ARI NETWORK SERVICES INC /WI

During the quarter ended April 30, 2017, the Company recorded an income tax benefit of approximately $595,000, net of an unrecognized tax benefit and valuation allowance, associated with US research and development (“R&D”) credits related to fiscal year 2013 through the third quarter of fiscal 2017. As of April 30, 2017, the Company had accumulated R&D credits for federal and state purposes of approximately $449,000 and $316,000, respectively.

One of our strategic advantages is our focus on integrating our solutions with dealer business management systems (DMS) to pass key information, including customer and transactional data, between our solutions and the DMS, saving our customers valuable

time and eliminating redundant data entry. We currently have integration capabilities with over 90 DMS, and we continue to seek other strategic alliances that can be integrated with our product and service offerings. We recently integrated our website offerings in the powersports, marine and RV markets with CDK Global to provide dealers with websites and enhanced integrations to their DMS. This new offering allows dealers to instantly post unit inventory as well as available parts and accessories to their website directly from their CDK Lightspeed system.

Non-recurring revenue is generated from one-time perpetual license fees from our business management offerings, certain offerings within the Company’s digital marketing services, professional services related to software customization and data conversion, usage fees charged on our RR products, set-up fees and other complementary products and services. Total non-recurring revenue increased 16.9% or $157,000, and 1.8% or $53,000 during the three and nine months ended April 30, 2017, compared to the same periods last year, primarily due to non-recurring revenues from the Auction 123 acquisition. Our goal is to maintain non-recurring revenue of less than 10% of total revenue, as the margins on this revenue tends to be lower than our RR products. Furthermore, non-recurring revenue must be resold each year.

Sales and marketing expense decreased 7.4% or $206,000 and 2.5% or $210,000 during the three and nine months ended April 30, 2017, compared to the same periods last year, primarily due to streamlining our sales force as we integrate our most recent acquisitions. Sales and marketing expense as a percentage of revenue decreased from 23.4% of revenue for the nine months ended April 30, 2016 to 20.8% for the same period in fiscal 2017. This decrease is due to the growth in our RR base, which requires much less resources to renew, as well as some open sales headcount in the three month period ending April 30, 2017 which the Company expects to fill in the next three months. Management expects sales and marketing expense as a percentage of revenue to be flat as RR continues to grow.

We had a net income tax benefit of $129,000 during the quarter ended April 30, 2017 compared to expense of $368,000 for the same period last year.  During the quarter ended April 30, 2017, the Company recorded an income tax benefit of approximately $595,000, net of an unrecognized tax benefit and valuation allowance, associated with US research and development (“R&D”) credits related to fiscal year 2013 through the third quarter of fiscal 2017. Income tax expense was $389,000 during the nine months ended April 30, 2017, compared to $972,000 during the same period last year. We paid income taxes of $106,000 and $45,000 during the nine months ended April 30, 2017 and 2016, respectively, primarily related to statutory alternative minimum taxes. Income tax expense may vary from period to period as we continue to evaluate the valuation allowance against net deferred tax assets.