month period is recorded as non-current deferred revenue, and the remaining portion is recorded as current deferred revenue.
Deferred revenues consist of the following (in thousands):
|
|
As of June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred professional services
|
|
$
|
1,522
|
|
|
$
|
885
|
|
Deferred license
|
|
|
292
|
|
|
|
305
|
|
Deferred support
|
|
|
1,234
|
|
|
|
590
|
|
Deposits
|
|
|
721
|
|
|
|
1,146
|
|
Deferred other revenue
|
|
|
139
|
|
|
|
105
|
|
Total deferred revenues
|
|
|
3,908
|
|
|
|
3,031
|
|
|
|
|
|
|
|
|
|
|
Less deferred revenues, current
|
|
|
(2,344
|
)
|
|
|
(1,885
|
)
|
Deferred revenues, non-current
|
|
$
|
1,564
|
|
|
$
|
1,146
|
|
During the fiscal year ended June 30, 2019, the Company recognized $1.5 million of revenue that was included in the deferred revenue balance, as adjusted for Topic 606, at the beginning of the year. All other activity in deferred revenue is due to the timing of invoicing in relation to the timing of revenue recognition.
Practical Expedients and Exemptions
There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s disclosures. Below is a list of practical expedients the Company applied in the adoption and application of Topic 606:
Application
●
|
The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer.
|
●
|
The Company generally expenses sales commissions when incurred when the amortization period would have been one year or less. These costs are recorded within sales and marketing expense in the consolidated statements of comprehensive income.
|
●
|
The Company does not disclose the value of unsatisfied performance obligations for contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed (apply to time engagements).
|
Modified Retrospective Transition Adjustments
●
|
For contract modifications, the Company reflected the aggregate effect of all modifications that occurred prior to the adoption date when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to satisfied and unsatisfied performance obligations for the modified contract at transition.
|
Costs to Obtain and Fulfill a Contract
The Company’s incremental direct costs of obtaining a contract consist of sales commissions which are amortized ratably over the term of economic benefit which the Company has determined to be the life of the contract for subscription customers. These deferred costs are classified as current or non-current based on the timing of when the Company expects to recognize the expense. Incremental costs related to initial support and renewals are expensed as incurred because the term of economic benefit is one year or less. The current and non-current portions of deferred commissions are included in prepaid expenses and other current assets and other long-term assets, respectively, in the Company’s condensed consolidated balance sheets. The Company had $0.3 million of deferred commissions at both June 30, 2019 and June 30, 2018. For the year ended June 30, 2019, $0.1 million of amortization expense related to deferred commissions was recorded in sales and marketing expense in the Company’s consolidated statement of comprehensive income.
Cost of Revenues
Cost of revenues primarily consists of expenses related to delivering the Company's service and providing support, amortization expense associated with capitalized software related to its services and acquired developed technologies and certain fees paid to various third parties for the use of their technology, services and data. Included in costs of revenues are cost of professional services, which consists primarily of employee-related costs associated with these services, the cost of subcontractors, certain third-party fees, and allocated overhead.
As the Company continues to invest in new products and services, the amortization expense associated with these capitalizable activities will be included in cost of revenues. Additionally, as the Company enters into new contracts with third parties for the use of their technology, services or data, or as its sales volume grows, the fees paid to use such technology or services may increase. The timing of these additional expenses will affect the Company's cost of revenues, both in terms of absolute dollars and as a percentage of revenues, in the affected periods.
Advertising Expense
The Company expenses advertising costs as incurred. For the years ended June 30, 2019 and 2018, advertising expense totaled $0.4 million and $0.4 million, respectively.
Foreign Currency
Management has determined that the functional currency of its subsidiaries is the local currency. Assets and liabilities of the UK subsidiaries are translated into US dollars at the year-end exchange rates. Income and expenses are translated at an average exchange rate for the year and the resulting translation gain (loss) adjustments are accumulated as a separate component of stockholders’ equity. The translation gain (loss) adjustment totaled ($0.5) million and $47,000 for the years ended June 30, 2019 and 2018, respectively.
Foreign currency gains and losses from transactions denominated in other than respective local currencies are included in income. The Company had no material foreign currency transaction gains (losses) for all periods presented.
Comprehensive Income
Comprehensive income includes all changes in equity (net assets) during a period from non-owner sources. For the years ended June 30, 2019 and 2018, the components of comprehensive income consist of foreign currency translation gains (losses).
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. Deferred taxation is provided in full in respect of timing differences between the treatment of certain items for taxation and accounting purposes. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination on the basis of the technical merits. The Company records unrecognized tax benefits as liabilities in accordance with ASC 740 and adjusts these liabilities based on new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. As of June 30, 2019, the Company accrued unrecognized tax benefits totaling $0.2 million.
The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense.
Basic and Diluted Earnings Per Share
Basic earnings per share (“BEPS”) is computed by dividing the net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share (“DEPS”) is computed giving effect to all dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of incremental shares issuable upon the exercise of stock options and warrants using the “treasury stock” method. The computation of DEPS does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings. For the years ended June 30, 2019 and 2018 there were common share equivalents of 57,524 and 56,626, respectively, included in the computation of the DEPS. For the years ended June 30, 2019 and 2018, 340,000 and 450,178 shares of common stock, respectively, vest based on the market price of the Company’s common stock and were excluded from the computation of DEPS because the shares have not vested, but no stock options were excluded from the computation of DEPS.
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the years ended June 30 (in thousands, except for per share amounts):
|
|
For the years ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,713
|
|
|
$
|
3,210
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted-average shares outstanding
|
|
|
12,150
|
|
|
|
11,849
|
|
Effect of dilutive securities
|
|
|
58
|
|
|
|
57
|
|
Diluted weighted-average diluted shares
|
|
|
12,208
|
|
|
|
11,906
|
|
Earnings per share attributed to common stockholders - basic
|
|
$
|
0.31
|
|
|
$
|
0.27
|
|
Earnings per share attributed to common stockholders - diluted
|
|
$
|
0.30
|
|
|
$
|
0.27
|
|
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,” which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC Topic 718. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The Company adopted ASU 2017-09 on July 1, 2018, and adoption of this standard did not have an impact on the Company's consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605) and Subtopic 985-605 Software - Revenue Recognition. Topic 605 and Subtopic 985-605 are collectively referred to as “Topic 605” or “prior GAAP.” Under Topic 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, Topic 606 requires enhanced disclosures, including disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The Company adopted Topic 606 on July 1, 2018, the first day of fiscal 2019, using the modified retrospective transition method. Under this method, the Company evaluated contracts that were in effect at the beginning of fiscal 2019 as if those contracts had been accounted for under Topic 606. The Company did not evaluate individual modifications for those periods prior to the adoption date, but the aggregate effect of all modifications as of the adoption date and such effects are provided below. Under the modified retrospective transition method, periods prior to the adoption date were not adjusted and continue to be reported in accordance with historical, pre-Topic 606 accounting. A cumulative catch-up adjustment was recorded to beginning retained earnings to reflect the impact of all existing arrangements under Topic 606.
The most significant impacts of the adoption of Topic 606 are as follows:
●
|
Revenue related to professional services for perpetual license contracts are recognized on percentage of hours incurred on the contract compared to the estimated total hours to complete, as compared to upon completion under prior GAAP. At adoption, the Company increased retained earnings and accounts receivable by $0.1 million related to this item.
|
●
|
Rental contracts, for which customers pay a monthly fee for an on-premise software license and support/maintenance are accounted for as perpetual licenses contracts with a financing component, rather than on a monthly subscription basis under prior GAAP. At adoption, the Company increased retained earnings, and other current assets and other long-term assets by $0.2 million related to this item.
|
●
|
Set-up fee revenue and associated costs pertaining to implementation of rental customers are no longer deferred over the life of the customer contract. At adoption, the Company increased retained earnings by $0.1 million and decreased deferred revenue by $0.2 million, and decreased other assets by $0.1 million related to this item.
|
●
|
Funded software development from a customer related to a capitalized software development project is now recognized as deferred revenue until the customer implements the software, and recognized over the life of the customer contract, as compared to an offset to capitalized software costs under prior GAAP. At adoption, the Company increased deferred revenue and increased capitalized software by $0.5 million related to this item.
|
The tax impact of the above adjustments was assessed and, at adoption, the Company decreased retained earnings and decreased deferred tax liability by $0.15 million each and increased taxes payable by $0.3 million.
Adjustments to beginning consolidated balance sheet accounts
The following table presents the cumulative effect adjustments, net of income tax effects, to beginning consolidated balance sheet accounts for Topic 606 adopted by the Company on the first day of fiscal year 2019 (in thousands):
|
|
June 30,
|
|
|
Topic
|
|
|
July 1,
|
|
|
|
2018
|
|
|
606
|
|
|
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
5,010
|
|
|
$
|
64
|
|
|
$
|
5,074
|
|
Prepaid expenses and other current assets
|
|
$
|
1,270
|
|
|
$
|
94
|
|
|
$
|
1,364
|
|
Total Current Assets
|
|
$
|
10,621
|
|
|
$
|
158
|
|
|
$
|
10,779
|
|
Software development costs, net
|
|
$
|
8,889
|
|
|
$
|
516
|
|
|
$
|
9,405
|
|
Deferred income taxes
|
|
$
|
1,251
|
|
|
$
|
121
|
|
|
$
|
1,372
|
|
Other long-term assets
|
|
$
|
545
|
|
|
$
|
41
|
|
|
$
|
586
|
|
TOTAL ASSETS
|
|
$
|
30,634
|
|
|
$
|
836
|
|
|
$
|
31,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of deferred revenues
|
|
$
|
1,885
|
|
|
$
|
556
|
|
|
$
|
2,441
|
|
Income tax payable
|
|
$
|
669
|
|
|
$
|
272
|
|
|
$
|
941
|
|
Total Current Liabilities
|
|
$
|
9,940
|
|
|
$
|
828
|
|
|
$
|
10,768
|
|
Deferred revenues, net of current portion
|
|
$
|
1,146
|
|
|
$
|
(213
|
)
|
|
$
|
933
|
|
Total Liabilities
|
|
$
|
17,114
|
|
|
$
|
616
|
|
|
$
|
17,730
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
$
|
2,003
|
|
|
$
|
220
|
|
|
$
|
2,223
|
|
Total Stockholders' Equity
|
|
$
|
13,520
|
|
|
$
|
220
|
|
|
$
|
13,740
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
30,634
|
|
|
$
|
836
|
|
|
$
|
31,470
|
|
The following table summarizes the effects of adopting Topic 606 on the Company's consolidated balance sheet accounts as of June 30, 2019 (in thousands):
|
|
As Reported
Under Topic 606
|
|
|
Adjustments
|
|
|
Balances Under
Prior GAAP
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
4,984
|
|
|
$
|
(108
|
)
|
|
$
|
4,876
|
|
Prepaid expenses and other current assets
|
|
$
|
1,573
|
|
|
$
|
(110
|
)
|
|
$
|
1,463
|
|
Total Current Assets
|
|
$
|
12,237
|
|
|
$
|
(218
|
)
|
|
$
|
12,019
|
|
Software development costs, net
|
|
$
|
9,487
|
|
|
$
|
(678
|
)
|
|
$
|
8,809
|
|
Deferred income taxes
|
|
$
|
1,372
|
|
|
$
|
120
|
|
|
$
|
1,492
|
|
Other long-term assets
|
|
$
|
475
|
|
|
$
|
(43
|
)
|
|
$
|
432
|
|
TOTAL ASSETS
|
|
$
|
32,519
|
|
|
$
|
(819
|
)
|
|
$
|
31,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of deferred revenues
|
|
$
|
2,344
|
|
|
$
|
(18
|
)
|
|
$
|
2,326
|
|
Income tax payable
|
|
$
|
592
|
|
|
$
|
(65
|
)
|
|
$
|
527
|
|
Total Current Liabilities
|
|
$
|
9,650
|
|
|
$
|
(83
|
)
|
|
$
|
9,567
|
|
Deferred revenues, net of current portion
|
|
$
|
1,564
|
|
|
$
|
(482
|
)
|
|
$
|
1,082
|
|
Deferred income taxes
|
|
$
|
742
|
|
|
$
|
17
|
|
|
$
|
759
|
|
Total Liabilities
|
|
$
|
14,982
|
|
|
$
|
(548
|
)
|
|
$
|
14,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
$
|
5,936
|
|
|
$
|
(271
|
)
|
|
$
|
5,665
|
|
Total Stockholders’ Equity
|
|
$
|
17,537
|
|
|
$
|
(271
|
)
|
|
$
|
17,266
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
32,519
|
|
|
$
|
(819
|
)
|
|
$
|
31,700
|
|
The following table summarizes the effects of adopting Topic 606 on the Company’s consolidated statement of comprehensive income for the year ended June 30, 2019 (in thousands, except per share value):
|
|
As Reported
Under Topic 606
|
|
|
Adjustments
|
|
|
Balances Under
Prior GAAP
|
|
Net revenues
|
|
$
|
37,714
|
|
|
$
|
(59
|
)
|
|
$
|
37,655
|
|
Cost of revenues
|
|
|
16,743
|
|
|
|
(6
|
)
|
|
|
16,737
|
|
Gross Profit
|
|
|
20,971
|
|
|
|
(53
|
)
|
|
|
20,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
16,030
|
|
|
|
-
|
|
|
|
16,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
4,941
|
|
|
|
(53
|
)
|
|
|
4,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(366
|
)
|
|
|
(15
|
)
|
|
|
(381
|
)
|
Total other expense, net
|
|
|
(366
|
)
|
|
|
(15
|
)
|
|
|
(381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
4,575
|
|
|
|
(68
|
)
|
|
|
4,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
862
|
|
|
|
(17
|
)
|
|
|
845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
3,713
|
|
|
$
|
(51
|
)
|
|
$
|
3,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributed to common stockholders – basic
|
|
$
|
0.31
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.30
|
|
Earnings per share attributed to common stockholders – diluted
|
|
$
|
0.30
|
|
|
$
|
-
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
3,713
|
|
|
$
|
(51
|
)
|
|
$
|
3,662
|
|
Foreign currency translation gain
|
|
|
(534
|
)
|
|
|
-
|
|
|
|
(534
|
)
|
Total Comprehensive Income
|
|
$
|
3,179
|
|
|
$
|
(51
|
)
|
|
$
|
3,128
|
|
The following table summarizes the effects of adopting Topic 606 on the Company’s consolidated statement of cash flows for the year ended June 30, 2019 (in thousands):
|
|
As Reported
Under Topic 606
|
|
|
Adjustments
|
|
|
Balances Under
Prior GAAP
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,713
|
|
|
$
|
(51
|
)
|
|
$
|
3,662
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
$
|
(9
|
)
|
|
$
|
(225
|
)
|
|
$
|
(234
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
(288
|
)
|
|
$
|
44
|
|
|
$
|
(244
|
)
|
Prepaid expenses and other assets
|
|
$
|
(126
|
)
|
|
$
|
22
|
|
|
$
|
(104
|
)
|
Income tax payable
|
|
$
|
(336
|
)
|
|
$
|
202
|
|
|
$
|
(134
|
)
|
Deferred revenues
|
|
$
|
590
|
|
|
$
|
(155
|
)
|
|
$
|
435
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
$
|
4,547
|
|
|
$
|
(163
|
)
|
|
$
|
4,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software development costs
|
|
$
|
(567
|
)
|
|
$
|
163
|
|
|
$
|
(404
|
)
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
$
|
(673
|
)
|
|
$
|
163
|
|
|
$
|
(510
|
)
|
Cash and cash equivalents at end of period
|
|
$
|
5,508
|
|
|
$
|
-
|
|
|
$
|
5,508
|
|
Accounting Standards Not Yet Adopted
In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This update simplifies the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. Under the new guidance, an entity performs its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the carrying amount of goodwill allocated to the reporting unit. ASU 2017-04 will be effective for the Company for the fiscal year ending June 30, 2021. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-04 to have a significant impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases.” The update requires lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. The guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and will be effective for the Company in its first quarter of fiscal 2020. The Company is currently assessing the impact the adoption of ASU 2016-02 will have on its consolidated financial statements and expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption of ASU 2016-02.
NOTE 5. INCOME TAXES
The Company is subject to taxation in the US, UK and various US state jurisdictions. The Company’s tax years for 1999 and forward are subject to examination by the US and state tax authorities due to losses incurred since inception. The Company is currently not under any material examination by any taxing authorities.
The Company follows the provisions of ASC 740-10, “Income Taxes,” that defines a recognition threshold and measurement attributes for the financial recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740-10 also provides guidance on the de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Under ASC 740-10, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
The Company has $0.2 million of unrecognized tax benefits that, if recognized, would affect the effective tax rate.
The Company’s practice is to recognize interest and/or penalties related to income matters in income tax expense. The Company did not recognize any penalties for the years ended June 30, 2019 and 2018.
The aggregate changes in the balance of unrecognized tax benefits were as follows (in thousands):
|
|
For the years ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Balance, beginning of the year
|
|
$
|
232
|
|
|
$
|
88
|
|
Increases for tax positions related to the current year
|
|
|
-
|
|
|
|
10
|
|
Increases for tax positions related to prior years
|
|
|
6
|
|
|
|
167
|
|
Decreases due to lapsed statutes of limitations
|
|
|
(11
|
)
|
|
|
(33
|
)
|
Balance, end of year
|
|
$
|
227
|
|
|
$
|
232
|
|
Income before income taxes for the years ended June 30, 2019 and 2018 was taxed under the following jurisdictions (in thousands):
|
|
For the years ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
United States of America
|
|
$
|
482
|
|
|
$
|
734
|
|
United Kingdom
|
|
|
4,093
|
|
|
|
3,749
|
|
Total
|
|
$
|
4,575
|
|
|
$
|
4,483
|
|
The provision (benefit) for income taxes consists of the following for the years ended June 30, 2019 and 2018 (in thousands):
|
|
US
Federal
|
|
|
US
State
|
|
|
UK
Corporate
|
|
|
Total
|
|
2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
113
|
|
|
$
|
48
|
|
|
$
|
710
|
|
|
$
|
871
|
|
Deferred
|
|
|
(14
|
)
|
|
|
(2
|
)
|
|
|
7
|
|
|
|
(9
|
)
|
Total
|
|
$
|
99
|
|
|
$
|
46
|
|
|
$
|
717
|
|
|
$
|
862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
273
|
|
|
$
|
75
|
|
|
$
|
399
|
|
|
$
|
747
|
|
Deferred
|
|
|
477
|
|
|
|
(50
|
)
|
|
|
99
|
|
|
|
526
|
|
Total
|
|
$
|
750
|
|
|
$
|
25
|
|
|
$
|
498
|
|
|
$
|
1,273
|
|
At June 30, 2019, the Company had net US deferred tax assets of approximately $1.8 million. Due to uncertainties surrounding the Company’s ability to generate future capital gains, a valuation allowance has been established to offset carry-forwards of its capital losses due to investments previously written off. Additionally, the future utilization of the Company’s federal and state NOLs to offset future taxable income have been determined to be subject to an annual limitation pursuant to Internal Revenue Code (“IRC”) Sections 382 and 383 as a result of ownership changes that have previously occurred.
Through its Section 382 study, the Company has analyzed any NOLs from its acquired subsidiaries to determine the maximum potential future tax benefit that might be available, and the corresponding limitation imposed based on IRC Section 382. As a result, by the year ended June 30, 2011, the Company adjusted the aforementioned net operating losses previously estimated. The outcome resulted in a determination that it could utilize, annually, approximately $0.4 million of previously incurred NOLs; presuming, however, there is taxable income in future periods affording utilization prior to expiration.
At June 30, 2019, the Company had combined federal and state NOLs of approximately $3.6 million and $1.3 million, respectively. The federal and state tax loss carry-forwards will begin to expire in 2027 and 2027, respectively, unless previously utilized.
Significant components of the Company’s net deferred tax assets at June 30, 2019 and 2018 are shown below. A valuation allowance of $1.2 million and $1.2 million has been established to offset the net deferred tax assets as of June 30, 2019 and 2018, respectively. The net decrease in the valuation allowance for the year ended June 30, 2018 was $0.5 million, related to the change in federal tax rate discussed below.
The tax effects of temporary differences and carry-forwards that give rise to significant portions of deferred tax assets (liabilities) consist of the following at June 30, 2019 and 2018 (in thousands):
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
State taxes
|
|
$
|
39
|
|
|
$
|
34
|
|
Net operating loss carry-forwards
|
|
|
762
|
|
|
|
902
|
|
Write-down of investments
|
|
|
1,174
|
|
|
|
1,183
|
|
Deferred revenue
|
|
|
292
|
|
|
|
116
|
|
Equity-based compensation
|
|
|
150
|
|
|
|
87
|
|
Reserves and accruals
|
|
|
284
|
|
|
|
278
|
|
Deferred rent
|
|
|
1
|
|
|
|
1
|
|
Domestic intangible and other long-lived assets
|
|
|
5
|
|
|
|
-
|
|
Tax credits
|
|
|
-
|
|
|
|
42
|
|
Total deferred tax assets
|
|
|
2,707
|
|
|
|
2,643
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Foreign intangible and other long-lived assets
|
|
|
(903
|
)
|
|
|
(872
|
)
|
Domestic intangible and other long-lived assets
|
|
|
-
|
|
|
|
(56
|
)
|
Unremitted foreign earnings
|
|
|
-
|
|
|
|
(70
|
)
|
Total deferred tax liabilities
|
|
|
(903
|
)
|
|
|
(998
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(1,174
|
)
|
|
|
(1,183
|
)
|
Net deferred tax assets
|
|
$
|
630
|
|
|
$
|
462
|
|
The provision (benefit) for income taxes for the years ended June 30, 2019 and 2018 differs from the amount computed by applying the US federal income tax rates to net income from continuing operations before taxes as a result of the following (in thousands):
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Taxes at federal statutory rates
|
|
$
|
961
|
|
|
$
|
1,236
|
|
State taxes, net of federal benefit
|
|
|
36
|
|
|
|
98
|
|
Rate changes
|
|
|
-
|
|
|
|
785
|
|
Unrecognized tax benefits
|
|
|
-
|
|
|
|
141
|
|
Permanent items and other
|
|
|
49
|
|
|
|
(360
|
)
|
Research and development
|
|
|
(87
|
)
|
|
|
(272
|
)
|
Differential in UK corporate tax rate
|
|
|
(122
|
)
|
|
|
(322
|
)
|
Unremitted foreign earnings
|
|
|
(69
|
)
|
|
|
279
|
|
Deemed repatriation tax
|
|
|
-
|
|
|
|
217
|
|
Stock compensation
|
|
|
(48
|
)
|
|
|
5
|
|
Foreign dividends
|
|
|
453
|
|
|
|
-
|
|
Foreign tax credits
|
|
|
(311
|
)
|
|
|
-
|
|
Change in valuation allowance
|
|
|
-
|
|
|
|
(534
|
)
|
Provision for income taxes
|
|
$
|
862
|
|
|
$
|
1,273
|
|
On December 22, 2017, new U.S. federal tax legislation, the Tax Cuts and Jobs Act (the "Tax Act") was enacted. The Tax Act significantly revises the U.S. corporate tax by implementing a territorial system and imposing a repatriation on deemed repatriated earnings of foreign subsidiaries. The Company derived that the enactment of the Tax Act resulted in a tax of approximately $0.3 million.
The Tax Act was a significant modification of existing U.S. federal tax law and contained several provisions which impacted the provision of the Company in fiscal year end June 30, 2018 and will impact the Company's tax position in future years. Among other things, the Tax Act permanently lowered the federal corporate tax rate to 21% from the existing maximum tax rate of 35%, effective for years including or commencing January 1, 2018. Due to the Company's fiscal year ending on June 30, 2018, the federal tax rate was adjusted on a per-day computation based on the number of days in 2017 and 2018 with the old and new federal tax rates (the "blended tax rate"). For the fiscal year ended June 30, 2018, the Company recorded tax expense of approximately $0.8 million primarily due to the remeasurement of deferred tax assets at the reduced federal corporate tax rate of 21%.
Beginning for tax years starting after December 31, 2017, the Tax Act eliminates the previous net operating loss carryback period of two years and permits an indefinite carryforward period. The net operating loss deduction is limited to 80% of taxable income. The net operating losses arising in tax years beginning on or after January 1, 2018 are subject to the 80% limitations. The net operating losses arising in tax years beginning before January 1, 2018 are not subject to the 80% limitation. The net operating losses arising in tax years ending after December 31, 2017 may not be carried back to prior years and may be carried forward indefinitely.
For tax years commencing after December 31, 2017, the Tax Act repealed the alternative minimum tax and taxpayers with alternative minimum tax credit carryfowards that have not been used may claim a refund in future years for those credits even though no income tax liabilities exist. Business expense deductions are eliminated for most entertainment costs and commuting benefits. Certain employer-provided meals expenses will also be eliminated after the year 2025. The bonus depreciation expensing provision increased from 50% to 100% for assets placed in service after September 27, 2018 and before 2023.
The Tax Act also subjects U.S. corporations to tax on Global Intangible Low-Taxed Income (“GILTI”), which imposes tax on foreign earnings in excess of a deemed return on tangible assets. Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision for which no provisional amounts have been recorded in the Company’s Consolidated Financial Statements. An accounting policy election can be made to either record deferred taxes related to GILTI or to record the related taxes in the period in which they occur. For the year ended June 30, 2019, the Company derived that the enactment of the GILTI tax will result in a tax of approximately $0.1 million.
In addition, the Tax Act substantially eliminates any element of deferred taxation of foreign income with a US parented multinational group and retains Subpart F income to provide full and immediate taxation of the classes of income under the pre-enactment law and subjects a new broad class of income under Subpart F as well creates new base erosion provisions.
NOTE 7. STOCKHOLDERS’ EQUITY
Common Stock
The Company issues shares of common stock to the non-management members of the Board of Directors under the Company’s 2007 Long Term Incentive Plan ("2007 LTIP") and 2017 Equity Incentive Plan (“2017 EIP”) in respect of quarterly compensation. The shares vest over a three-year period and are issued quarterly. The Company also gives the non-management members of the Board of Directors the option to receive shares of common stock in lieu of cash compensation.
On January 6, 2017, the Company approved the issuance of 37,795 shares of common stock to the non-management members of the Board of Directors under the Company’s 2017 EIP in respect of quarterly compensation. The shares vest over a three-year period and are issued quarterly. The shares were valued at approximately $241,000, based on the closing market price of the Company’s common stock on the day of the grant.
On July 3, 2017, the Company approved the issuance of 34,592 shares of common stock to the non-management members of the Board of Directors under the Company's 2017 EIP in respect of quarterly compensation. The shares vest over a three-year period and are issued quarterly. The shares were valued at approximately $220,000, based on the closing market price of the Company's common stock on the day of the grant.
On July 2, 2018, the Company approved the issuance of 25,524 shares of common stock to the non-management members of the Board of Directors under the Company’s 2017 EIP in respect of quarterly compensation. The shares vest over a three-year period and are issued quarterly. The shares were valued at approximately $220,000, based on the closing market price of the Company’s common stock on the date of the grant.
During the years ended June 30, 2019 and 2018, the Company issued 28,141 and 30,571 shares of common stock, respectively, net of shares surrendered for tax withholding, for the vesting of shares granted to the non-management members of the Board of Directors under the Company’s 2007 LTIP and 2017 EIP and in lieu of cash compensation.
Stock Repurchase Plan
The Company’s Board of Director’s authorized the repurchase of up to $2.0 million of its common stock effective September 19, 2018 (“Stock Repurchase Plan”). Stock repurchases may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate. As of June 30, 2019, the Company repurchased 41,765 shares of common stock under the Stock Repurchase Plan for a total cost of approximately $0.3 million.
Treasury Stock
During the year ended June 30, 2019, the Company repurchased 41,765 shares of common stock in treasury, at a cost of $0.3 million under the Stock Repurchase Plan. During the years ended June 30, 2019 and 2018, the Company repurchased and retired 3,566 and 5,599 shares, respectively, of common stock for treasury, with an original cost of $27,000 and $47,000, respectively.
Stock-Based Compensation
Stock-based compensation expense for restricted stock and stock issuances of $1.0 million and $0.6 million was recorded in the years ended June 30, 2019 and 2018, respectively, and was recorded primarily in general and administrative expenses in the statements of comprehensive income. As of June 30, 2019, $0.8 million of total unrecognized stock-based compensation expense related to restricted stock is expected to be recognized over approximately 3.2 years.
A summary of the Company's common stock option activity is presented below (shares in thousands):
|
|
Options Outstanding
|
|
|
|
Number of
Shares
(in
thousands)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life
(in years)
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Options outstanding - July 1, 2018
|
|
|
68
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(18
|
)
|
|
|
1.90
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Options outstanding - June 30, 2019
|
|
|
50
|
|
|
$
|
1.09
|
|
|
|
1.8
|
|
|
$
|
362
|
|
Options exercisable - June 30, 2019
|
|
|
50
|
|
|
$
|
1.09
|
|
|
|
1.8
|
|
|
$
|
362
|
|
Options exercisable and vested - June 30, 2019
|
|
|
50
|
|
|
$
|
1.09
|
|
|
|
1.8
|
|
|
$
|
362
|
|
During the year ended June 30, 2019, the Company issued 13,723 shares of common stock in connection with the cashless exercise of stock options to purchase 18,099 shares of the Company's common stock. The total intrinsic value of the stock options exercised during the year ended June 30, 2019 was $0.1 million.
The aggregate intrinsic value represents the total pre-tax amount of proceeds, net of the exercise price, which would have been received by the option holders if all option holders had exercised and immediately sold all options with an exercise price lower than the market price of the Company's common stock on June 30, 2019.
During the years ended June 30, 2019 and 2018, the Company granted a total of 20,000 and 240,000 restricted shares of common stock, respectively, to employees under the 2017 EIP, valued at $0.1 million and $1.5 million, respectively. The restricted stock vests when the Company's volume weighted average price ("VWAP") per share is at or above certain levels.
A summary of the Company's restricted common stock activity is presented below (shares in thousands):
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of Shares
|
|
|
Initial Value Price
|
|
|
|
(in thousands)
|
|
|
Per Share
|
|
Restricted stock outstanding - July 1, 2018
|
|
|
450
|
|
|
$
|
4.25
|
|
Issuance of restricted stock
|
|
|
20
|
|
|
|
6.12
|
|
Vesting
|
|
|
(130
|
)
|
|
|
3.22
|
|
Forfeitures
|
|
|
-
|
|
|
|
-
|
|
Restricted stock outstanding - June 30, 2019
|
|
|
340
|
|
|
$
|
4.76
|
|
The fair value of the restricted stock awards vested was $3.5 million for the fiscal year ended June 30, 2019.
A summary of the vesting levels of the Company's restricted common stock is presented below (shares in thousands):
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Initial Value Price
|
|
|
|
Shares
|
|
|
Per Share
|
|
30 day VWAP per share vesting level (1):
|
|
|
|
|
|
|
|
|
$10.00 per share
|
|
|
124
|
|
|
$
|
4.72
|
|
$11.00 per share
|
|
|
126
|
|
|
$
|
4.74
|
|
$12.00 per share
|
|
|
86
|
|
|
$
|
4.78
|
|
$13.00 per share
|
|
|
4
|
|
|
$
|
6.12
|
|
|
(1)
|
The outstanding restricted stock becomes vested when the Company’s 30-day volume weighted average price (“VWAP”) per share is at or above these levels.
|
During the years ended June 30, 2019 and 2018, the Company withheld 4,053 and 4,531 shares of common stock at a cost of $34,000 and $33,000, respectively, for the payment of taxes on shares that vested during the year.
Employee Stock Purchase Plan
The Company has established Employee Stock Purchase Plans ("ESPP Plans"). Under the ESPP Plans, the Company will grant eligible employees the right to purchase common stock through payroll deductions. US employees purchase stock at a price equal to the lesser of 85 percent of the fair market value of a share of the Company’s common stock on the Exercise Date (as defined under the ESPP Plans) of the current Offering Period (as defined under the ESPP Plans) or 85 percent of the fair market value of the Company's common stock on the Grant Date (as defined under the ESPP Plans) of the Offering Period. UK employees purchase at a price equal to the lesser of 100 percent of the fair market value of a share of the Company’s common stock on the Exercise Date of the current Offering Period or 100 percent of the fair market value of the Company's common stock on the Grant Date of the Offering Period, but receive a 15 percent matching contribution from the Company.
During the years ended June 30, 2019 and 2018, the Company issued 10,406 and 14,712 shares of common stock, respectively, to employees, including executive officers, under the ESPP in lieu of compensation, which shares of common stock were valued at approximately $0.1 million based on the closing market price of the Company’s common stock on January 2, 2018 and December 31, 2018, and $0.1 million based on the closing market price of the Company’s common stock on January 1, 2017 and July 1, 2017, respectively.