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

Transcription

1 Item 2. Management s Discussin and Analysis f Financial Cnditin and Results f Operatins The fllwing discussin f ur results f peratins and financial cnditin shuld be read tgether with ur unaudited cnslidated financial statements fr the three and six mnths ended January 31, 2016 and 2015, including the ntes theret, which appear elsewhere in this quarterly reprt n Frm 10-Q. All amunts are in thusands, except per share data. This discussin, including, withut limitatin, the sectin entitled Summary f Operating Results, cntains frward-lking statements regarding future events and ur future results that are subject t the safe harbrs created under the Securities Act f 1933 (the Securities Act ) and the Securities Exchange Act f 1934 (the Exchange Act ). All statements ther than statements f histrical facts are statements that culd be deemed t be frward-lking statements. These statements are based n current expectatins, estimates, frecasts, and prjectins abut the markets in which we perate and the beliefs and assumptins f ur management. Wrds such as expects, anticipates, targets, gals, prjects, intends, plans, believes, seeks, estimates, endeavrs, strives, may, variatins f such wrds, and similar expressins are intended t identify such frward-lking statements. In additin, any statements that refer t prjectins f ur future financial perfrmance, ur anticipated grwth and trends in ur businesses, and ther characterizatins f future events r circumstances are frward-lking statements. Readers are cautined that these frward-lking statements are nly predictins and are subject t risks, uncertainties, and assumptins that are difficult t predict, estimate, r verify, including thse identified in Part I, Item 1A f ur annual reprt n Frm 10-K fr the year ended July 31, 2015, and elsewhere herein. Therefre, actual results may differ materially and adversely frm thse expressed in any frward-lking statements. We undertake n bligatin t revise r update any frward-lking statements fr any reasn. Overview ARI Netwrk Services, Inc. ffers an award-winning suite f data-driven sftware tls and marketing services t help dealers, equipment manufacturers and distributrs in selected vertical markets Sell Mre Stuff! nline and in-stre. Our innvative prducts are pwered by a prprietary data repsitry f enriched riginal equipment and aftermarket electrnic cntent f OEM parts, aftermarket parts, garments and accessries ( PG&A ) and whle gds frm mre than 1,800 manufacturers. Business is cmplicated, but we believe ur custmers technlgy tls dn t have t be. We remve the cmplexity f selling and servicing new and used whle gds inventry, and PG&A fr custmers in the autmtive tire and wheel aftermarket ( ATW ), autmtive aftermarket parts and service ( AAPS ), pwersprts, utdr pwer equipment ( OPE ), marine, hme medical equipment ( HME ), recreatinal vehicles ( RV ) and appliance industries. Mre than 23,500 equipment dealers, distributrs and manufacturers wrldwide leverage ur web and ecatalg platfrms t Sell Mre Stuff! Our Slutins We ffer sftware as a service ( SaaS ) and data as a service ( DaaS ) slutins t help ur custmers Sell Mre Stuff! bth nline and in-stre. Our primary slutins include: (i) Lead Generatin and ecmmerce Websites, which prvide a web presence fr dealers and whlesalers, and serve as a platfrm fr driving leads and ecmmerce sales; (ii) ecatalgs, which drive sales f inventry and PG&A at the dealer s parts cunter, their nline website and ther surces thrugh parts lkup f ur prprietary data repsitry; (iii) business management sftware designed t streamline every aspect f a dealer s peratin, drive prfitability, and allw them t prvide better custmer service; and (iv) digital marketing slutins designed t generate leads and drive traffic bth t the dealer s website and brick-and-mrtar lcatin. Our slutins als imprve ur custmers verall custmer satisfactin thrugh a highly efficient and accurate data lkup experience at the parts cunter and a quicker respnse time t nline inquiries, bth f which serve t significantly imprve a custmer s verall experience with the dealer. Our SaaS and DaaS slutins are sld thrugh ur internal sales frce and are cmpsed primarily f recurring licenses and subscriptins and, in the case f business management sftware, perpetual licenses and maintenance cntracts. Custmers typically sign annual, aut-renewing cntracts. Tday, apprximately 90% f ur revenues are recurring. 20

2 Lead Generatin and ecmmerce Websites Our Lead Generatin and ecmmerce-enabled website slutins prvide cnsumers with infrmatin abut a dealership and its prduct lines thrugh ur extensive library f electrnic catalg cntent and allw cnsumers t btain infrmatin n whle gds and purchase PG&A via the dealer s website 24 hurs a day, 7 days a week. Our website slutins are tailred t each f the vertical markets we serve and are tightly integrated with ur electrnic library f inventry and PG&A cntent. We ffer a full menu f website add-ns including a mbile inventry management applicatin, third-party inventry integratins and business management integratins. Our lead generatin tls are designed t efficiently manage and nurture generated leads thrugh campaigns, autmated respnses, sales team reminders, and ther lead generating activities, increasing cnversin rates and ultimately revenues fr ur custmers. Websites are sld thrugh ur inside sales teams, which are aligned by vertical market. The sales prcess will typically include a live dem f the site and may even include a free trial perid (we refer t these as test drives ). In additin t mnthly recurring subscriptin fees, we may als charge a nminal, ne-time setup fee t develp a new dealer website as well as variable transactin fees. Our website slutins are typically sld under ne year, renewable cntracts with mnthly payment terms. We estimate that as f January 31, 2016, we hst and maintain mre than 7,000 websites fr dealers acrss all f ur vertical markets. ecatalg Platfrm Slutins Our ecatalg slutins leverage ur industry-leading library f electrnic whle gds, aftermarket PG&A and OEM parts cntent t allw manufacturers, distributrs, dealers and cnsumers t view and interact with this infrmatin t efficiently supprt the sales and service f equipment either in-stre r nline. We ffer a variety f bth DaaS and SaaS ecatalg prducts tailred t the specific industries we serve. Our ecatalg slutins are sld thrugh ur dedicated internal sales team. Fees charged fr the use f ur ecatalg prducts include a recurring license fee, subscriptin fees fr subscribed catalgs and, in sme cases, page view fees. Business Management Sftware Our business management sftware slutins are designed t streamline every aspect f a dealer s peratins t allw them t prvide imprved custmer service. These prducts are sld thrugh ur dedicated internal sales team, and fees charged include perpetual ne-time license r installatin fees, maintenance and supprt fees, as well as hsting fees fr ur SaaS versin. These slutins are a new ffering, as a result f ur acquisitins f Tire Cmpany Slutins, LLC (TCS) in September 2014 and TASCO Crpratin (TASCO) in April 2015, and are currently nly ffered in the ATW and AAPS aftermarkets. Digital Marketing Slutins ARI cmplements ur suite f data-driven sftware tls with digital marketing slutins that deliver the engaging experiences that tday s cnsumers demand. ARI s digital marketing slutins include search engine ptimizatin, marketing, scial media management, search engine marketing ( PPC ), nline reputatin management and nline directry management t help dealers drive mre nline leads, ecmmerce sales and in-stre traffic. Other Slutins We als ffer a suite f cmplementary slutins, which include sftware, website custmizatin, prfessinal services and hsting services. Our Grwth Strategy ARI s gal is t becme the leading prvider f SaaS and DaaS slutins that help ur custmers efficiently and effectively sell mre majr units, replacement parts, accessries and service in ther wrds, t Sell Mre Stuff! Our cntinued gal is t grw revenues at a duble-digit rate and t grw earnings thrugh scalability. We will accmplish this gal by deplying ur slutins t dealers, distributrs, manufacturers, service prviders, and cnsumers in selected vertical markets where the finished gds are cmplex equipment, requiring service, that are primarily sld and serviced thrugh an independent dealer channel that typically carries multiple brands. We believe this strategy will drive increased value t ur sharehlders, emplyees and custmers. We als believe the executin f the fllwing strategic pillars will enable us t achieve the grwth and prfitability needed t drive lng-term sustainable value fr ur sharehlders. These strategic fundatins are primarily centered n enhancing the value 21

3 prpsitin t ur custmers, which will lead t additinal revenues thrugh pricing actins, prduct and feature upsells, reduced custmer churn rates, and expansin by leveraging ur cre cmpetencies in new cmplementary markets. Each f these strategic pillars is a lng-term fundatin fr grwth; within each we have established near-term gals, as discussed belw. Drive rganic grwth thrugh expanded service fferings t grw bth ur subscriber custmer base and ur average revenue per dealer. As a subscriptin-based, recurring revenue (RR) business, the mst imprtant drivers f future grwth are nurturing and defending ur custmer base, develping and selling additinal prducts t ur existing custmer base, and acquiring new custmers. We define RR as revenue frm prducts and services which are subscriptin-based and renewable, including sftware access fees, data cntent fees, maintenance and supprt fees and hsting fees. We define churn as the percentage f RR that des nt renew. RR increased 17.0%, r $1,567,000 t 91.6% f ttal revenue fr the quarter ended January 31, 2016, cmpared t the same perid last year and 23.8% r $4,127,000 t 91.4% f ttal revenue fr the six mnths ended January 31, 2016, cmpared t the same perid last year. T experience further grwth in RR, we will cntinue t: Develp and deply innvative new slutins. We have resurces assigned t each f ur cre prducts that cntinue t research and develp new value-added features and functinality fr ur existing prducts. The intrductin f new slutins, upgrades t existing prducts, and new feature sets are all designed t grw ur average revenue per dealer ( ARPD ), an imprtant measure fr a subscriptin-based business, and the increase in ur custmer base serves t quickly cmpund the benefits f an increased ARPD. We have recently released a number f new features, upgrades and prducts, including the fllwing: Web Platfrms Dealer Management System Sftware Integratins we cmpleted develpment t integrate ur web platfrm with three leading management sftware systems vendrs perating in the pwersprts, marine, RV, and utdr pwer markets. Manufacturer Branded Platfrm Prgram we develped tling that enabled us t rapidly launch ver 4,000 websites with cnsistent branding and OEM marketing cntrl in supprt f ur partnership with Tr, a leading utdr pwer equipment manufacturer. Supplier Drp Shipment Prgram we develped and released an integratin with a leading Hme Medical prduct supplier, enabling autmated drp-ship fulfillment f ecmmerce rders. This is ur secnd drp-ship prgram in the Hme Medical market. Search Engine and Cnversin Optimizatin we perfrmed varius enhancements t help increase traffic t ur custmers websites and increase cnversin rates within the website, yielding up t 50% imprvement in bth f these areas as a result. Respnsive Website Platfrm we began develpment n a next generatin architecture fr ur dealership websites, which is natively based n Respnsive Design and includes dramatic perfrmance and scalability capabilities. 22

4 ecatalg Platfrms Data Manager Develpment we cntinued develpment and market testing f the next generatin f Data Manager, ur OEM parts prduct infrmatin management sftware. This next generatin platfrm is being designed t reduce OEM publishing csts and time t market thrugh real-time publishing, ensuring end users have access t the mst accurate and rich part and service infrmatin acrss ARI s sftware ecsystem. Digital Marketing Services New Digital Marketing Services Packages we recently develped and launched a new set f innvative Digital Marketing Services packages, ffering a curated blend f services targeted fr unique custmer segments that increase business traffic and drive sales pprtunities. The new slutins recently earned a prestigius pwersprts industry award. These prduct enhancements are designed t autmate and enhance the marketing, sales and servicing activities fr ur custmers, in rder t help them sell and service mre parts, garments, accessries and whle gds. Differentiate ur cntent. We believe we have the largest library f replacement part, majr unit, and PG&A cntent in the vertical markets we serve. Hwever, simply ffering the largest cntent library in the markets we serve is nt sufficient t drive the lng-term revenue grwth we desire. We strive t deliver mre value t ur custmers thrugh enrichment f ur cntent. Cntent enrichment can take several frms, including the incrpratin f user reviews and feedback int ur existing cntent, further enhancing cntent prvided t us by ur OEM custmers, and creating new frms f cntent that further ur custmers ability t efficiently service and sell mre whle gds and PG&A. Enter new markets. ARI currently maintains a significant share in ur cre vertical markets f OPE, pwersprts, marine and appliances. Accrdingly, we anticipate lw single-digit grwth in these markets. ARI maintains a lwer share in ur grwth vertical markets f HME, ATW and AAPS. Accrdingly, we anticipate duble-digit grwth in these markets. As we cntinue t increase ur share in ur current markets, leveraging ur technlgy in new and underserved markets will be imprtant t maintaining substantial rganic grwth rates. Including the acquisitin f TCS, ARI currently has mre than 3,000 dealer websites in the ATW market. We estimate that the ttal market apprximates 18,000 dealers. Further, the brader AAPS market, which we entered via ur acquisitin f DCi, cmprises nearly 80,000 independent service prviders, mre than all f ur ther markets cmbined. We intend t cntinue t invest heavily in this grwth market, including seeking pprtunities t leverage ur prducts and services in the brader AAPS. We are ne f the first website prviders t service the HME market. We estimate that this market cmprises nearly 25,000 service prviders, and believe the market t be in an early stage with respect t ecmmerce adptin. We recently invested in dedicated resurces designed t expedite ur grwth in this market. Expand gegraphically. Althugh we maintain relatinships with dealers thrughut the wrld, we have lw penetratin int internatinal markets. Grwing ur internatinal business will require us t secure and publish electrnic cntent frm OEMs utside the U.S. and make changes t ur existing prducts that will allw us t rapidly deply these prducts in a scalable and efficient manner, withut the need t have bts n the grund in thse cuntries. 23

5 Nurture and retain existing custmers thrugh wrld-class custmer service and value-added prduct feature updates. In rder t achieve sustained duble-digit grwth, we nt nly need t execute the grwth strategies described abve, we must als retain ur existing custmers. In a SaaS business, the cst t retain an existing custmer is much less than the cst t acquire a new custmer. Accrdingly, custmer churn is an imprtant metric we track and manage. We experienced imprvements in ur churn rates the past several years as a result f strategic actins taken by the Cmpany, all f which are designed t enhance the stickiness f ur prduct within ur custmers peratins. On a trailing twelve mnth basis, churn was 15.5% fr the perid ending January 31, 2016, cmpared t 14.5% fr the same perid last year. The increase was due t the terminatin f a bulk license arrangement with an OEM, price increases fr sme legacy custmers wh had heavily discunted pricing, and the grwth in website revenue which tends t have a higher churn rate. We will cntinue t leverage ur relatinships with existing custmers and clsely mnitr and manage the level f custmer churn. Lead the market with pen integratin t related platfrms. One f ur strategic advantages is ur fcus n integrating ur slutins with dealer business management systems ( DMS ) in rder t pass key infrmatin, including custmer and transactinal data, between ur slutins and the DMS, saving ur custmers valuable time and eliminating redundant data entry. The Cmpany recently signed an exclusive reseller agreement with CDK Glbal Recreatin, the prvider f Lightspeed, a renwned DMS in the pwersprts industry. They will integrate ARI s AccessrySmart int their DMS, which will autmatically ffer ur prduct t their custmers. We currently have integratin capabilities with ver 90 DMS s (we refer t these relatinships as Cmpass Partners ), and we cntinue t seek ther strategic alliances that can be integrated with ur prduct and service fferings. Successfully execute acquisitins that align with ur cre strategy Since 1995, we have had a frmal crprate develpment prgram aimed at identifying, evaluating, and clsing acquisitins that align with ur strategy. We fcus n vertically-riented markets with a large base f independent, multi-line dealers that sell and service cmplex equipment. Our strategy is t acquire cmpanies that have ne r mre f the fllwing attributes: (i) expand ur market share in existing verticals; (ii) expand int new markets that fit ur desired prfile; (iii) prvide us with cmplementary prducts which can be crss-sld t ur existing custmer base; (iv) prvide pprtunities t crss-sell ur existing prducts; and (v) can be integrated int ur peratins, thereby creating cst-saving synergies. Since the prgram s inceptin, we have clsed 16 acquisitins. A summary f sme f ur mst recent acquisitins is as fllws: Acquisitin Date Strategy Direct Cmmunicatins Inc. July 2015 A leading prvider f electrnic catalg and cntent in the AAPS industry TASCO Crpratin (and affiliated Signal April 2015 Extend business management sftware platfrm in the ATW market Extraprise Crpratin) Tire Cmpany Slutins, LLC September 2014 Cnslidate website psitin and add new business management sftware in the ATW market DUO Web Slutins Nvember 2013 A leading prvider f scial media and nline digital marketing slutins in the pwersprts industry 50 Belw Sales & Marketing, Inc. Nvember 2012 A market leader in the pwersprts industry (Retail Divisin) Entrance int ATW and DME industries New award-winning website platfrm Ready2Ride, Inc. August 2012 First f its kind aftermarket fitment data fr the pwersprts industry 24

6 Acquisitins On July 13, 2015, the Cmpany acquired substantially all f the assets f Direct Cmmunicatins Inc. (DCi), a leading prvider f differentiated prduct cntent and electrnic catalg sftware serving manufacturers, distributrs, jbbers and independent retailers in AAPS. Cnsideratin fr the acquisitin included: (1) a cash payment equal t $3,750,000; (2) 159,795 shares f the Cmpany s cmmn stck; and (3) the issuance f a prmissry nte in principal amunt f $2,000,000 t DCi. The principal amunt f the DCi Nte was reduced by apprximately $64,000 as a result f pst-clsing adjustments t the valuatin f the net assets acquired, pursuant t the terms f the asset purchase agreement. On April 27, 2015, the Cmpany acquired substantially all f the assets f TASCO, a leading prvider f business management sftware designed exclusively fr the autmtive ATW aftermarket industry. Cnsideratin fr the acquisitin included: (1) a cash payment at the clsing f the transactin equal t $1,750,000; (2) 242,424 shares f the Cmpany s cmmn stck; and (3) a $200,000 hldback payable n April 27, The hldback amunt was reduced by apprximately $62,000 as a result f pstclsing adjustments t the estimated valuatin f the net assets acquired, pursuant t the terms f the asset purchase agreement. On September 30, 2014, the Cmpany acquired substantially all f the assets f TCS, a leading prvider f sftware, websites and marketing services designed exclusively fr the autmtive ATW vertical. Cnsideratin fr the acquisitin included: (1) a cash payment equal t $4,200,000; (2) 618,744 shares f the Cmpany's cmmn stck; (3) the issuance f tw prmissry ntes initially in aggregate principal amunt f $2,933,000 (as adjusted) t the frmer wners f TCS; and (4) a cntingent earn-ut purchase price payable in three ptential payments and cntingent upn the attainment f specific revenue gals. The earn-ut des nt have an upper range, hwever, the payut at 100% per the asset purchase agreement is $933,000 and the fair value was estimated at $711,000. The Cmpany s strategy is t integrate the sales teams frm acquisitins as quickly as pssible in rder t realize crss-selling synergies. As a result, we d nt track revenues and csts specific t the individual acquired businesses. Summary f Operating Results Ttal revenue increased 15.9%, r $1,613,000, fr the three mnths ended January 31, 2016 t $11,752,000, cmpared t $10,139,000 fr the same perid last year. Year-t-date revenue increased 22.0% r $4,238,000 t $23,489,000, cmpared t $19,251,000 fr the same perid last year. Recurring revenue increased 17.0% t $10,769,000 during the three mnths ended January 31, 2016 and 23.8% t $21,479,000 during the six mnths ended January 31, 2016, cmpared t $9,202,000 and $17,352,000, respectively, during the same perids last year. Recurring revenue cnstituted 91.4% f ur ttal revenue fr the six mnths ended January 31, 2016 cmpared t 90.1% fr the same perid last year. The grwth in year-ver-year ttal revenue was attributable t incremental revenue frm the TCS business acquired in September 2014, the TASCO business acquired in April 2015 and the DCi business acquired in July 2015, as well as rganic grwth in revenue frm ARI s histrical prducts, primarily in the lead generatin and ecmmerce slutins. Grwth was als driven by rganic grwth in the acquired TCS business primarily in the business management sftware segment. Operating incme increased 30.3%, r $203,000, frm $670,000 fr the three mnths ended January 31, 2015 t $873,000 fr the same perid this year and increased 76.4% r $728,000 frm $953,000 fr the six mnths ended January 31, 2015 t $1,681,000 fr the same perid this year. Net perating expenses increased 15.9% r $1,208,000 during the three mnth perid ended January 31, 2016, cmpared t the same perid last year, primarily due t the additinal csts f the DCi and TASCO peratins. Net perating expenses increased 20.3% r $2,988,000 during the six mnths ended January 31, 2016, cmpared t the same perid last year, primarily due t the additinal csts f the DCi and TASCO peratins and six mnths f TCS peratins in fiscal 2016, cmpared t fur mnths last year. Net incme was $448,000, r $0.03 per share, fr the three mnths ended January 31, 2016, cmpared t $260,000, r $0.02 per share, fr the same perid last year. Net incme fr the six mnths ended January 31, 2016 was $837,000, r $0.05 per share, cmpared t a net incme f $365,000, r $0.03 per share, fr the same perid last year. Cash prvided by peratins increased 7.9% t $2,951,000 fr the six mnths ended January 31, 2016 cmpared t $2,734,000 fr the same perid last year, primarily as a result f revenue grwth and peratinal efficiencies. 25

7 Revenue The fllwing table summarizes ur prduct revenue and RR and nn-recurring revenue (in thusands): Three mnths ended January 31 Six mnths ended January % f Ttal 2015 % f Ttal % Change 2016 % f Ttal 2015 % f Ttal % Change Lead Generatin and ecmmerce Websites $ 5, % $ 5, % 2.7 % $ 11, % $ 10, % 11.4 % ecatalg Services 4, % 3, % 28.9 % 8, % 6, % 29.4 % Business Management Sftware % % % 1, % % % Digital Marketing Slutins % % 12.4 % % % 29.1 % Other Revenue % % (16.1)% % % (45.6)% Ttal revenue $ 11, % $ 10, % 15.9 % $ 23, % $ 19, % 22.0 % Recurring revenue 10, , % 21, , % Nn-recurring revenue % 2, , % Ttal revenue $ 11, % $ 10, % 15.9 % $ 23, % $ 19, % 22.0 % Ttal revenue increased 15.9% t $11,752,000 and 22.0% t $23,489,000, fr the three and six mnths ended January 31, 2016, respectively, cmpared t the same perids last year. RR increased 17.0% t $10,769,000 and 23.8% t $21,479,000 fr the three and six mnths ended January 31, 2016, respectively, cmpared t the same perids last year. RR represented 91.4% f ttal revenue fr the first six mnths f fiscal 2016, versus 90.1% fr the same perid in fiscal We cntinue t fcus n achieving recurring revenue f 90% r greater. Lead Generatin and ecmmerce Website Revenue Our lead generatin and ecmmerce website slutins generate revenue frm ne-time setup and custmizatin fees t develp new dealer websites, which is recgnized ratably ver the term f the cntract, mnthly recurring subscriptin fees and variable transactin fees. Our lead generatin and ecmmerce website slutins are typically sld as ne year, renewable cntracts with mnthly payment terms. We estimate that we currently hst and maintain mre than 7,000 websites fr dealers in all f ur vertical markets. Lead generatin and ecmmerce website slutins have becme ARI s largest surce f revenue and accunted fr 50.0% f ttal revenue during the six mnths ended January 31, Lead generatin and ecmmerce revenue increased 2.7% t $5,876,000 fr the three mnths ended January 31, 2016, cmpared t the same perid last year as a result f rganic grwth. Lead generatin and ecmmerce revenue increased 11.4% t $11,744,000 fr the six mnths ended January 31, 2016, cmpared t the same perid last year as a result f bth rganic grwth and ur acquisitin f TCS in September We anticipate that ur web platfrms will cntinue t be ne f the Cmpany s largest surce f revenue grwth. ecatalg Revenue Our ecatalg slutins generate revenue frm renewable subscriptin fees fr ur sftware, data cntent, sftware maintenance and supprt fees and sftware custmizatin fees. ecatalg is ur secnd largest surce f revenue, representing 38.1% f ttal revenue during the six mnths ended January 31, ecatalg revenue increased 28.9% t $4,446,000 during the three mnths ended January 31, 2016 and 29.4% t $8,961,000 during the six mnths ended January 31, 2016, cmpared t the same perids last year, primarily due t ur acquisitin f DCi in July The catalg cntent prvided in ur ecatalg slutins helps t drive sales grwth in ur website and lead management slutins, as well as cntinuing t drive rganic grwth in ther areas f the business. Business Management Sftware Business management sftware revenue is generated frm perpetual ne-time license and installatin fees fr ur new business management sftware, alng with recurring maintenance, supprt fees and hsting fees. These prducts were acquired as part f the TASCO and TCS acquisitins. Business management sftware revenue mre than dubled frm $411,000 fr the three mnths ended January 31, 2015 t $866,000 fr the same perid this year. Business management sftware revenue increased frm $533,000 fr the six mnths ended January 31, 2015 t $1,675,000 fr the same perid this year. Revenue frm business management sftware represented 7.1% f ttal revenue during fiscal The increase in business management sftware revenue is primarily a result f revenue frm the newly acquired TASCO prduct in April 2015, as well as rganic grwth in the business management sftware segment acquired thrugh TCS. Digital Marketing Revenue 26

8 Revenues frm ur digital marketing slutins are generated frm set-up fees and subscriptin fees fr ur search engine ptimizatin, scial media marketing and website enhancement tls. Ttal digital marketing revenue increased 12.4% t $382,000 and 29.1% t $737,000 during the three and six mnths ended January 31, 2016, cmpared t the same perids last year. We expect digital marketing revenue t cntinue t increase ver the prir year as we cntinue t grw this business. Other Revenue We als ffer a suite f cmplementary slutins, which include sftware and website custmizatin services, perpetually licensed sftware and hsting services. Other revenue, which is primarily nn-recurring in nature, decreased 16.1% t $182,000 and 45.6% t $372,000 during the three and six mnths ended January 31, 2016, cmpared t the same perids last year. The decrease in ther revenue is principally due t a large ne-time prfessinal service cntract with ne f ur majr manufacturers resulting in revenue during fiscal Recurring Revenue RR is ne f the mst imprtant grwth drivers f ur business. Increasing the percentage f ur revenues that are recurring, while at the same time reducing the rate f custmer churn, enhances ur ability t generate prfitable grwth. Our subscriptin-based SaaS and DaaS prducts generate higher margins than ur nn-recurring prducts and services, and the incremental cst f selling these prducts t new dealers (we refer t these as new lgs ) is relatively lw. Reducing the rate f ur custmer churn, which is the percentage f RR that des nt renew, helps drive rganic grwth as it allws fr a greater percentage f ur new lgs t be incremental t the tp line (versus making up fr lst lgs) and als increases the base upn which we can apply price increases and sell additinal prducts and features. We generate RR frm each f ur primary prduct categries frm mnthly license, subscriptin, maintenance and supprt fees. RR increased 17.0%, r $1,567,000 and 23.8% r $4,127,000 fr the three and six mnths ended January 31, 2016, cmpared t the same perids last year. The grwth in RR was primarily attributable t bth the additin f RR frm ur acquisitins f TCS, TASCO and DCi and rganic grwth. We expect RR t cntinue t grw ver the prir year cmparable perids thrughut fiscal Nn-recurring Revenue Nn-recurring revenue is generated frm ne-time perpetual license fees frm ur business management fferings, certain fferings within the Cmpany s digital marketing slutins, prfessinal services related t sftware custmizatin and data cnversin, usage fees charged n ur RR prducts, set-up fees and ther cmplementary prducts and services. Ttal nn-recurring revenue was $983,000 and $2,010,000 fr the three and six mnths ended January 31, 2016, versus $937,000 and $1,899,000 fr the same perids last year. The increase in nn-recurring revenue is primarily due t an increase in nn-recurring revenues related t perpetual license revenue fr ur business management fferings and ther nn-recurring revenue related t ur acquired businesses. These increases are partially ffset by a large ne time service cntract with ne f ur majr manufacturers which resulted in nn-recurring revenue during fiscal Our gal is t maintain nn-recurring revenue f less than 10% f ttal revenue, as the margin n this revenue tends t be lwer than ur RR prducts. Furthermre, nn-recurring revenue must be resld each year. 27

9 Cst f Revenue and Grss Margin We classify as cst f revenue thse csts directly attributable t the prvisin f services. These csts include (i) sftware amrtizatin, which represents the peridic amrtizatin f csts fr internally develped r purchased sftware sld t custmers; (ii) direct labr fr the prvisin f catalg prductin, prduct implementatins and prfessinal services revenue; and (iii) ther direct csts, which represent amunts paid t third-party vendrs fr data ryalties, as well as data cnversin and replicatin fees directly attributable t the services we prvide ur custmers. The table belw breaks ut cst f revenue int each f these three categries (in thusands): Three mnths ended January 31 Six mnths ended January 31 % f % f % f % f 2016 Revenue 2015 Revenue % Change 2016 Revenue 2015 Revenue % Change Net revenues $ 11,752 $ 10, % $ 23,489 $ 19, % Cst f revenues: Amrtizatin f capitalized sftware % % (1.6) % 1, % 1, % (5.6) % csts Direct labr % % 19.7 % 1, % % 26.9 % Other direct csts % % 13.7 % 1, % 1, % 20.9 % Ttal cst f revenues 2, % 1, % 10.8 % 4, % 3, % 14.5 % Grss prfit $ 9, % $ 8, % 17.0 % $ 19, % $ 15, % 23.8 % Grss prfit was $9,688,000 r 82.4% f revenue fr the three mnths ended January 31, 2016, cmpared t $8,277,000 r 81.6% f revenue fr the same perid last year. Amrtizatin f capitalized sftware csts as a percentage f revenue decreased fr the three and six mnths ended January 31, 2016, cmpared t the same perids last year, primarily due t revenue increasing at a faster rate than sftware amrtizatin csts. Direct labr csts as a percentage f revenue increased fr the three and six mnths ended January 31, 2016, cmpared t the same perids last year primarily due t an increase in ur digital marketing revenue and website implementatins. Other direct csts as a percentage f revenue remained cnsistent fr the six mnths ended January 31, 2016, cmpared t the same perid last year. The Cmpany expects fluctuatins in grss margin frm quarter t quarter and year ver year based n the mix f prducts sld. Operating Expenses We categrize net perating expenses as fllws: Sales and marketing expenses cnsist primarily f persnnel and related csts, including cmmissins fr ur sales and marketing emplyees, and the cst f marketing prgrams and trade shw attendance; Custmer peratins and supprt expenses are cmpsed f ur cmputer hsting peratins, sftware maintenance agreements fr ur cre netwrk and persnnel and related csts fr peratins and supprt emplyees; Sftware develpment and technical supprt expenses are cmpsed primarily f persnnel and related csts; we capitalize certain f these csts in accrdance with GAAP, which is discussed belw, while the remaining csts are primarily related t technical supprt and research and develpment; General and administrative expenses primarily cnsist f persnnel and related csts fr executive, finance, human resurces and administrative persnnel, legal and ther prfessinal fees and ther crprate expenses and verhead; Depreciatin and amrtizatin expenses cnsist f depreciatin n fixed assets, which are cmpsed f leasehld imprvements and infrmatin technlgy assets, and the amrtizatin f acquisitin-related intangible assets. Csts assciated with the amrtizatin f sftware prducts are a cmpnent f cst f revenue; and We allcate certain shared csts amng the varius net perating expense classificatins. Allcated csts include facilities, insurance, internal sftware and telecmmunicatins. These csts are generally allcated based n headcunt, unless circumstances dictate therwise. All public cmpany csts, including legal and accunting fees, investr relatins csts, bard fees and directrs and fficers liability insurance, remain in general and administrative. 28

10 The fllwing table summarizes ur perating expenses by expense categry (in thusands): Three mnths ended January 31 Six mnths ended January 31 % f % f % % f % f % 2016 Revenue 2015 Revenue Change 2016 Revenue 2015 Revenue Change Sales and marketing $ 2, % $ 2, % 3.0 % $ 5, % $ 5, % 5.8 % Custmer peratins and supprt 2, % 1, % 29.8 % 4, % 3, % 36.9 % Sftware develpment and technical 1, % 1, % 23.0 % 2, % 1, % 32.4 % supprt General and administrative 1, % 1, % 8.9 % 3, % 3, % 10.1 % Depreciatin and amrtizatin (1) % % 44.6 % 1, % % 53.7 % Net perating expenses $ 8, % $ 7, % 15.9 % $ 17, % $ 14, % 20.3 % (1) Exclusive f amrtizatin f sftware prducts f $544, $553, $1,040 and $1,102 fr the three and six mnths ended January 31, 2016 and 2015, respectively, which are included in cst f revenue. Net perating expenses increased 15.9% r $1,208,000 and 20.3% r $2,988,000 fr the three and six mnths ended January 31, 2016, cmpared t the same perid last year. The Cmpany acquired the net assets f TCS in September 2014, TASCO in April 2015 and DCi in July The increase in net perating expenses was primarily due t the perating csts f these acquisitins during the first half f fiscal 2016, while there were n perating csts fr TASCO and DCi, and nly fur mnths f TCS peratins during the first half f fiscal Net perating expenses as a percentage f revenue decreased frm 76.3% fr the first half f fiscal 2015 t 75.2% fr the first half f fiscal Management expects net perating expenses t cntinue t decline as a percentage f ttal revenue t the extent the Cmpany cntinues t make prgress in its integratin f the TCS, TASCO and DCi peratins and, t the extent the Cmpany can leverage grwth in its cre RR prducts, as incremental csts related t these prducts decrease fr every dllar f new revenue. Sales and Marketing Sales and marketing expense increased 3.0%, r $80,000 and 5.8% r $303,000 during the three and six mnths ended January 31, 2016, cmpared t the same perids last year. The increase was primarily a result f the expenses assciated with the TCS and DCi peratins. Sales and marketing expense as a percentage f revenue decreased frm 27.1% f revenue fr the six mnths ended January 31, 2015 t 23.5% fr the same perid in fiscal This decrease is due t the grwth in ur RR base, which requires much less resurces t renew. Management expects sales and marketing expense as a percentage f revenue t fluctuate quarter t quarter, based upn the timing f the Cmpany s marketing events and trade shw schedule and its decisin t add additinal sales and marketing resurces t drive rganic revenue grwth. Custmer Operatins and Supprt Custmer peratins and supprt expense increased 29.8% r $557,000 and 36.9%, r $1,313,000, during the three and six mnths ended January 31, 2016, cmpared t the same perids last year. The increase was primarily a result f the expense assciated with the TCS, TASCO and DCi peratins. Custmer peratins and supprt expense as a percentage f revenue increased frm 18.5% f revenue fr the six mnths ended January 31, 2015 t 20.8% during the first six mnths f fiscal The custmer peratins and supprt functins f an acquired business typically take lnger t fully integrate due t merging sftware platfrms, help desks and custmer hsting systems in rder t perate mre efficiently. Management expects custmer peratins and supprt expenses t cntinue t increase during fiscal 2016, cmpared t the prir year, due t the additinal csts assciated with the acquisitins, but t decline as a percentage f revenue ver time, as we cntinue t integrate these areas int ur peratins, while RR cntinues t grw. Sftware Develpment and Technical Supprt Our sftware develpment and technical supprt staff have three essential respnsibilities fr which the accunting treatment varies depending upn the wrk perfrmed: (i) csts assciated with internal sftware develpment effrts (after technlgical feasibility is established) are capitalized as sftware prduct csts and amrtized ver the estimated useful life f the prduct; (ii) csts fr prfessinal services perfrmed fr custmers related t sftware custmizatin prjects are classified as cst f revenue; and (iii) all ther activities, including research and develpment, are cnsidered perating expenses and included within the sftware develpment and technical supprt perating expense categry. 29

11 Sftware develpment and technical supprt csts increased 23.0%, r $247,000, during the three mnths ended January 31, 2016 versus the same perid last year and 32.4%, r $630,000, during the six mnths ended January 31, 2016 versus the same perid last year. The increase was primarily a result f the additinal develpment staff assciated with the TCS sftware and the Cmpany s cntinued fcus n reducing churn. During the three and six mnths ended January 31, 2016, we capitalized $300,000 and $558,000 f sftware develpment labr, verhead and interest expense, versus $256,000 and $516,000 during the same perids last year. In additin t internal capitalized sftware csts, we had utsurced capitalized develpment csts f $154,000 and $269,000 during the three and six mnths ended January 31, 2016 and $123,000 and $202,000 during the same perids last year. During the three mnths ended January 31, 2016, we devted resurces t several new enhancements f ur website and ecatalg prducts. We expect fluctuatins in the percentage f sftware develpment and technical supprt csts classified as perating expenses frm perid t perid, based n the mix f research and prttype wrk versus capitalized sftware develpment and prfessinal services activities. General and Administrative General and administrative expense increased 8.9%, r $142,000 and 10.1%, r $323,000, during the three and six mnths ended January 31, 2016, cmpared t the same perids last year. The increase was primarily a result f the additinal headcunt frm the TCS and DCi acquisitins. General and administrative expense as a percentage f revenue decreased frm 16.6% f revenue fr the six mnths ended January 31, 2015 t 15.0% fr the same perid in fiscal Management expects general and administrative expense as a percentage f revenue t decrease ver time as we cntinue t scale the business, althugh additinal acquisitins r ther transactins culd result in elevated general and administrative expense in future perids. Other Incme and Expense The table belw summarizes the cmpnents f ther incme and expenses (in thusands): Three mnths ended January 31 Six mnths ended January % Change % Change Interest expense $ (120) $ (140) (14.3)% $ (232) $ (229) 1.3 % Other, net 4 (100.0)% (8) 3 (366.7)% Ttal ther incme (expense) $ (120) $ (136) (11.8)% $ (240) $ (226) 6.2 % Interest expense is cmpsed f bth interest paid n the Cmpany s debt financing arrangements and amrtizatin f nn-cash interest charges related t deferred finance csts and imputed interest n cntingent liabilities. Interest and ther expense decreased 11.8% r $16,000 during the three mnths ended January 31, 2016, cmpared t the same perid last year, as the Cmpany paid dwn a prtin f its debt bligatins and cntingent liabilities. Interest and ther expense increased 6.2% r $14,000 during the six mnths ended January 31, 2016, cmpared t the same perid last year, primarily as a result f additinal debt bligatins and cntingent liabilities t partially fund the TCS and DCi acquisitins. Incme Taxes The Cmpany has net deferred tax assets f $4,898,000 as f January 31, 2016, primarily cnsisting f net perating lss carryfrwards ( NOLs ) and bk t tax temprary differences. Incme tax expense is prvided fr at the applicable statutry tax rate applied t current U.S. incme befre taxes, plus r minus any adjustments t the deferred tax assets and t the estimated valuatin allwance against deferred tax assets. Incme tax expense, if any, des nt represent a significant current cash bligatin, as we cntinue t have NOLs t ffset substantially all f the taxable incme. We had incme tax expense f $305,000 and $604,000 during the three and six mnths ended January 31, 2016, cmpared t $274,000 and $363,000 during the same perids last year. We paid incme taxes f $43,000 and $55,000 during the six mnths ended January 31, 2016 and 2015, respectively, primarily related t statutry alternative minimum taxes. Incme tax expense may vary frm perid t perid as we cntinue t evaluate the valuatin allwance against net deferred tax assets. We als have NOLs related t tax lsses incurred by ur Netherlands peratin. We have determined that, cnsistent with prir perids, it is nt likely that the net perating lsses will be utilized and therefre, a full valuatin allwance is recrded, resulting in $0 net deferred tax assets related t the Netherlands peratin at January 31, 2016 and

12 Adjusted EBITDA EBITDA is calculated as net incme adjusted t exclude interest expense, amrtizatin, depreciatin and incme tax expense. Adjusted EBITDA further eliminates nn-cash, stck-based cmpensatin expense. Management believes Adjusted EBITDA is helpful in understanding perid-ver-perid perating results separate and apart frm nn-perating expenses and expenses pertaining t prir perid investing activities, particularly given the Cmpany s significant investments in capitalized sftware and its cntinuing effrts in cmpleting acquisitins, which typically result in significant nn-cash depreciatin and amrtizatin expense in subsequent perids. Hwever, Adjusted EBITDA has significant limitatins as an analytical tl and shuld nly be used cautiusly in additin t, and never as a substitute fr, perating incme, cash flws r ther measures f financial perfrmance prepared in accrdance with generally accepted accunting principles and may nt necessarily be cmparable t similarly titled measures f ther cmpanies. The table belw presents the recnciliatin f net incme t EBITDA and Adjusted EBITDA (in thusands): Three mnths ended January 31 Six mnths ended January 31 Twelve mnths ended January Net incme (lss) $ 448 $ 260 $ 837 $ 364 $ 1,544 $ 698 Interest Amrtizatin included in cst f sales ,040 1,102 1,961 2,192 Depreciatin and amrtizatin , ,175 1,442 Lss n FMV f Warrant Derivatives (4) Lss n impairment f lng-lived assets Incme taxes , EBITDA $ 2,007 $ 1,635 $ 3,912 $ 2,838 $ 7,200 $ 5,476 Stck-based cmpensatin expense Adjusted EBITDA $ 2,095 $ 1,742 $ 4,115 $ 3,048 $ 7,639 $ 6,085 Revenue $ 11,752 $ 10,139 $ 23,489 $ 19,251 $ 44,681 $ 35,975 Adjusted EBITDA as a % f revenue 17.8 % 17.2 % 17.5 % 15.8 % 17.1 % 16.9 % Adjusted EBITDA increased 20.3%, frm $1,742,000 during the secnd quarter f fiscal 2015 t $2,095,000 during the secnd quarter f fiscal Adjusted EBITDA increased 35.0%, frm $3,048,000 during the first half f fiscal 2015 t $4,115,000 during the first half f fiscal Adjusted EBITDA as a percentage f revenue increased frm 15.8% during the six mnths ended January 31, 2015 t 17.5% during the same perid this year. The increase was primarily due t the imprvement in perating incme. Management expects adjusted EBITDA as a percentage f revenue t increase during fiscal 2016, versus fiscal 2015, t the extent earnings cntinue t increase as a result f RR grwth and as the Cmpany recgnizes a full year f earnings related t its recent acquisitins. Liquidity and Capital Resurces The fllwing table sets frth certain cash flw infrmatin derived frm ur unaudited financial statements (in thusands): Six mnths ended January Change Net cash prvided by perating activities $ 2,951 $ 2,734 $ 217 Net cash used in investing activities (1,473) (5,389) 3,916 Net cash prvided by (used in) financing activities (595) 2,556 (3,151) Effect f freign currency exchange rate changes n cash (1) (21) 20 Net change in cash $ 882 $ (120) $ 1,002 Cash at end f perid $ 3,166 $ 1,688 $ 1,478 We generated $882,000 f net cash during the six mnths ended January 31, 2016, cmpared t the utilizatin f $120,000 during the same perid last year. We generated net cash prvided by perating activities f $2,951,000 during the six mnths ended January 31, 2016 cmpared t $2,734,000 during the same perid last year. This increase in cash generated frm peratins was primarily due t increased pre-tax prfitability. 31

13 Cash used in investing activities decreased $3,916,000 fr the six mnths ended January 31, 2016, cmpared t the same perid last year. We paid cash f $322,000 fr cntingent liabilities related t ur acquisitins, capitalized $827,000 f sftware develpment csts, and acquired technlgy equipment f $324,000 during the six mnths ended January 31, We paid cash f $4,200,000 as cnsideratin fr the TCS acquisitin, paid $250,000 fr cntingent liabilities, capitalized $718,000 f sftware develpment csts, acquired technlgy equipment f $279,000, and received $58,000 frm an earn-ut receivable during the six mnths ended January 31, We will cntinue t invest cash in the business t further ur grwth strategies previusly discussed. Net cash used in financing activities was $595,000 during the six mnths ended January 31, 2016, primarily t pay dwn the SVB nte, the TCS ntes and ur capital lease bligatins. Net cash prvided frm financing activities was $2,556,000 during the six mnths ended January 31, 2015, as the Cmpany increased its senir debt, as described belw, by $3,000,000 t partially fund the TCS acquisitin in September Management believes that current cash balances and its ability t generate cash frm peratins are sufficient t fund ur needs ver the next twelve mnths, althugh additinal financing may be necessary if the Cmpany were t cmplete a material acquisitin r t make a large investment in its business. Debt The Cmpany has a Lan and Security Agreement (the Agreement ) with Silicn Valley Bank ( SVB ), pursuant t which SVB extended t the Cmpany credit facilities cnsisting f a $3,000,000 revlving credit facility with a maturity date f September 30, 2016 and a $6,050,000 term lan with a maturity date f September 30, In additin t this, the Cmpany has issued several prmissry ntes in cnnectin with its acquisitins. See Nte 3 t the cnslidated financial statements fr further details. The fllwing table summarizes the Cmpany s utstanding debt bligatins as f January 31, 2016 (in thusands): SVB Term Nte TCS Ntes DCi Ntes Ttal Ntes Payable 2016 $ 303 $ 465 $ $ , ,134 1, , , , ,815 1,815 $ 5,294 $ 2,705 $ 1,936 $ 9,935 Off-Balance Sheet Arrangements The Cmpany has n ff-balance sheet arrangements that have r are reasnably likely t have a current r future effect n its financial cnditin, revenue r expenses, results f peratins, liquidity, capital expenditures r capital resurces. Item 3. Quantitative and Qualitative Disclsures abut Market Risk Nt Applicable. Item 4. Cntrls and Prcedures The Cmpany has established disclsure cntrls and prcedures t ensure that material infrmatin relating t it, including its cnslidated subsidiaries, is made knwn n a timely basis t the fficers wh certify ur financial reprts and t ther members f senir management and the Bard f Directrs. The Cmpany s management, with the participatin f ur Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness f ur disclsure cntrls and prcedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as f the end f the perid cvered by this reprt. Based n such evaluatin, ur Chief Executive Officer and Chief Financial Officer have cncluded that, as f such date, the Cmpany s disclsure cntrls and prcedures are effective (1) in recrding, prcessing, summarizing and reprting, n a timely basis, infrmatin required t be disclsed by the Cmpany in the reprts that it files r submits under the Exchange Act and (2) t ensure that infrmatin required t be disclsed in the reprts it files r submits under the Exchange Act is accumulated and cmmunicated t its management, including the Chief Executive Officer and Chief Financial Officer, t allw timely decisins regarding required disclsure. 32