(1)
As of May 31, 2016, 143,653 options were exercisable. For additional information, see “EXECUTIVE COMPENSATION – SofTech Equity Incentive Plans”.
Recent Sale of Unregistered Securities
Not Applicable
Issuer Purchases of Equity Securities
During the fourth quarter of fiscal year 2016, we did not purchase any shares of our common stock.
16
ITEM 6. SELECTED FINANCIAL DATA
We are a “Smaller Reporting Company”, as defined by the SEC, and are not required to provide the information required by this Item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and results of operations should be read in conjunction with the consolidated financial statements and the notes to those statements included in this Form 10-K. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth in this Form 10-K under “Risk Factors,” actual results may differ materially from those anticipated in these forward-looking statements.
Overview
We operate in one reportable segment and are engaged in the development, marketing, distribution and support of computer software solutions that enable companies to manage the entire lifecycle of their products from conception through design and manufacture, to service and disposal, all of which is known in the industry as Product Lifecycle Management (“PLM”). These solutions include software technology offerings for Computer Aided Design (“CAD”), Product Data Management (“PDM”) and Collaboration technologies, all of which fit under the broadly defined PLM industry. Our operations are organized geographically in the U.S. and Europe. We have sales and customer support offices in the U.S. and Italy. We also operate through resellers in North America, Europe and Asia.
Over approximately the last two fiscal years, the Company developed a new data management product for the residential property market called HomeView™. The solution is based on a patent filed by the Company in December 2012. HomeView was launched in January 2016 and is available to download on iTunes.
In March 2011, the current management team (CEO and VP of Business Development) completed a transaction (the “Recapitalization Transaction”) in which a group of eight investors purchased 39% of the Company’s common stock, arranged for debt facilities of $3.2 million and negotiated for a $7.6 million debt reduction from Greenleaf Capital, Inc. (“Greenleaf”), at that time, the Company’s sole lender and largest shareholder. Subsequent to the Recapitalization Transaction the Company purchased all of Greenleaf’s 271,411 shares in Company common stock and retired them.
A core tenet of the management team’s strategy following the Recapitalization Transaction has been to actively consider ways to monetize some or all of SofTech’s assets and to pursue new strategic initiatives, such as potential business combinations, sale transactions, development of new product offerings, filing of new patent ideas and strategic partnerships.
Since the Recapitalization Transaction, the Company has taken the following actions consistent with this strategy:
·
Sold the AMT product line in May 2011 in exchange for cash;
·
Sold the existing CAD and PLM patents in June and September 2012 in exchange for cash and a percent of future funds recovered;
·
Filed three patents and acquired the rights to another;
·
Developed and launched the Connector product line described hereunder;
·
Sold the CADRA product line in October 2013 in exchange for cash and a percent of future revenues;
·
Developed a new data management product for the residential property market called HomeView; and
·
On August 23, 2016, entered into an agreement to sell the ProductCenter and Connector technologies in an asset sale subject to shareholder approval.
The above actions have allowed the Company to improve its liquidity by reducing its outstanding debt. The proposed transaction to sell the ProductCenter and Connector technologies would allow the Company to be debt free for the first time in decades, provide working capital to meet its near term needs and the liquidity to increase marketing efforts related to the HomeView technology. The product line sales and patent sales generated taxable income that was sheltered from both federal and state income taxes through utilization of the Company’s tax assets. We anticipate the realized capital gain from the sale of the ProductCenter and Connector technologies would also be substantially sheltered from both federal and state income taxes through utilization of tax assets.
The sale of the CADRA product line, described below, was the most significant of the above described completed events.
17
On October 18, 2013, the Company sold substantially all of the assets of its CADRA product line, including all intellectual property related to that technology but specifically excluding cash, billed accounts receivable and liabilities other than the deferred maintenance liability associated with CADRA customer maintenance contracts for support services (the “CADRA Sale”), to Mentor Graphics Corporation (“Mentor”), pursuant to an Asset Purchase Agreement dated August 30, 2013 (the “Asset Purchase Agreement”). The aggregate consideration for the CADRA Sale was up to $3.95 million, comprised of (i) $2.88 million of which was paid on the closing date; (ii) $320,000 which was paid on the one year anniversary (the “Holdback Payment”) of the closing date; and (iii) up to an aggregate $750,000 over the three-year period subsequent to the closing date, based on 10% of the net revenue generated by the CADRA business during the three-year period immediately following the transaction, (the “Earn-Out Payments”) subject to the terms of the Earn-Out Agreement dated August 30, 2013 (the “Earn-Out Agreement”).
The Company recorded a gain on the sale of the CADRA product line of $649,000 in fiscal year 2014 which included non-cash expenses related to intangible assets of approximately $3.3 million. It also included an estimate of the market value of deferred contingent payments of $922,000 related to the Holdback Payment and the Earn-Out Payments. Through May 31, 2016 the Company collected $847,000 of deferred contingent payments from Mentor and could receive up to an additional $223,000 in April 2017 based on revenue generated by the CADRA product line for the period from February 1, 2016 to October 31, 2016.
The Company continued to offer the CADRA technology as a reseller throughout Europe (except Germany) on an exclusive basis until October 18, 2014 pursuant to a distribution agreement with Mentor (the “Distributorship Agreement”). This arrangement was extended on a non-exclusive basis through March 31, 2017 and is subject to annual renewals by mutual agreement thereafter. Due to the significant continued involvement in the sale and support of the CADRA product line, the transaction did not qualify for presentation as discontinued operations.
On August 23, 2016, the Company entered into an Asset Purchase Agreement pursuant to which it agreed to sell its ProductCenter and Connector technologies (“PLM Business”) to Essig Research, Inc. (“Essig”) in exchange for aggregate consideration of $3.25 million plus contingent payments. The Company’s indebtedness to Essig ($1.15 million as of August 24, 2016) will be repaid in this transaction and the Company will repurchase 110,000 shares of its common stock from Essig at approximately $6.50 per share, resulting in an expected cash payment of approximately $1.4 million being paid to the Company at the closing.
In addition, the Company may earn two additional contingent payments based on revenue of the PLM Business (“PLM Revenue”) for the two twelve month periods immediately following the transaction.
For the first 12 month period the contingent payment will be derived as follows:
·
If PLM Revenue is less than $3.2 million then zero.
·
If PLM Revenue is more than $3.2 million then $75,000 plus 12.5% of the amount in excess of $3.275 million.
For the second 12 month period the contingent payment will be derived as follows:
·
If PLM Revenue is less than $3.75 million then zero.
·
If PLM Revenue is more than $3.75 million then $75,000 plus 12.5% of the amount in excess of $3.825 million.
The revenue for the PLM Business for the twelve month period ended May 31, 2016 was approximately $3.434 million including about $218,000 of consulting revenue performed for a SofTech, Srl customer.
U.S. revenue is defined as U.S. GAAP except that no purchase accounting adjustments shall be applied. It shall include license, maintenance, subscription and consulting revenue. Essig will be required to report revenue within 30 days of the period end with payment due within 60 days of period end.
The proposed transaction has been unanimously approved by the Company’s Board of Directors and is subject to SofTech shareholder approval.
Critical Accounting Policies and Significant Judgments and Estimates
The SEC defines “critical accounting policies” as those that require the application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
18
Our significant accounting policies are described in Note B to the consolidated financial statements for the fiscal year ended May 31, 2016, included herein. We believe that the following accounting policies require the application of our most difficult, subjective or complex judgments:
Revenue Recognition
We follow the provisions of ASC 985-605,
Software – Revenue Recognition,
for transactions involving the licensing of software and software support services. Revenue from software license sales is recognized when persuasive evidence of an arrangement exists, delivery of the product has been made, there is a fixed fee and collectability is reasonably assured. The Company does not provide for a right of return. For multiple element arrangements, total fees are allocated to each of the undelivered elements based upon vendor specific objective evidence (“VSOE”) of their fair values, with the residual amount recognized as revenue for the delivered elements, using the residual method set forth in ASC 985-605. Revenue from customer maintenance support agreements is deferred and recognized ratably over the term of the agreements, typically one year. Revenue from engineering, consulting and training services is recognized as those services are rendered using a proportional performance model.
Estimating Allowances for Doubtful Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of any of our significant customers could have a material adverse effect on the collectability of our accounts receivable and our future operating results.
Valuation of Long-lived and Intangible Assets
We periodically review the carrying value of all intangible assets and other long-lived assets. If indicators of impairment exist, we compare the undiscounted cash flows estimated to be generated by those assets over their estimated economic life to the related carrying value of those assets to determine if the assets are impaired. If the carrying value of the asset is greater than the estimated undiscounted cash flows, the carrying value of the assets would be decreased to their fair value through a charge to operations. As of May 31, 2016 and 2015, we do not have any long-lived assets we consider to be impaired.
Goodwill
We account for goodwill pursuant to ASC 350,
Intangibles – Goodwill and Other
. This statement requires that goodwill and other indefinite lived intangible assets be reviewed annually, or more frequently as a result of an event or change in circumstances, for possible impairment. As of May 31, 2016, we conducted our annual impairment test of goodwill by comparing the fair value of the reporting unit to the carrying amount of the underlying assets and liabilities of our one reporting unit. We concluded that the fair value of the reporting unit exceeded the carrying amount of the underlying assets and liabilities, therefore no impairment existed as of the testing date.
Valuation of Deferred Tax Assets
We regularly evaluate our ability to recover the reported amount of our deferred income taxes considering several factors, including our estimate of the likelihood of our generating sufficient taxable income in future years during the period over which temporary differences reverse. Our deferred tax assets are currently fully reserved.
19
RESULTS OF OPERATIONS
Fiscal Year Ended May 31, 2016 as compared to Fiscal Year Ended May 31, 2015
The table below presents the comparative income statements for the fiscal years ended May 31, 2016 and 2015 along with the dollar and percentage change amounts for each revenue and expense item (expressed in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Change in
$
|
|
Change in
%
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Products
|
$
|
515
|
$
|
535
|
$
|
(20)
|
|
(3.7)%
|
|
Services
|
|
3,661
|
|
3,407
|
|
254
|
|
7.5
|
|
Total revenues
|
|
4,176
|
|
3,942
|
|
234
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
Products
|
|
67
|
|
151
|
|
(84)
|
|
(55.6)
|
|
Services
|
|
1,455
|
|
1,539
|
|
(84)
|
|
(5.5)
|
|
Total cost of revenues
|
|
1,522
|
|
1,690
|
|
(168)
|
|
(9.9)
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
2,654
|
|
2,252
|
|
402
|
|
17.9
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
633
|
|
894
|
|
(261)
|
|
(29.2)
|
|
Selling, general and administration expenses
|
|
2,555
|
|
2,481
|
|
74
|
|
3.0
|
|
Change in fair value of Earn-Out Payments
|
|
46
|
|
(85)
|
|
131
|
|
(154.1)
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(580)
|
|
(1,038)
|
|
458
|
|
(44.1)
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
96
|
|
165
|
|
(69)
|
|
(41.8)
|
|
Other (income) expense
|
|
(5)
|
|
114
|
|
(119)
|
|
(104.4)
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
$
|
(671)
|
$
|
(1,317)
|
$
|
646
|
|
(49.1)%
|
The table below presents the relationship, expressed as a percentage, between revenue and expense items and total revenue, for the twelve month periods ended May 31, 2016 and 2015:
|
|
|
|
|
|
|
|
Items as a percentage of revenue
|
|
|
|
2016
|
|
2015
|
|
Revenues:
|
|
|
|
|
|
Products
|
|
12.3%
|
|
13.6%
|
|
Services
|
|
87.7
|
|
86.4
|
|
Total revenues
|
|
100.0
|
|
100.0
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
Products
|
|
1.6
|
|
3.8
|
|
Services
|
|
34.8
|
|
39.0
|
|
Total cost of revenues
|
|
36.4
|
|
42.9
|
|
|
|
|
|
|
|
Gross margin
|
|
63.6
|
|
57.1
|
|
|
|
|
|
|
|
Research and development expenses
|
|
15.2
|
|
22.7
|
|
Selling, general and administrative expenses
|
|
61.2
|
|
62.9
|
|
Change in fair value of Earn-Out Payments
|
|
1.1
|
|
(2.2)
|
|
|
|
|
|
|
|
Operating loss
|
|
(13.9)
|
|
(26.3)
|
|
|
|
|
|
|
|
Interest expense
|
|
2.3
|
|
4.2
|
|
Other (income) expense
|
|
(.1)
|
|
2.9
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
(16.1)%
|
|
(33.4)%
|
20
Revenue
Total revenue for fiscal year 2016 was approximately $4.2 million, an increase of about $234,000 or 5.9% as compared to fiscal 2015. The following table summarizes revenue by product line for the fiscal years ended May 31, 2016 and 2015 (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
Product Line
|
|
|
|
|
|
|
|
|
|
ProductCenter
|
$
|
3,152
|
$
|
3,149
|
$
|
3
|
|
-%
|
|
Connector
|
|
229
|
|
248
|
|
(19)
|
|
(7.7)
|
|
CADRA
|
|
389
|
|
527
|
|
(138)
|
|
(26.2)
|
|
Other
|
|
406
|
|
18
|
|
388
|
|
2,155.6
|
|
Total
|
$
|
4,176
|
$
|
3,942
|
$
|
234
|
|
5.9%
|
Product Revenue
Product revenue for the fiscal year ended May 31, 2016 was approximately $515,000 as compared to approximately $535,000 for fiscal year 2015, a 3.7% decrease. The table below details product revenue by product line for the fiscal years ended May 31, 2016 and 2015 (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
Product Line
|
|
|
|
|
|
|
|
|
|
ProductCenter
|
$
|
478
|
$
|
482
|
$
|
(4)
|
|
(.8)%
|
|
CADRA
|
|
28
|
|
49
|
|
(21)
|
|
(42.9)
|
|
Other
|
|
9
|
|
4
|
|
5
|
|
125.0
|
|
Total
|
$
|
515
|
$
|
535
|
$
|
(20)
|
|
(3.7)%
|
Our product revenue for ProductCenter for the fiscal year ended May 31, 2016 was essentially unchanged as compared to fiscal 2015. The product revenue from this product line has been significantly higher over the last two fiscal years as compared to fiscal years 2013 and 2014 due to several existing customers expanding their usage of ProductCenter. Our outlook for fiscal 2017 based on the existing pipeline of qualified prospects is for performance similar to that of the last two fiscal years. The decline in product revenue for the CADRA technology in fiscal 2016 as compared to fiscal 2015 is due to the age of this technology. We will continue to offer this product in Europe through our Distributorship Agreement with Mentor but we do not expect it to be a significant element of our revenue.
Service Revenue
Our service revenue is composed of annual maintenance contracts for previously licensed ProductCenter and CADRA technology, subscription revenue for our Connector technology and consulting revenue generated primarily from our ProductCenter technology and third party PLM solutions we distribute. The table below summarizes service revenue by product line for the fiscal years ended May 31, 2016 and 2015, respectively (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
Product Line
|
|
|
|
|
|
|
|
|
|
ProductCenter
|
$
|
2,674
|
$
|
2,666
|
$
|
8
|
|
.3%
|
|
Connector
|
|
229
|
|
248
|
|
(19)
|
|
(7.7)
|
|
CADRA
|
|
361
|
|
478
|
|
(117)
|
|
(24.5)
|
|
Other
|
|
397
|
|
15
|
|
382
|
|
2,546.7
|
|
Total
|
$
|
3,661
|
$
|
3,407
|
$
|
254
|
|
7.5%
|
Total maintenance and subscription revenue included in the above summary totaled approximately $2.58 million for the twelve months ended May 31, 2016, an increase of 2.7% from fiscal year 2015.
Our maintenance revenue for ProductCenter grew approximately $41,000 or 2.1% during fiscal year 2016, the third consecutive fiscal year of maintenance revenue growth for this product line. Renewal rates for annual maintenance contracts for this product line were as follows for the last five fiscal years: FY2016: 96%; FY2015: 100%; FY2014: 90%; FY2013: 89%; and FY2012: 93%. The improved renewal rates and sales associated with our increased product revenue in fiscal 2015 and 2016 as compared to the two immediately preceding fiscal years were responsible for ProductCenter’s maintenance revenue growth.
21
Our Connector technology is offered only as an annual subscription. Under these arrangements the subscriber pays in advance for the use of the technology for the subsequent twelve month period and the revenue is amortized evenly during the use period. Connector subscription billings for fiscal 2016 were approximately $176,000, an increase of 7.9% from fiscal 2015. During fiscal 2016 we received subscription orders from eight (8) new customers and three (3) customers chose not to renew their subscription. In most instances of non-renewal, delays in the implementation of the ARAS Innovator solution is the cause for the non-renewal for our Connector technology. The Connector renewal rate for fiscal 2016 was 76.5% as compared to 55.6% in the prior fiscal year.
The CADRA service revenue is primarily composed of maintenance revenue. The decline of nearly 25% in service revenue for this product line is due in equal measures to reduced renewals for this aging technology and weakness of the U.S. dollar relative to the Euro during fiscal 2016 as compared to the prior fiscal year. We expect to continue to support this technology under the Distributorship Agreement with Mentor but do not expect this to be a significant contributor to our operating results in fiscal 2017 and beyond.
Consulting revenue included in the above summary totaled approximately $1.08 million for the twelve months ended May 31, 2016, an increase of 20.7% compared to the prior fiscal year. The significant increase in consulting revenue was due to the previously announced (February 12, 2016 press release) contract award from AgustaWestland whereby we were responsible for the integration of multiple third party technologies for improving AgustaWestland’s Advanced Configuration Management processes for managing common parts across product platforms. We are discussing with this customer an expansion of this solution.
Revenue by Geographic Area
Revenue generated in the U.S. accounted for approximately 78% of total revenue for the twelve months ended May 31, 2016 as compared to approximately 80% of total revenue in the comparable prior period. Revenue generated in Europe was approximately 22% of total revenue for the twelve months ended May 31, 2016 as compared to approximately 20% of total revenue in the comparable prior period. There was minimal revenue generated from Asia for the twelve months ended May 31, 2016 and 2015.
Gross Margin
Gross margin as a percentage of revenue was 63.6% and 57.1% for the twelve month periods ended May 31, 2016 and 2015, respectively. Gross margin on product revenue was 87.0% in fiscal year 2016 as compared to 71.8% in the prior fiscal year. Gross margin on service revenue was 60.3% in fiscal year 2016 as compared to 54.8% in the prior fiscal year. The increased gross margin on product revenue in fiscal 2016 as compared to 2015 is due primarily to reduced non-cash expenses associated with the amortization of capitalized software costs. The increased gross margin on service revenue is due to increased maintenance and subscription revenue on our ProductCenter and Connector revenue as detailed above with no increase in headcount to support that revenue.
Research and Development Expenses
Research and development expenses were approximately $633,000 for the fiscal year ended May 31, 2016, a decrease of approximately $261,000 or 29.2% from the comparable twelve month period in fiscal year 2015. During fiscal year 2016 approximately $438,000 of software development costs related to the development of our HomeView technology were capitalized as compared to approximately $202,000 in the comparable prior period thereby accounting for the majority of the decrease in R&D expenses.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses were approximately $2.56 million for the fiscal year ended May 31, 2016, an increase of approximately 3% from the comparable twelve month period in fiscal year 2015. Our SG&A expenses related to the product launch of HomeView doubled to approximately $423,000 during fiscal 2016 while our SG&A expenditures related to our ProductCenter and Connector technologies declined by about 7% as compared to fiscal 2015.
Interest Expense
Interest expense for the fiscal year ended May 31, 2016 was approximately $96,000, as compared to approximately $165,000 for the comparable prior period. The average outstanding debt amount during fiscal 2016 decreased by more than 20% as compared to fiscal 2015 which was responsible for the majority of the decrease in interest expense. In addition, in fiscal 2015, a portion of the debt carried an interest rate of 14% as compared to the 9.5% rate on the fiscal 2016 debt.
22
Loss Before Income Taxes
Loss before income taxes for fiscal year 2016 was approximately $671,000 as compared to approximately $1,317,000 for the comparable prior period.
Loss Per Share
Net loss per share for fiscal year 2016 was approximately $.75, as compared to $1.48 in fiscal year 2015. The weighted average number of shares outstanding was 902,529 in fiscal 2016 as compared to 890,120 in fiscal 2015.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 2016, our primary source of liquidity comes from our cash of approximately $175,000 which included approximately $91,000 held by our European subsidiaries. Approximately 70% of our annual maintenance and subscription billings are invoiced and/or collected in the second half of our fiscal year. This uneven billing and collection of the most significant element of our revenue results in liquidity challenges in our first two quarters of the fiscal year.
During the twelve month periods ended May 31, 2016 and 2015, the net cash used in operating activities totaled approximately $(359,000) and $(1,287,000), respectively. The net loss for the twelve month period ended May 31, 2016 adjusted for non-cash expenditures used approximately $(441,000) as compared to approximately $(869,000) in the comparable prior period. The net change in current assets and liabilities provided cash of approximately $82,000 during fiscal year 2016 composed primarily of a reduction in accounts receivable and prepaid assets and an increase in accounts payable and accrued liabilities provided cash which was partially offset by a reduction in deferred revenue which used cash.
Net cash provided by (used in) investing activities during fiscal year 2016 and 2015 was approximately $(264,000) and $363,000, respectively. In fiscal year 2016 the Company capitalized approximately $438,000 of development costs related HomeView, its data management technology for the residential property market, which was partially offset by $200,000 in deferred contingent payments received in fiscal 2016 related to the sale of the CADRA product line in fiscal 2014. In fiscal year 2015, the Company received a total of $604,000 in deferred and contingent payments related to the sale of the CADRA product line which was partially offset by $202,000 in capitalized software development costs related to the HomeView product line.
Net cash provided by (used in) financing activities during fiscal year 2016 totaled approximately $486,000 as compared to approximately $(60,000) during the prior fiscal year. In fiscal 2016, we received $454,000 from net borrowings under our debt agreements and $50,000 in net proceeds from the issuance of common stock which were partially offset by payments of $18,000 related to capital leases of equipment. In fiscal 2015, we received approximately $750,000 from term loan borrowings and $820,000 in net proceeds from the sale of common stock. These sources of cash were partially offset by our repurchase of approximately 151,000 shares of our common stock for $312,000 and principal payments of approximately $1.3 million on our outstanding term loans.
Sources of Cash
As of May 31, 2016, we had cash on hand of approximately $175,000, a decrease of approximately $135,000 from May 31, 2015. The decrease in cash was related to approximately $(359,000) used in operating activities and $(264,000) used in investing activities which were partially offset by approximately $486,000 in net cash provided by financing activities. Each of these changes is fully described above.
From fiscal year 2002 through fiscal year 2014, the Company generated positive cash flow (defined as net income (loss) derived on a GAAP basis with non-cash expenses added back). The aggregate positive cash flow during this period was approximately $12.1 million. In fiscal 2015, the Company incurred negative cash flow of $(869,000). Approximately $(400,000) of the negative cash flow was related to the investment the Company made in developing HomeView, its new product offering for the residential property market. In addition, the Company incurred negative cash flow of approximately $(350,000) at its wholly-owned subsidiary in Milan, Italy as that entity pursued new revenue initiatives beyond the distribution of the CADRA technology. In fiscal year 2016 our negative cash flow was ($441,000), a significant improvement as compared to fiscal 2015. Our HomeView activities were responsible for $(423,000) of that negative cash flow in fiscal 2016 and our Italian subsidiary generated negative cash flow of ($167,000). These were partially offset by positive cash flow generated from our ProductCenter and Connector technologies.
23
Factors Affecting Sources of Liquidity
Internally Generated Funds.
The key factors affecting our internally generated funds are demand for our products and services, competition, economic conditions in the markets in which we operate and industry trends. The significant investment we have made since fiscal 2015 as detailed above in our HomeView technology also impacts our liquidity. The revenue plans for this technology require that we first attract account holders willing to share their information. Therefore, we expect additional investment will be required to aggressively market the technology and to pursue potential partnerships with other entities in the residential property market. Our Italian subsidiary is continuing to show improved operating performance as compared to fiscal 2015 and we expect that entity can attain positive cash flow by the end of fiscal 2017 given the expectation of additional consulting projects from AgustaWestland.
Capital Resource Activity with Essig
EssigPR Note.
On June 20, 2014, the Company entered into a three (3) year promissory note agreement (the “Note”) with EssigPR, Inc. (“EssigPR”), a Puerto Rico corporation, as the lender and a related party of the Company. The EssigPR Note is a $750,000 term loan maturing on April 1, 2017, that accrues interest at a 9.5% interest rate, paid quarterly in arrears. The principal on the EssigPR Note will be paid from the Holdback Payment and Earn-Out Payments in connection with Mentor’s purchase of the CADRA product line from SofTech pursuant to the Asset Purchase Agreement. Specifically, the Holdback Payment and Earn-Out Payments, which may constitute up to $1.02 million, are described as follows:
·
$320,000 paid in October 2014, the one-year anniversary of the sale of the CADRA product line. This Holdback Payment of 10% of the purchase price was to ensure non-breach of the Asset Purchase Agreement and was subject to offset by Mentor should they have any indemnity claims under the Asset Purchase Agreement. The indemnification period expired without any indemnification claims presented to the Company and the Holdback Payment of $320,000 was received on October 20, 2014; and
·
Up to an additional $223,000 as of May 31, 2016 (maximum Earn-Out Payments of $750,000 less first three payments of approximately $44,000, $284,000 and $200,000 received in March 2014, 2015 and 2016, respectively).
In the event whereby the total payments received from Mentor as described above are insufficient to fully satisfy all amounts due under the Note, including principal and interest, the Company shall pay the remaining balance on April 1, 2017. In the event whereby these payments exceed the amounts due under the Note, such excess shall be the sole property of the Company.
On October 1, 2014, the Company entered into an additional short term borrowing arrangement with EssigPR (“Short Term Note”) whereby it was agreed that the Company would retain $300,000 of the Holdback Payment due from Mentor in October 2014 rather than utilize those monies to pay down the above described Note. The interest rate on the Short Term Note is 9.5%, payable quarterly in arrears. The Short Term Note could be repaid at any time without penalty and was due in full on April 10, 2015. EssigPR was awarded 5,000 fully vested stock options to purchase SofTech common stock at $1.00 per share. The stock options will expire on October 1, 2024 if not exercised. The Short Term Note arrangement did not increase the total principal amount of debt owed to EssigPR. Rather, the arrangement had the effect of establishing new payoff terms for that portion of the debt owed to EssigPR under the Note.
The Short Term Note has been amended multiple times during fiscal year 2015, 2016 and in the first quarter of fiscal 2017 to extend the due date and/or increase the amount of the borrowings as detailed in Note F to the financial statements. The most recent amendment on August 12, 2016 was in contemplation of completion of the sale of the PLM Business as detailed hereunder.
On the occurrence and continuance of an event of default under the Note that is not cured after written notice from EssigPR, all or any part of the indebtedness under the Note may become immediately due at the option of EssigPR. Under the Note, events of default are (1) a default in the payment of any money owed by the Company to EssigPR under the Note or in any other transaction or (2) a default in the Company’s performance of any obligation to EssigPR under the Note or any other agreement between the two parties, whether such agreement is presently existing or entered into in the future. If the Company dissolves, becomes insolvent, or makes an assignment for the benefit of creditors, all such indebtedness under the Note shall become automatically due and payable.
EssigPR is owned by Joseph P. Daly, a related party of the Company whose beneficial ownership was approximately 19.4% of the Company’s outstanding common stock as of August 24, 2016.
24
Issuance of Redeemable Common Stock.
During fiscal 2015, the Company issued 170,000 shares of redeemable common stock at $5.00 per share to five accredited investors. The transactions are described as follows:
On June 20, 2014, we issued 110,000 shares of SofTech common stock, par value $0.10 per share, in a direct private placement to Mr. Joseph P. Daly (the “Daly Purchase Agreement”). The terms of the Daly Purchase Agreement are as follows:
·
Number of Shares Sold:
110,000 shares of the Company’s common stock, par value $.10 per share
·
Purchase Price Per Share:
$5.00 per share
·
Type of Offering:
Direct private placement to an accredited investor; no registration rights; no third party placement fees
·
Purchase Put Right:
Mr. Daly shall have the right to require the Company to repurchase some or all of the shares at $7.00 per share during the ninety (90) day period immediately following the three-year anniversary of the Closing Date. If we are unable to honor such put right, the unpaid portion converts into a loan obligation secured by all our assets and bearing interest at an annual rate of 20%. If we default on our obligations under such note, the holder of such note may assert any rights it has as a secured creditor, including rights to foreclose on our assets.
Shares Sold in Private Placement.
In four transactions during September and October 2014, the Company raised proceeds of $300,000 from the issuance of an aggregate of 60,000 shares of the Company’s common stock, par value $0.10 per share, at $5.00 per share to four accredited investors in separate private placement transactions.
These transactions were completed pursuant to securities purchase agreements with each of the investors, the material terms of which are as follows:
·
Number of Shares Sold
: An aggregate of 60,000 shares of the Company’s common stock, par value $0.10 per share;
·
Purchase Price Per Share:
The shares were sold to accredited investors at a purchase price of $5.00 per share in lots of 10,000 shares;
·
Type of Offering:
Direct private placement to accredited investors; no registration rights; no third party placement fees;
·
Fees:
In lieu of registration rights and Company costs savings related to direct negotiation with accredited investors, each $50,000 investment entitles the investor to a fee of $5,000 to be paid in eight equal quarterly installments during the twenty-four month period following the investment; and
·
Purchase Put Right:
Each share purchased shall also give the investors the right to require the Company to repurchase the shares at $7.00 per share for the 30 day period following the twenty-four month anniversary of the investment.
The Company does not believe that the issuance of such shares will restrict the Company’s ability to utilize its net operating losses to reduce tax liabilities that might otherwise be due.
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|
|
|
Name of Accredited Investor
|
|
Date of Securities Purchase Agreement
|
|
Amount of Investment in Transaction ($/# of Shares Purchased)
|
|
Robert Anthonyson
|
|
September 18, 2014
|
|
$100,000 / 20,000 shares
|
|
Glenn W. Dillon
|
|
September 22, 2014
|
|
$100,000 / 20,000 shares
|
|
Thomas Doherty
|
|
September 22, 2014
|
|
$50,000 / 10,000 shares
|
|
Leonard Schrank
|
|
October 9, 2014
|
|
$50,000 / 10,000 shares
|
The offer and sale of securities in the private placements described above were made to “accredited investors” (as defined in Rule 501(a) under the Securities Act) in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and Rule 506 thereunder.
Under similar terms to the above described sale of shares, on September 21, 2015 Mr. Anthonyson purchased an additional 10,000 shares at $5.00 per share. Mr. Anthonyson has the right to require the Company to repurchase some or all of those shares at $7.00 per share at any time between September 21, 2017 and October 21, 2017.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of the SEC’s Regulation S-K.
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This Item is not applicable because we are a “smaller reporting company,” as defined by applicable SEC regulation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The required Financial Statements are included at the end of this Form 10K, on pages F-1 through F-21.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Management’s Report on Disclosure Controls and Procedures
. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating the cost-benefit relationship of possible changes or additions to our controls and procedures.
As of May 31, 2016, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in our periodic SEC filings within the required time period.
Management’s Report on Internal Control over Financial Reporting
. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
With the participation of our President and Chief Financial Officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting as of May 31, 2016, based on the framework and criteria established in
Internal Control – Integrated Framework
, issued by the Committee of Sponsoring Organizations of the Treadway Commission of 1992.
Based on our assessment of the effectiveness in internal control over financial reporting as of May 31, 2016, we concluded that our internal controls over financial reporting were effective.
This Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Our report was not subject to attestation by our registered public accounting firm pursuant to the rules of the SEC that permit us to provide only management’s report in this Form 10-K.
Changes in Internal Control Over Financial Reporting
. There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended May 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
26
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The following table sets forth certain information regarding our directors and executive officers as of August 24, 2016:
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Joseph P. Mullaney
|
|
59
|
|
President, Chief Executive Officer and Director
|
|
Robert B. Anthonyson
|
|
69
|
|
Vice President of Business Development and Director
|
|
J. Phillip Cooper
|
|
73
|
|
Director
|
|
|
|
|
|
|
Joseph P. Mullaney
has served as President, Chief Executive Officer and Director since the consummation of the Recapitalization Transaction. From January 2008 through March 2011, Mr. Mullaney was a management consultant for several technology, renewable energy and telecom companies. From January 2007 through December 2007, Mr. Mullaney served as Chief Executive Officer and Chief Financial Officer of Boston Communications Group, Inc., and repositioned that troubled entity for a successful cash sale at double its then current market value. From June 2001 through December 2006, Mr. Mullaney served as President and Chief Executive Officer of the Company. During this period, Mr. Mullaney developed and implemented the turnaround strategy that ended three consecutive years of negative cash flow totaling almost $10 million and resulted in twelve consecutive years of positive cash flow. Mr. Mullaney has a BS from Stonehill College and an MBA from Northeastern University. Mr. Mullaney’s extensive entrepreneurial and executive experience, his in-depth knowledge of our Company in his executive capacity, his proven ability to raise funds and provide access to capital make him uniquely qualified to serve as President, CEO and as a member of our Board. Mr. Mullaney’s term as a director expires at the annual meeting of shareholders to be held in 2016.
Robert B. Anthonyson
has served as Vice President of Business Development and Director since the consummation of the Recapitalization Transaction. From 2003 through March 2011 Mr. Anthonyson was the general partner of Layne & Barton, LLC, a consulting firm providing real estate brokerage and advisory services. Previously, Mr. Anthonyson was a founder of AVID Systems, a developer of RFID-based technology that allows automated payment when entering or exiting parking garages (sold to Amtech Corp.), co-founder of Dynamics Associates (sold to Interactive Data Corp. then owned by Chase), a patent holder, and technologist. Mr. Anthonyson also served as the project manager of the award-winning $80M park and underground garage project that transformed Boston’s downtown financial district. Mr. Anthonyson currently serves as a Director of FireStar Software. Mr. Anthonyson has a BS and MS from MIT and an MBA from Stanford University. Mr. Anthonyson’s extensive knowledge of, and experience in, the software and technology industry, experience as a founder of several technologies and companies and leadership background make him uniquely qualified to serve as VP of Business Development and as a member of our Board. Mr. Anthonyson’s term as a director expires at the annual meeting of shareholders expected to be held in 2016.
J. Phillip Cooper
is the Chairman of the Compensation Committee and the Audit Committee. Mr. Cooper is the former Vice Chairman, EVP, and CFO of Charles River Associates (NASDAQ: CRAI), from which he retired in June 2006. Mr. Cooper has held numerous CEO positions at several technology companies, including Newstar Technologies in Toronto, Ontario; Clinical Information Advantages, Inc., in Waltham, MA; and Applied Expert Systems in Cambridge, MA. Currently, Mr. Cooper is a member of Boston Harbor Angels, a member of the Board of Advisors of The Capital Network and serves as a Director or Advisor for three technology companies. Mr. Cooper has a B.Com from the University of Toronto and a Ph.D. from MIT. Mr. Cooper’s significant public company experience, leadership and management experience in the technology industry, and expertise in the fields of marketing, business development, deal structuring and negotiation, acquisition and strategic partnering, and financial engineering enable him to make critical contributions as a member of our Board. Mr. Cooper’s term as a director expires at the next annual meeting of shareholders.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended ("Section 16(a)") requires our Directors and executive officers, and persons who beneficially own more than ten percent of a registered class of our equity securities (collectively, "Section 16 reporting persons"), to file with the SEC initial reports of ownership and reports of changes in ownership of our Common Stock and other equity securities. Section 16 reporting persons are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
As of August 24, 2016, to our knowledge all of our officers and directors have filed all reports required to be filed by them pursuant to the requirements of Section 16.
27
Structure and Operation of the Board
The following is a brief description of the functions of the Board:
Board Leadership Structure and Role in Risk Oversight
Our Board of Directors as a whole is responsible for our risk oversight. Our executive officers address and discuss with our Board of Directors our risks and the manner in which we manage or mitigate such risks. While our Board of Directors has the ultimate responsibility for our risk oversight, our Board of Directors works in conjunction with its committees on certain aspects of its risk oversight responsibilities. In particular, our Audit Committee focuses on financial reporting risks and related controls and procedures and our Compensation Committee strives to create compensation practices that do not encourage excessive levels of risk taking that would be inconsistent with our strategies and objectives.
Since March 2011, Joseph Mullaney has served as our President and Chief Executive Officer. At this time, our Board believes that Mr. Mullaney’s combined role as President, Chief Executive Officer and Director enables us to benefit from Mr. Mullaney’s significant institutional and industry knowledge and experience, while at the same time promoting unified leadership and direction for our Board and executive management without duplication of effort and cost. Given our history, position, Board composition and the relatively small size of our company and management team, at this time, our Board believes that we and our shareholders are best served by our current leadership structure.
Nomination of Directors
Our bylaws do not provide a procedure for shareholders to nominate directors. The Board of Directors does not currently have a standing nominating committee. Instead, the Board of Directors currently has the responsibility of selecting individuals to be nominated for election to the Board of Directors. The Board of Directors does not have a formal policy regarding diversity, the Directors seek a diverse group of candidates who possess the background, skills and expertise to make a significant contribution to the Board of Directors, to the Company and to its shareholders. Qualifications considered by the Directors in nominating an individual may include, without limitation, independence, integrity, business experience, education, accounting and financial expertise, reputation, civic and community relationships and industry knowledge. In nominating an existing director for re-election to the Board of Directors, the Directors will consider and review an existing director’s Board and Committee attendance, performance and length of service.
Audit Committee Related Function
The Board has formed an Audit Committee composed of one non-employee Director: Mr. Cooper, who is “independent” as that term is defined in rules promulgated by the SEC and in accordance with the standards of the Nasdaq stock market. At this time, the Audit Committee does not have a charter. The Audit Committee is appointed by and reports to our Board of Directors. Its responsibilities include, but are not limited to, the appointment, compensation and dismissal of our independent public accountants, review of the scope and results of our independent public accountants audit activities, evaluation of the independence of our independent public accountants and review of our accounting controls and policies, financial reporting practices and internal audit control procedures and related reports.
Compensation Committee Related Function
The current Board has formed a Compensation Committee composed of one non-employee Director: Mr. Cooper, who is “independent” as that term is defined in rules promulgated by the SEC and in accordance with the standards of the Nasdaq stock market. At this time, the Compensation Committee does not have a charter. The Compensation Committee is appointed by and reports to our Board of Directors. The Compensation Committee has the responsibility of reviewing and establishing compensation for executive officers and making policy decisions concerning salaries and incentive compensation for executive officers of SofTech.
28
Executive Compensation Programs.
The Company's compensation programs are aimed at enabling it to attract and retain the best possible executive talent and rewarding those executives commensurate with their ability and performance. The Company's compensation programs consist primarily of base salary, bonus plan, and stock option plan.
Base Salary.
Base salaries for executive officers are determined in the same manner as that of other salaried employees. Salary guidelines are established by comparing the responsibilities of the individual's position in relation to similar positions in other software development companies of similar size. Individual salaries were determined this year by considering respective levels of responsibility, position and industry comparables.
Bonus Plan.
The President, Vice President of Business Development and Chief Financial Officer participate in incentive plans which compensate these individuals in the form of cash bonuses. Awards under these plans are based on the attainment of specific Company and individual performance measures established by the Board at the beginning of the fiscal year.
Incentive Compensation Plan.
The 2011 Plan was approved by our shareholders at the Annual Meeting held on May 24, 2011. Under the 2011 Plan, 150,000 shares of our common stock are reserved for issuance. Additionally, any shares subject to any award under the 2011 Plan that expires or is terminated unexercised or is forfeited will be available for awards under the 2011 Plan.
Director Compensation.
The Board of Directors administers the 2011 Equity Incentive Plan. No option may be exercised after the expiration of ten years from its date of grant. Each non-employee Director will receive an annual fee of $12,000 paid on a quarterly basis in arrears for their first three-year term. The annual fee for the second three year term will increase to $24,000 paid quarterly in arrears. In addition, in order to align their interests with those of the shareholders, each non-employee Director will be granted an option to purchase 5,000 shares of common stock upon his or her initial appointment to the Board of Directors, and will be granted annually (beginning in 2012) an option to purchase 1,000 shares of common stock so long as such Director holds such position. All such options shall have an exercise price equal to the fair market value of our common stock on the date of grant. These options will vest monthly on a pro rata basis over three years from the date of grant. In the event a Director resigns, stock options already vested may be exercised within 90 days and all unvested stock options will be forfeited. Director Cooper was granted an option to purchase 5,000 shares on June 7, 2011 and an additional option to purchase 1,000 shares for each annual meeting subsequent to his initial appointment. In addition, on April 8, 2014, Mr. Cooper was awarded an option to purchase 10,000 shares.
Communication with Shareholders
We have established a process for shareholders to communicate with the Board of Directors. Shareholders wishing to communicate with the Board of Directors of SofTech should send an email to investors@softech.com or write or telephone Joseph P. Mullaney at the Company’s corporate offices:
Joseph P. Mullaney
SofTech, Inc.
650 Suffolk Street, Suite 415
Lowell, Massachusetts 01854
Telephone: (978) 513-2700
Facsimile: (978) 851-4806
All such communication must state the number of Company securities held by the shareholder and must clearly state that the communication is intended to be shared with the Board of Directors. Mr. Mullaney will forward all such communications to the members of the Board.
Code of Ethics
SofTech has adopted a code of ethics that applies to the Principal Executive Officer, Principal Financial Officer, or those performing similar functions. A copy of the code of ethics is available on the Company’s website at
www.softech.com
.
29
ITEM 11.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to our President and Chief Executive Officer and to each of the two most highly compensated executive officers (collectively, the “Named Executive Officers”) during or with respect to each of the two fiscal years ended May 31, 2016 and 2015.
2016 Summary Compensation Table
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Name and principal position
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Year
|
|
Salary
|
|
Bonus
|
|
Stock Option Awards
|
|
All other compensation
(1)
|
|
Total
|
|
Joseph P. Mullaney,
|
|
2016
|
$
|
247,500
|
$
|
-
|
$
|
-
|
$
|
4,950
|
$
|
252,450
|
|
President & CEO
|
|
2015
|
|
237,187
|
|
40,000
|
|
32,125
|
|
5,544
|
|
314,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert B. Anthonyson ,
|
|
2016
|
|
192,500
|
|
-
|
|
-
|
|
3,850
|
|
196,350
|
|
VP of Business Development
|
|
2015
|
|
184,890
|
|
40,000
|
|
32,125
|
|
4,490
|
|
261,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amy E. McGuire, Former
|
|
2016
|
|
105,000
|
|
-
|
|
-
|
|
4,350
|
|
109,350
|
|
Chief Financial Officer
(2)
|
|
2015
|
|
102,709
|
|
5,000
|
|
6,425
|
|
2,163
|
|
116,297
|
(1)
Reflects our contributions to each of the Named Executive Officer’s accounts under our 401(k) plan, medical and medical expense reimbursement.
(2)
Ms. McGuire resigned from the Company effective August 5, 2016. Ms. McGuire has agreed to assist the Company following her resignation in a part time advisory role during an undefined transition period. In exchange for her transition services, Ms. McGuire will receive an advisory fee of $100.00 per hour.
Narrative Compensation Disclosure
Mr. Mullaney – an annual salary of $247,500 with a bonus opportunity of up to 50% of the annual salary. Performance goals for payment of bonuses are to be established by mutual agreement between Compensation Committee and Mr. Mullaney. In addition, Mr. Mullaney is entitled to one year’s compensation in the event his employment is terminated without cause.
Mr. Anthonyson – an annual salary of $192,500 with a bonus opportunity of up to 50% of the annual salary. Performance goals for payment of bonuses are to be based half on attainment of corporate goals and half on personal goals. In addition, Mr. Anthonyson is entitled to six months compensation in the event his employment is terminated without cause.
Ms. McGuire – an annual salary of $105,000 with a bonus opportunity of up to 35% of annual salary, half based on corporate goals and the other half based on personal goals. In addition, Ms. McGuire was entitled to four months annual salary in the event her employment was terminated without cause. Ms. McGuire terminated her employment with SofTech on August 5, 2016.
Retirement Plan
We have a 401K retirement plan, for which all our employees are eligible, including the Named Executive Officers. We match employee contributions, which are vested immediately, up to 2% of the employee’s compensation.
Grants of Plan-Based Awards in 2016
No stock awards were granted to the Company’s Named Executive Officers during fiscal year 2016.
30
Director Compensation
Each non-employee Director receives annual fees of $12,000 for their first three year term, paid on a quarterly basis in arrears. The annual fee increases to $24,000 for the second three year term. In addition, each non-employee Director will be granted an option to purchase 5,000 shares of Common Stock with respect to his or her initial appointment to the Board of Directors, and will be granted annually an option to purchase 1,000 shares of common stock at the Company’s Annual Meeting of Shareholders so long as such Director holds such position. All such options shall have an exercise price equal to the fair market value of the common stock on the date of grant and shall vest monthly on a pro rata basis over three years from the date of grant so long as the Director continues to be a member of the Board of Directors.
Outstanding Equity Awards At Fiscal Year-End 2016
The following table sets forth certain information concerning the compensation of our non-employee directors during the fiscal year ended May 31, 2016.
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Name
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Fees earned
or paid
in cash
(1)
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|
Option
awards
|
|
Total
|
|
|
|
|
|
|
|
|
|
J. Phillip Cooper
|
$
|
24,000
|
$
|
-
|
$
|
24,000
|
(1)
Directors who are compensated as full-time employees receive no additional compensation for service on our Board of Directors. Each independent director who is not a full-time employee is paid an annual fee of $12,000 for their first three year term and $24,000 for their second three year term on a quarterly basis in arrears.
The Board of Directors administers the 2011 Equity Incentive Plan. No option may be exercised after the expiration of ten years from its date of grant. Non-employee Directors receive an annual fee of $12,000 for the first three year term and $24,000 for the second three year term, paid on a quarterly basis in arrears. In addition, in order to align their interests with those of the shareholders, the non-employee Director was granted an option to purchase 5,000 shares of common stock at an exercise price equal to the fair market value of our common stock on the date of grant. These options will vest monthly on a pro rata basis over each non-employee Director’s initial three year term as a Director. In the event a Director resigns, stock options already vested may be exercised within 90 days and all unvested stock options will be forfeited.
2011 Equity Incentive Plan
The 2011 Plan was approved by our shareholders at the Annual Meeting held on May 24, 2011. Under the 2011 Plan, 150,000 shares of our common stock are reserved for issuance. Additionally, any shares subject to any award under the 2011 Plan that expires or is terminated unexercised or is forfeited will be available for awards under the 2011 Plan.
All employees, officers, directors, consultants and advisors of the Company or any of its affiliates capable of contributing to the successful performance of the Company are eligible to be participants in the 2011 Plan. Based on the number of our current employees, directors and consultants, there are approximately 40 individuals who currently would be eligible to participate in the 2011 Plan. We may grant stock options, restricted stock, restricted stock units, stock equivalents and awards of shares of common stock that are not subject to restrictions or forfeiture under the 2011 Plan. We may not in any fiscal year grant to any participant stock options, SARs or other awards with respect to which performance goals apply covering more than 50,000 shares.
The 2011 Plan is administered by the Compensation Committee of the Board of Directors composed of members who are independent from Company management (the “Committee”). The Committee has the authority to adopt administrative rules and practices governing the operation of the 2011 Plan and to interpret its provisions. The Committee may, subject to applicable law, delegate to one or more of our executive officers the power to make awards to participants who are not executive officers or Directors, subject to a maximum number of shares fixed by the Committee. The Board may at any time also take any such action.
31
Except as may be limited by the 2011 Plan or applicable law, the Committee selects participants to receive awards and determines the terms and conditions of each award, including the number of shares of common stock subject to awards, the price, if any, a participant pays to receive or exercise an award, the time or times when awards vest or may be exercised, settled or forfeited, any performance goals, restrictions or other conditions to vesting, exercise, or settlement of awards, and the effect on awards of the disability, death, or termination of service of participants. Awards may be made to participants who are foreign nationals or employed outside the United States on terms the Committee deems appropriate.
Upon an equity restructuring or other corporate transaction that affects the common stock such that an adjustment is required in order to preserve the benefits intended to be provided by the 2011 Plan, the Committee shall equitably adjust any or all of the number and kind of shares in respect of which awards may be made under the 2011 Plan, the number and kind of shares subject to outstanding awards, the exercise price with respect to any of the foregoing, and the limit on individual grants. The Committee may act to preserve the participants’ rights in the event of a change in control of the Company as the Committee may consider equitable to participants and in the best interests of the Company, including without limitation: accelerating any time period relating to the vesting, exercise, or settlement of awards, providing for payment to participants of cash or other property with a fair market value equal to the amount that would have been received upon the vesting, exercise, or settlement of awards in connection with the change in control, adjusting the terms of awards in a manner determined by the Committee to reflect the change in control, causing awards to be assumed, or new rights substituted therefor, by another entity, or terminating awards.
We may not, without shareholder approval, amend any outstanding option or SAR to reduce the exercise price or replace it with a new award exercisable for common stock at a lower exercise price. Subject to the prohibition on repricing, the Committee may not amend, modify or terminate any outstanding award for which the respective participant’s consent would be required unless the terms of the award permit such action, the Committee determines that such action is required by law, or the Committee determines that the action would not materially and adversely affect the participant. The Board of Directors may amend, suspend or terminate the 2011 Plan, subject to any shareholder approval it deems necessary or appropriate.
We have granted options to purchase 149,500 shares of our common stock under the 2011 Plan. These options were granted to our non-employee director as part of our director compensation policy and our employees. For more information, see “EXECUTIVE COMPENSATION– Director Compensation” above.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners And Management
The following table provides information concerning beneficial ownership of our common stock as of August 24, 2016, for (i) each person named in the “Summary Compensation Table” as a Named Executive Officer, (ii) each director individually, (iii) all directors and executive officers as a group, and (iv) each person known by us to beneficially own more than 5% of our outstanding common stock. The address for our executive officers, directors and Chandra Singh is in care of SofTech, Inc., 650 Suffolk Street, Suite 415, Lowell, MA 01854.
|
|
|
|
|
|
Name of Beneficial Owner(1)(2)
|
|
Amount and Nature of Beneficial Ownership
|
|
Percent of Class
|
|
Joseph P. Mullaney
|
|
108,635
(6)
|
|
11.7%
|
|
Robert B. Anthonyson
|
|
184,838
(6)
|
|
19.9
|
|
J. Phillip Cooper
|
|
37,784
(4)
|
|
4.1
|
|
Chandra Singh
|
|
127,036
(3)
|
|
14.1
|
|
Joseph P. Daly
|
|
177,500
(5)
|
|
19.4
|
|
All Directors and executive officers as a group (3 persons)
|
|
331,257
(7)
|
|
34.5
|
(1)
Based upon information furnished by the persons listed. Except as otherwise noted, all persons have sole voting and investment power over the shares listed. A person is deemed, as of any date, to have “beneficial ownership” of any security that such person has the right to acquire within 60 days after such date.
(2)
There were 903,724 shares outstanding on August 24, 2016.
(3)
Includes 3,225 shares owned by spouse, as to which beneficial ownership is disclaimed.
32
(4)
Includes 16,917 shares issuable upon exercise of stock options held by Mr. Cooper related to his service as a Board member.
(5)
As reported on Form 4 filed with the SEC on August 18, 2015, includes 10,000 shares issuable upon exercise and 26,500 shares owned by EssigPR, Inc., a corporation located in Rincon, Puerto Rico owned by Mr. Daly. Mr. Daly’s business address is 497 Circle Freeway, Cincinnati, Ohio 45246.
(6)
Includes shares issuable under stock options as follows: Mr. Mullaney – 25,000 and Mr. Anthonyson -25,000.
(7)
Includes 66,917 shares issuable upon exercise of stock options held by all Directors and executive officers as a group.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Director Independence
In determining whether the members of our board of directors and its committees are independent, we have elected to use the definition of “independence” set forth in the listing standards of the NASDAQ Stock Market. After considering all relevant relationships and transactions, our board of directors, in consultation with legal counsel, has determined that Mr. Cooper is “independent” within the meaning of the applicable listing standards of the NASDAQ Stock Market. Messrs. Mullaney and Anthonyson are not independent within the meaning of the applicable listing standards of the NASDAQ Stock Market. The Company has a separate standing Audit Committee and a separate standing Compensation Committee, each of which is comprised of the independent director, Mr. Cooper. The Company does not have a separate standing Nominating and Governance Committee. Instead, the full board of directors has the responsibility of selecting individuals to be nominated for election to the board of directors.
Transaction with Certain Beneficial Owners and Directors
As part of the Recapitalization Transaction in March 2011, we raised approximately $421,765 in cash from the issuance of 384,588 shares of common stock in a private placement to investors. Among the investors were: Joseph P. Mullaney, who was appointed as our President and Chief Executive Officer and elected as a member of our board of directors upon consummation of the Recapitalization Transaction; Robert B. Anthonyson, who was appointed as our Vice President of Business Development and elected as a member of our board of directors upon consummation of the Recapitalization Transaction; J. Phillip Cooper, who was elected as a member of our board of directors upon consummation of the Recapitalization Transaction; and Chandra Singh, who owned approximately 10.9% of our outstanding common stock prior to the Recapitalization Transaction and 12.8% after consummation of the transaction.
In connection with the private placement, we also entered into the Registration Rights Agreement with the Selling Shareholders, pursuant to which we agreed to file with the SEC a registration statement to cover the resale of the 384,588 shares of common stock issued in the private placement, within 90 calendar days after the closing of the private placement. We agreed to use our reasonable best efforts to have the registration statement declared effective as promptly as reasonable possible. We also agreed to use our reasonable best efforts to keep the registration statement continuously effective until the earlier of (i) such time as all of the shares have been sold by the Selling Shareholders and (ii) the date that all the shares may be sold immediately without registration under the Securities Act and without restrictions under Rule 144 of the Securities Act. This registration document was deemed effective on December 28, 2011.
The Registration Rights Agreement also grants piggyback registration rights to the Selling Shareholders if we propose to register any of our equity securities under the Securities Act (other than on a registration statement on Form S-8 or S-4), whether for our own account or for the account of another person.
33
We agreed in the Registration Rights Agreement to pay for all expenses, including the reasonable legal expenses of one counsel to the Selling Shareholders (not to exceed $25,000), relating to the registration of any shares thereunder.
Transaction with Act3 Technologies, LLC
On November 1, 2011 the Company entered into an agreement with Act3 Technologies, LLC (“Act3”) pursuant to which it obtained the exclusive right to develop, commercialize and monetize certain intellectual property owned by Act3 relating to internet marketing software (the “Act3 IP”). The Company obtained these rights solely in exchange for its agreement to certain sharing of the proceeds that may be derived with Act3 if the Company is successful in commercializing the Act3 IP, provided that the Company first recover any development costs it may have incurred up to specified levels. The agreement does not obligate the Company to undertake any level of effort or expenditure in this regard and the decision whether to seek to commercialize the Act3 IP is solely in the Company’s discretion. The Company also has a right of first refusal to purchase Act3 through December 31, 2050. Joseph Mullaney, Robert Anthonyson and J. Phillip Cooper, each a member of our board of directors, own approximately 10%, 10%, and 3%, respectively, of the equity interests in Act3.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Independent Registered Public Accounting Firm, Audit Fees
The aggregate fees billed by Moody, Famiglietti & Andronico for each of the last two fiscal years for professional services rendered to the Company are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Audit Fees
(1)
|
|
Audit-Related Fees
|
|
Tax Fees
|
|
All Other Fees
|
|
Fiscal year ended May 31, 2016
|
$
|
81,340
|
$
|
-
|
$
|
-
|
$
|
-
|
|
Fiscal year ended May 31, 2015
|
$
|
24,047
|
$
|
-
|
$
|
-
|
$
|
-
|
The aggregate fees billed by McGladrey LLP for each of the last two fiscal years for professional services rendered to the Company are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Audit Fees
(1)
|
|
Audit-Related Fees
|
|
Tax Fees
|
|
All Other Fees
|
|
Fiscal year ended May 31, 2015
|
$
|
79,887
|
$
|
-
|
$
|
-
|
$
|
-
|
(1)
Includes Form 10-Q reviews and issuance of Consents related to registration statements. Effective November 20, 2014, SofTech dismissed McGladrey as its independent registered public accounting firm and engaged Moody, Famiglietti & Andronico, LLP to audit and review the Company’s financial statements for the fiscal year ended May 31, 2015. MFA was engaged for general audit and review services and not because of any particular transaction or accounting principle, or because of any disagreement with McGladrey LLP.
The Company's Board of Directors is responsible for the appointment, compensation, retention and oversight of the work of the registered public accounting firm (including
resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company. The Board pre-approves all permissible non-audit services and all audit, review or attest engagements required under the securities laws (including the fees and terms thereof) to be performed for the Company by its registered public accounting firm, provided, however, that de minimus non-audit services may instead be approved in accordance with applicable SEC rules. The Company's Board of Directors approved 100% of the services described in the table above.
34
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)
Certain Documents Filed as Part of this Form 10-K
1.
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Changes in Redeemable Common Stock and Shareholders' Equity (Deficit)
Consolidated Statements of Cash Flows
2.
Financial Statement Schedules -None.
3.
Exhibits – See Exhibit Index immediately preceding such Exhibits.
(b)
The exhibits filed as part of this Form 10-K are listed on the Exhibit Index immediately preceding such Exhibits. The Exhibit Index is incorporated herein by reference.
(c)
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SOFTECH, INC.
Date: August 29, 2016
/s/ Joseph P. Mullaney
Joseph P. Mullaney
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
|
|
|
Signature
|
Title
|
Date
|
|
|
|
|
|
|
|
|
|
/s/ Joseph P. Mullaney
|
President, Chief Executive Officer and Director
|
August 29, 2016
|
|
Joseph P. Mullaney
|
(Principal Executive and Financial Officer)
|
|
|
|
|
|
|
/s/ Robert B. Anthonyson
|
Vice President of Business Development and Director
|
August 29, 2016
|
|
Robert B. Anthonyson
|
|
|
|
|
|
|
|
/s/ J. Phillip Cooper
|
Director
|
August 29, 2016
|
|
J. Phillip Cooper
|
|
|
|
|
|
|
35
EXHIBIT INDEX
|
|
|
|
Exhibit
|
|
|
|
No.
|
|
Description of Document
|
|
2.1
|
|
Asset Purchase Agreement, dated as of August 30, 2013, between Mentor Graphics Corporation and the Company (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K, filed on September 6, 2013).
|
|
2.2
|
|
Earn-Out Agreement, dated August 30, 2013, between Mentor Graphics Corporation and the Company (incorporated by reference to Exhibit 2.2 to the Company’s Form 8-K, filed on September 6, 2013).
|
|
3.1
|
|
Articles of Organization, as amended through October 12, 1988 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2008, filed on April 14, 2008).
|
|
3.1.1
|
|
Articles of Amendment to Articles of Organization, dated April 15, 2011 (incorporated by reference to Exhibit 3.1.1 to the Company’s Registration Statement filed on Form S-1 on June 9, 2011).
|
|
3.1.2
|
|
Articles of Amendment to Articles of Organization, effective June 7, 2011 (incorporated by reference to Exhibit 3.1.1 to the Company’s Registration Statement filed on Form S-1 on June 9, 2011).
|
|
3.2
|
|
By-laws (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2008, filed on April 14, 2008).
|
|
4.1
|
|
Rights Agreement, dated as of February 3, 2012 between the Company and Registrar and Transfer Company, as Rights Agent, together with the following Exhibits thereto; Exhibit A –Form of Right Certificate; Exhibit B- Summary of Rights (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on February 3, 2012).
|
|
10.1
|
|
Securities Purchase Agreement by and among the Company and the Purchasers named therein dated March 8, 2011 (Incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement filed on Form S-1 on June 9, 2011).
|
|
10.2
|
|
Registration Rights Agreement by and among the Company and the Purchasers named therein dated March 8, 2011 (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement filed on Form S-1 on June 9, 2011).
|
|
10.3
|
|
SofTech, Inc. 2011 Equity Incentive Plan (incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement filed on Form S-1 on June 9, 2011).
|
|
10.4
|
|
Form of Notice of Grant of Incentive Stock Option and Option Agreement under 2011 Equity Incentive Plan (incorporated by reference to Exhibit 10.14 to the Company’s Registration Statement filed on Form S-1 on June 9, 2011).
|
|
10.5
|
|
Form of Notice of Grant of Nonqualified Stock Option and Option Agreement under 2011 Equity Incentive Plan (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement filed on Form S-1 on June 9, 2011).
|
|
10.6
|
|
Form of Notice of Grant of Restricted Stock and Restricted Stock Agreement under 2011 Equity Incentive Plan (incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement filed on Form S-1 on June 9, 2011).
|
|
10.7
|
|
Form of Notice of Grant of Restricted Stock and Restricted Stock Agreement under 2011 Equity Incentive Plan (Non-Employee Directors) (incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement filed on Form S-1 on June 9, 2011).
|
|
10.8
|
|
Form of Notice of Grant of Nonqualified Stock Option and Option Agreement under 2011 Equity Incentive Plan (Non-Employee Directors) (incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement filed on Form S-1 on June 9, 2011).
|
|
10.9
|
|
Loan Pledge and Security Agreement by and between SofTech Inc. and Prides Crossing Capital dated May 10, 2013 (incorporated by reference to Exhibit 10.27 to the Company’s 8-K filed on July 12, 2013).
|
|
10.9.1
|
|
Amendment to Loan Pledge and Security Agreement by and between SofTech Inc. and Prides Crossing Capital dated July 9, 2013 (incorporated by reference to Exhibit 10.27.1 to the Company’s 8-K filed on July 12, 2013).
|
|
10.9.2
|
|
Amended and Restated Loan, Pledge and Security Agreement, dated December 5, 2013, by and among Prides Crossing Capital Funding, L.P. and the Company (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2013 filed on January 14, 2014).
|
|
10.10
|
|
Consent to the Sale of Assets and Amendment to Loan, Pledge and Security Agreement, dated October 17, 2013, between Prides Crossing Capital, L.P., Prides Crossing Capital-A, L.P., Joseph P. Mullaney and the Company. (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2013 filed on January 14, 2014).
|
|
10.11
|
|
Amendment No.3 to Loan, Pledge and Security Agreement by and between Prides Crossing Capital Funding L.P. and SofTech, Inc. dated August 8, 2014 (incorporated by reference to Exhibit 10.18 to the Company’s Form 10-Q filed on January 14, 2015).
|
36
|
|
|
|
|
|
|
10.12
|
|
Amendment No.4 to Loan, Pledge and Security Agreement by and between Prides Crossing Capital Funding L.P. and SofTech, Inc. dated October 29, 2014 (incorporated by reference to Exhibit 10.18 to the Company’s Form 10-Q filed on January 14, 2015).
|
|
|
10.13
|
|
Securities Purchase Agreement by and between Joseph Daly and SofTech, Inc. dated June 20, 2014 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 26, 2014).
|
|
|
10.14
|
|
Promissory Note by and between EssigPR, Inc. and SofTech, Inc. dated June 20, 2014 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on June 26, 2014).
|
|
|
10.15
|
|
Partnership Agreement by and between Essig Research, Inc. and SofTech, Inc. dated June 20, 2014 (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on June 26, 2014).
|
|
|
10.16
|
|
Stock Purchase Agreement by and between Greenleaf Capital and SofTech, Inc. dated July 24, 2014 (incorporated by reference to Exhibit 10.14 to the Company’s Form 10-K filed on October 7, 2014).
|
|
|
10.17
|
|
Short Term Loan Agreement by and between SofTech, Inc. and EssigPR, Inc. dated October 1, 2014 (incorporated by reference to Exhibit 10.15 to the Company’s Form 10-K filed on October 7, 2014).
|
|
|
10.18
|
|
Amendment Term Loan Agreement by and between SofTech, Inc. and EssigPR, Inc. dated April 2, 2015 (incorporated by reference to Exhibit 10.18 to the Company’s Form 10-Q filed on April 14, 2015).
|
|
|
10.19
|
|
Amendment No. 2 Term Loan Agreement by and between SofTech, Inc. and EssigPR, Inc. dated July 15, 2015 (incorporated by reference to Exhibit 10.19 to the Company’s Form 8-K filed on July 21, 2015).
|
|
|
10.20
|
|
Amendment No. 3 Term Loan Agreement by and between SofTech, Inc. and EssigPR, Inc. dated October 16, 2015 (incorporated by reference to Exhibit 10.20 to the Company’s Form 8-K filed on October 16, 2015).
|
|
|
10.21
|
|
Amendment No. 4 Term Loan Agreement by and between SofTech, Inc. and EssigPR, Inc. dated November 30, 2015, (incorporated by reference to Exhibit 10.21 to the Company’s Form 10-Q filed on January 14, 2016).
|
|
|
10.22
|
|
Amendment No. 5 Term Loan Agreement by and between SofTech, Inc. and EssigPR, Inc. dated January 8, 2016, (incorporated by reference to Exhibit 10.22 to the Company’s Form 10-Q filed on January 14, 2016).
|
|
|
10.23
|
|
Amendment No. 6 Term Loan Agreement by and between SofTech, Inc. and EssigPR, Inc. dated April 11, 2016, (incorporated by reference to Exhibit 10.23 to the Company’s Form 10-Q filed on April 14, 2016).
|
|
|
10.24
|
|
Amendment No. 7 Term Loan Agreement by and between SofTech, Inc. and EssigPR, Inc. dated August 12, 2016, filed herewith.
|
|
|
10.25
|
|
Form of Securities Purchase Agreement by and between SofTech, Inc. and certain purchasers, dated September 18, 2014, September 22, 2014 and October 9, 2014 (incorporated by reference to Exhibit 10.18 to the Company’s Form 10-Q filed on January 14, 2015).
|
|
10.26
|
|
Form of Securities Purchase Agreement by and between SofTech, Inc. and Robert Anthonyson, dated September 21, 2015 (incorporated by reference to Exhibit 10.21 to the Company’s Form 10-Q filed on October 15, 2015).
|
|
21.1
|
|
Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to the Company’s Registration Statement filed on Form S-1 on June 9, 2011).
|
|
31.1
|
|
Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
|
|
31.2
|
|
Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
|
|
32.1
|
|
Certification of the Principal Financial Officer and Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
101.INS
|
|
XBRL Instance Document
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
SofTech, Inc.
Lowell, Massachusetts
We have audited the accompanying consolidated balance sheets of SofTech, Inc. and Subsidiaries (the “Company”) as of May 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss, changes in redeemable common stock and shareholders’ deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SofTech, Inc. and Subsidiaries as of May 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ Moody, Famiglietti & Andronico, LLP
Tewksbury, MA
August 29, 2016
F-1
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
May 31,
|
|
May 31,
|
|
|
|
2016
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
175
|
$
|
310
|
|
Accounts receivable (less allowance for uncollectible accounts of $18 as of May 31, 2016 and 2015)
|
|
477
|
|
587
|
|
Earn-Out Payments from CADRA Sale, current portion
|
|
130
|
|
243
|
|
Prepaid and other assets
|
|
207
|
|
315
|
|
|
|
|
|
|
|
Total current assets
|
|
989
|
|
1,455
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
71
|
|
57
|
|
Goodwill
|
|
948
|
|
948
|
|
Capitalized software development costs, net
|
|
825
|
|
422
|
|
Capitalized patent costs
|
|
113
|
|
109
|
|
Earn-Out Payments from CADRA Sale, net of current portion
|
|
-
|
|
133
|
|
Related party note receivable
|
|
134
|
|
134
|
|
Other assets
|
|
35
|
|
35
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
$
|
3,115
|
$
|
3,293
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
178
|
$
|
137
|
|
Accrued expenses
|
|
323
|
|
283
|
|
Deferred maintenance and subscription revenue
|
|
1,531
|
|
1,732
|
|
Current portion of capital lease
|
|
24
|
|
19
|
|
Current portion of long-term debt – related party
|
|
900
|
|
446
|
|
|
|
|
|
|
|
Total current liabilities
|
|
2,956
|
|
2,617
|
|
|
|
|
|
|
|
Capital lease, net of current portion
|
|
39
|
|
30
|
|
Other liabilities
|
|
-
|
|
10
|
|
|
|
|
|
|
|
Total liabilities
|
|
2,995
|
|
2,657
|
|
Commitments and contingencies
Redeemable Common Stock and Shareholders’ Deficit:
|
|
|
|
|
|
Redeemable common stock, $0.10 par value, 180,000 and 170,000 shares issued and outstanding at May 31, 2016 and 2015, respectively.
|
|
1,260
|
|
1,190
|
|
|
|
|
|
|
|
Shareholders’ deficit:
|
|
|
|
|
|
Common stock, $0.10 par value 20,000,000 shares authorized, 723,724 issued and outstanding at May 31, 2016 and 2015, respectively.
|
|
73
|
|
73
|
|
Additional paid in capital
|
|
27,138
|
|
27,056
|
|
Accumulated deficit
|
|
(28,073)
|
|
(27,400)
|
|
Accumulated other comprehensive loss
|
|
(278)
|
|
(283)
|
|
Total shareholders’ deficit
|
|
(1,140)
|
|
(554)
|
|
|
|
|
|
|
|
TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS’ DEFICIT
|
$
|
3,115
|
$
|
3,293
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-2
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
(in thousands, except for share and per share data)
|
|
|
|
Years Ended
|
|
|
|
May 31,
|
|
May 31,
|
|
|
|
2016
|
|
2015
|
|
Revenues:
|
|
|
|
|
|
Products
|
$
|
515
|
$
|
535
|
|
Services
|
|
3,661
|
|
3,407
|
|
Total revenues
|
|
4,176
|
|
3,942
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
Products
|
|
67
|
|
151
|
|
Services
|
|
1,455
|
|
1,539
|
|
Total cost of revenues
|
|
1,522
|
|
1,690
|
|
|
|
|
|
|
|
Gross margin
|
|
2,654
|
|
2,252
|
|
|
|
|
|
|
|
Research and development expenses
|
|
633
|
|
894
|
|
Selling, general and administrative expenses
|
|
2,555
|
|
2,481
|
|
Change in fair value of earn-out and holdback payments
|
|
46
|
|
(85)
|
|
|
|
|
|
|
|
Operating loss
|
|
(580)
|
|
(1,038)
|
|
|
|
|
|
|
|
Interest expense
|
|
96
|
|
165
|
|
Other (income) expense
|
|
(5)
|
|
114
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
(671)
|
|
(1,317)
|
|
Provision for income taxes
|
|
2
|
|
2
|
|
|
|
|
|
|
|
Net loss
|
$
|
(673)
|
$
|
(1,319)
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
$
|
(0.75)
|
$
|
(1.48)
|
|
Weighted average common shares outstanding-basic and diluted
|
|
902,529
|
|
890,120
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
For the Twelve Months Ended
|
|
|
|
May 31,
|
|
May 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Net loss
|
$
|
(673)
|
$
|
(1,319)
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
5
|
|
199
|
|
|
|
|
|
|
|
Comprehensive loss
|
$
|
(668)
|
$
|
(1,120)
|
See accompanying notes to consolidated financial statements.
F-4
SOFTECH, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
(in thousands, except for share and per share data)
|
|
|
|
Years Ended
|
|
|
|
May 31,
|
|
May 31,
|
|
|
|
2016
|
|
2015
|
|
Redeemable common stock:
|
|
|
|
|
|
Balance at beginning of year
|
$
|
1,190
|
$
|
275
|
|
Issuance of redeemable common stock
|
|
50
|
|
850
|
|
Repurchase of redeemable common stock
|
|
-
|
|
(275)
|
|
Accretion of redeemable common stock to redemption value
|
|
20
|
|
340
|
|
Redeemable common stock at end of year
|
$
|
1,260
|
$
|
1,190
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
Balance at beginning of year
|
$
|
73
|
$
|
83
|
|
Repurchase of common stock
|
|
-
|
|
(10)
|
|
Balance at end of year
|
|
73
|
|
73
|
|
Additional paid in capital:
|
|
|
|
|
|
Balance at beginning of year
|
|
27,056
|
|
27,338
|
|
Repurchase of common stock
|
|
-
|
|
(27)
|
|
Accretion of redeemable common stock to redemption value
|
|
(20)
|
|
(340)
|
|
Fee to be paid to redeemable common stock investors
|
|
(6)
|
|
(30)
|
|
Stock based compensation
|
|
108
|
|
115
|
|
Balance at end of year
|
|
27,138
|
|
27,056
|
|
Accumulated deficit:
|
|
|
|
|
|
Balance at beginning of year
|
|
(27,400)
|
|
(26,081)
|
|
Net loss
|
|
(673)
|
|
(1,319)
|
|
Balance at end of year
|
|
(28,073)
|
|
(27,400)
|
|
Accumulated other comprehensive loss:
|
|
|
|
|
|
Balance at beginning of year
|
|
(283)
|
|
(482)
|
|
Foreign currency translation adjustments
|
|
5
|
|
199
|
|
Balance at end of year
|
|
(278)
|
|
(283)
|
|
|
|
|
|
|
|
Total shareholders’ deficit at end of year
|
$
|
(1,140)
|
$
|
(554)
|
|
|
|
|
|
|
|
Outstanding shares:
|
|
|
|
|
|
Balance of redeemable common stock at beginning of year
|
|
170,000
|
|
50,000
|
|
Repurchase of redeemable common stock
|
|
-
|
|
(50,000)
|
|
Issuance of redeemable common stock
|
|
10,000
|
|
170,000
|
|
Balance of redeemable common stock at end of year
|
|
180,000
|
|
170,000
|
|
|
|
|
|
|
|
Balance of common stock at beginning of year
|
|
723,724
|
|
825,135
|
|
Repurchase of common stock
|
|
-
|
|
(101,411)
|
|
Balance of common stock at end of year
|
|
723,724
|
|
723,724
|
See accompanying notes to consolidated financial statements.
F-5
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Years Ended
|
|
|
|
May 31,
|
|
May 31,
|
|
|
|
2016
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net loss
|
$
|
(673)
|
$
|
(1,319)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
Depreciation and amortization expense
|
|
74
|
|
279
|
|
Change in fair value of earn-out and holdback payments
|
|
46
|
|
(85)
|
|
Non-cash loss on foreign currency transactions
|
|
4
|
|
114
|
|
Stock-based compensation
|
|
108
|
|
115
|
|
Non-cash interest expense
|
|
-
|
|
27
|
|
Changes in current assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
110
|
|
86
|
|
Prepaid expenses and other current assets
|
|
108
|
|
(111)
|
|
Accounts payable, accrued expenses and other liabilities
|
|
65
|
|
(663)
|
|
Deferred maintenance revenue
|
|
(201)
|
|
270
|
|
Net cash used in operating activities
|
|
(359)
|
|
(1,287)
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Proceeds from earn-out and holdback payments
|
|
200
|
|
604
|
|
Capital expenditures
|
|
(22)
|
|
(3)
|
|
Capitalized software development costs
|
|
(438)
|
|
(202)
|
|
Capitalized identifiable intangible assets
|
|
-
|
|
(33)
|
|
Capitalized patent costs
|
|
(4)
|
|
(3)
|
|
Net cash provided by (used in) investing activities
|
|
(264)
|
|
363
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from issuance of redeemable common stock, net of issuance costs
|
|
50
|
|
820
|
|
Cost of repurchasing common stock
|
|
-
|
|
(37)
|
|
Borrowings under debt agreement
|
|
647
|
|
750
|
|
Cost of repurchasing redeemable common stock
|
|
-
|
|
(275)
|
|
Repayment under debt agreements
|
|
(193)
|
|
(1,304)
|
|
Repayments under capital lease
|
|
(18)
|
|
(14)
|
|
Net cash provided by (used in) financing activities
|
|
486
|
|
(60)
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
2
|
|
85
|
|
Decrease in cash and cash equivalents
|
|
(135)
|
|
(899)
|
|
Cash and cash equivalents, beginning of year
|
|
310
|
|
1,209
|
|
Cash and cash equivalents, end of year
|
$
|
175
|
$
|
310
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Interest paid
|
$
|
88
|
$
|
122
|
|
Income taxes paid
|
$
|
2
|
$
|
2
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and financing activities:
|
|
|
|
|
|
Purchase of property and equipment under capital lease
|
$
|
32
|
$
|
-
|
|
Accretion of redeemable common stock
|
$
|
20
|
$
|
340
|
See accompanying notes to consolidated financial statements.
F-6
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
SofTech, Inc. (the “Company”) was formed in Massachusetts on June 10, 1969. The Company is primarily engaged in the development, marketing, distribution and support of computer software solutions that serve the Product Lifecycle Management (“PLM”) industry. The Company’s operations are organized geographically with offices in the U.S. and in Italy. The Company also has resellers in Asia and Europe.
In addition to the products offered to the PLM industry, in 2012, the Company filed a patent application describing an information management system for the residential property market. The Company established a wholly-owned subsidiary, HomeView, Inc. on April 7, 2015 in Massachusetts. HomeView™, a technology being developed by HomeView, Inc., is a secure, intelligent home asset management and maintenance system. HomeView allows homeowners to create a virtual home manual that logs, manages and tracks personal assets and attributes about the property. Home ownership is made easier by managing user manuals, warranty periods, service records, maintenance reminders and other projects with HomeView. Our plans are to offer this technology as a hosted solution wherein the software would reside on our servers.
During fiscal years 2015 and 2016, the Company invested a substantial amount of time in, among other things, researching this market, reviewing various business models, creating specifications for the technology and developing the technology. In January 2016, the product was introduced to the market and a free version of the app was made available on iTunes.
The Company has been actively engaged in acquiring and filing new U.S. patents, evaluating alternatives for monetizing its existing patents and investigating the acquisition of specific patents already awarded that might enhance shareholder value.
The consolidated financial statements of the Company include the accounts of SofTech, Inc. and its wholly-owned subsidiaries, Information Decisions, Inc., Workgroup Technology Corporation, HomeView, Inc., SofTech, GmbH (inactive since 2014) and SofTech, Srl. All significant intercompany accounts and transactions have been eliminated in consolidation.
BASIS OF ACCOUNTING AND LIQUIDITY
The consolidated financial statements have been prepared on a basis that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company’s long-term viability is dependent on its ability to generate sufficient product revenue, net income and cash flows from operations to support its business as well as its ability to obtain additional capital.
The Company has sustained net operating losses and negative cash flow from operations for fiscal year 2015 and fiscal 2016 as detailed in the table below (000’s):
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
May 31,
|
|
May 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Net loss
|
$
|
(673)
|
$
|
(1,319)
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
$
|
(359)
|
$
|
(1,287)
|
The majority of the net losses and net cash used in operating activities detailed above relate to our Italian subsidiary and expenses we have incurred in launching our HomeView technology.
As outlined further in these disclosures, the Company has debt obligations that are payable during October 2016 and common stock that is redeemable during the next twelve months. The Company’s ability to meet its obligations and continue as a going concern is dependent on the successful execution of its operating plans.
F-7
Our Italian subsidiary, SofTech, Srl, was primarily focused on marketing and supporting the CADRA technology prior to the sale of that product line in fiscal 2014. Since that time, it has been offering CADRA under a Distributorship Agreement while developing new revenue streams. The losses diminished significantly in fiscal 2016 as compared to 2015 as a result of these new initiatives. In fiscal 2016, we were awarded a contract to implement a solution at our largest European customer to, among other things, automate their bill of materials using third party technologies and professional services. This project was substantially completed during the fiscal year and we are discussing expansion of that solution with this customer. We anticipate continued improvement in operating results.
With regard to HomeView, we are continuing to develop the technology and expect multiple new releases for the foreseeable future. We began introducing this product to the market in January 2016. The Company expects that additional capital will be required to continue to introduce HomeView into the market effectively.
As of July 31, 2016, approximately 350 HomeView accounts have been established tracking approximately 12,000 details about the things in the homes of those users. Through various marketing efforts we continue to attract new visitors to the HomeView website.
As detailed in previous filings, one of the alternatives for obtaining the additional capital we need to continue the market introduction of HomeView and meet our near term capital needs is the sale of one or more of the Company’s existing revenue producing product lines. Subsequent to year end the Company entered into just such an agreement as described immediately hereunder. After pursuing other funding alternatives management determined that the sale was the most favorable alternative for shareholders.
The transaction is subject to the approval of the Company’s shareholders and is expected to be completed by October 2016. The approval of two-thirds of the shares outstanding is required. Approximately 56% of outstanding shares are owned by Company Directors and the buyer.
If completed, the liquidity provided will allow for the Company to repay all of its outstanding debt, repurchase Put shares that come due within the next twelve months and fund its working capital requirements for at least the next twelve months.
On August 23, 2016, we entered into an Asset Purchase Agreement pursuant to which we agreed to sell our ProductCenter and Connector product lines to Essig Research, Inc. (“Essig”) for a total of $3.25 million plus contingent payments based on revenue targets for the two twelve-month periods immediately following the transaction date (the “PLM Sale”). Essig is an affiliate of EssigPR, Inc., which is owned by Joseph P. Daly, a related party of the Company whose beneficial ownership was approximately 19.4% of the Company’s outstanding common stock as of August 24, 2016. The assets to be acquired by Essig include the properties and assets used exclusively in the PLM operations which is composed of the ProducCenter and Connector product lines. Essig will assume the contractual liabilities associated with maintenance and subscription support services. Specifically excluded from the sale and retained by SofTech are cash, billed accounts receivable and all remaining assets and liabilities not specifically identified, including the operations of SofTech Srl and HomeView. Approximately $1.15 million of indebtedness as of August 24, 2016 owed by the Company to Essig under existing debt agreements would be repaid as part of this transaction, thereby reducing the cash paid to the Company at the closing. In addition, at the closing of the transaction, the Company has agreed to repurchase from Mr. Daly 110,000 shares of its common stock at approximately $6.50 per share. These shares are currently subject to a $7.00 put right that, absent such repurchase, would have been exercisable by Mr. Daly in fiscal 2018. The closing of the PLM Sale, which is subject to approval by the SofTech shareholders and the satisfaction of other customary closing conditions (including a holdback of a portion of the purchase price to secure any indemnification claims arising under the Asset Purchase Agreement), is expected to occur by October 2016. The transaction is not subject to any financing condition.
The transaction is subject to the approval of the Company’s shareholders and is expected to be completed by October 2016. The approval of two-thirds of the shares outstanding is required. If completed, the liquidity provided will allow for the Company to repay all of its outstanding debt, repurchase Put shares that come due within the next twelve months and fund its working capital requirements for at least the next twelve months. There can be no assurance, however, that the sale will be completed.
F-8
CADRA SALE
On October 18, 2013, the Company sold substantially all of the assets of its CADRA product line, including all intellectual property related to that technology but specifically excluding cash, billed accounts receivable and liabilities other than the deferred maintenance liability associated with CADRA customer maintenance contracts for support services (the “CADRA Sale”), to Mentor Graphics Corporation (“Mentor”), pursuant to an Asset Purchase Agreement dated August 30, 2013 (the “Asset Purchase Agreement”). The aggregate consideration for the CADRA Sale is up to $3.95 million. Through May 31, 2016 the Company has received a total of approximately $3.7 million from Mentor and could receive up to an additional $223,000 based upon the CADRA revenue generated by Mentor for the period from February 1, 2016 through October 31, 2016. In accordance with the terms of the Asset Purchase Agreement the final payment would be received on or before April 1, 2017. During fiscal year 2016 and 2015 the Company received earn out payments of $200,000 and $283,000, respectively, under the terms of the Asset Purchase Agreement.
In conjunction with completing the CADRA Sale, the Company entered into a one-year, exclusive Distributorship Agreement with Mentor allowing us to market and support the CADRA technology as a reseller throughout Europe (except Germany) at a thirty percent (30%) gross margin. In March 2016 that arrangement was extended through March 24, 2017 on a non-exclusive basis. Under the new arrangement, gross margin on software remained at 30% and the gross margin on support contracts is 35%.
RECLASSIFICATIONS
Certain accounts in the financial statements for the fiscal year ended May 31, 2015 have been reclassified for presentation purposes and had no impact on net loss. Specifically, on the Statement of Cash Flows for the fiscal year ended May 31, 2015, the Proceeds from the earn-out and holdback payments of $604,000 which were previously classified under financing activities, have been reclassified as investing activities in these financial statements. In addition, on the Statement of Changes in Redeemable Common Stock and Shareholders’ Deficit for the fiscal year ended May 31, 2015 investor fees of $30,000 which were previously netted against the $850,000 in proceeds from the issuance of redeemable common stock were separately presented.
B. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates included in the financial statements pertain to revenue recognition, the allowance for doubtful accounts receivable, the fair value estimate of the Earn-Out Payments due from Mentor related to the sale of the CADRA business and the valuation of long term assets including goodwill, capitalized patent costs, capitalized software development costs and deferred tax assets. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains cash at certain financial institutions in amounts that at times, exceed Federal Deposit Insurance Corporation limits. Cash held in foreign bank accounts at May 31, 2016 totaled approximately $90,000. The Company does not believe it is exposed to significant credit risk related to cash and cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable are stated at the amount management expects to collect from outstanding balances. An allowance for doubtful accounts is provided for those accounts receivable considered to be uncollectible based upon management's assessment of the collectability of accounts receivable, which considers historical writeoff experience and any specific risks identified in customer collection matters. Bad debts are written off against the allowance when identified. The Company’s allowance for uncollectible accounts was approximately $18,000 at May 31, 2016 and 2015.
F-9
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and equivalents and accounts receivable. The Company maintains its cash and equivalents with high credit quality financial institutions. The Company believes it is not exposed to any significant losses due to credit risk on cash and equivalents. Accounts receivable are stated at the amount management expects to collect from outstanding balances. Consequently, the Company believes that its exposure to losses due to credit risk on net accounts receivable is limited.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. The Company provides for depreciation on a straight-line basis over the following estimated useful lives:
|
|
|
|
Computer software and equipment
|
|
2-5 years
|
|
Office furniture
|
|
5-10 years
|
|
Automobiles
|
|
4-6 years
|
|
Leasehold improvements
|
|
Less of life of lease
or estimated lease term
|
Property and equipment was composed of the following at May 31 (000’s):
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Computer Software
|
$
|
506
|
$
|
473
|
|
Equipment
|
|
502
|
|
479
|
|
Office Furniture
|
|
116
|
|
116
|
|
Leasehold Improvements
|
|
31
|
|
31
|
|
|
|
1,155
|
|
1,099
|
|
Less Accumulated Depreciation
|
|
(1,084)
|
|
(1,042)
|
|
|
|
|
|
|
|
|
$
|
71
|
$
|
57
|
Depreciation expense, including amortization of assets under capital lease, was approximately $40,000 for both fiscal years 2016 and 2015.
Maintenance and repairs are charged to expense as incurred; betterments are capitalized. At the time property and equipment are retired, sold, or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts. Any resulting gain or loss on disposal is credited or charged to income.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for its software development costs in accordance with Accounting Standards Codification (“ASC”)
985-20,
Software-Costs of Computer Software to Be Sold, Leased or Marketed
and
ASC 350-40, Intangibles-Goodwill and Other- Internal Use-Software.
ASC 985-20 is applicable
to costs incurred to develop or purchase software to be sold, leased or otherwise marketed as a separate product or as part of a product or process. ASC 350-40 is applicable to costs incurred to develop or obtain software solely to meet an entity’s internal needs and for which no substantive plan exists or is being developed to externally market the software. ASC 350-40 also covers technology that would be offered as a hosted solution.
Under ASC 985-20, costs that are incurred in researching and developing a computer software product are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, software development costs are capitalized until the product is available for general release to customers.
Under ASC 350-40 there are three distinct stages associated with development software which include 1) preliminary project; 2) application development; and 3) post implementation-operation. Costs should be capitalized after each of the following has occurred:
·
The preliminary project stage has been completed;
·
Management with the relevant authority authorizes the project;
·
Management with the relevant authority commits to fund the project;
·
It is probable that the project will be completed; and
·
It is probable that the software will be used for the intended purpose.
F-10
Capitalization stops after the software is substantially complete.
Capitalized costs are amortized using the straight-line method over the estimated economic life of the product, generally three years. The Company evaluates the realizability of the assets and the related periods of amortization on a regular basis. Judgment is required in determining when costs should begin to be capitalized under both standards as well as the technology’s economic life.
During fiscal years 2016 and 2015, the Company capitalized approximately $438,000 and $202,000, respectively, of software development costs. Amortization expense related to capitalized software development costs for fiscal years 2016 and 2015 was approximately $36,000 and $98,000, respectively.
DEBT ISSUANCE COSTS
The Company capitalizes the direct costs associated with entering into debt agreements and amortizes those costs over the life of the debt agreement. In May 2013, the Company entered into the Loan Agreement as detailed in Note F. Total direct costs incurred in establishing this debt agreement were approximately $255,000 which were amortized over the term of the arrangement in accordance with ASC 470-50. Amortization expense related to debt issuance costs for fiscal year 2015 was approximately $149,000 and was fully amortized in that period.
INCOME TAXES
The provision for income taxes is based on the earnings or losses reported in the consolidated financial statements. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company provides a valuation allowance against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company recognizes the tax benefit from an uncertain tax position only if it more-likely-than-not that the tax position will be sustained upon examination by taxing authorities, based on technical merits of the tax position. The evaluation of an uncertain tax position is based on factors that include, but are not limited to, changes in the tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, and changes in facts or circumstances related to a tax position. Any changes to these estimates, based on the actual results obtained and/or a change in assumptions, could impact the Company’s tax provision in future periods. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes. In accordance with the applicable statute of limitations, the Company’s tax returns could be audited by the Internal Revenue Service and various states for the fiscal years ended 2013 to 2015.
REVENUE RECOGNITION
The Company follows the provisions of ASC 985-605,
Software – Revenue Recognition,
for transactions involving the licensing of software and software support services. Revenue from software license sales is recognized when persuasive evidence of an arrangement exists, delivery of the product has been made, there is a fixed fee and collectability is reasonably assured. The Company does not provide for a right of return. For multiple element arrangements, total fees are allocated to each of the undelivered elements based upon vendor specific objective evidence (“VSOE”) of their fair values, with the residual amount recognized as revenue for the delivered elements, using the residual method set forth in ASC 985-605. Revenue from customer maintenance and subscription support agreements is deferred and recognized ratably over the term of the agreements, typically one year. Revenue from engineering, consulting and training services is recognized as those services are rendered using a proportional performance model. Deferred revenue represents billings and payments received for which the aforementioned revenue recognition criteria have not been met.
CAPITALIZED PATENT COSTS
Costs related to patent applications are capitalized as incurred and are amortized once the patent application is accepted or are expensed if the application is finally rejected. Patent costs are amortized over their estimated economic lives under the straight-line method, and are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable through the estimated undiscounted future cash flows from the use of the associated patent. Capitalized patent costs totaled approximately $4,000 and $3,000 for the years ending May 31, 2016 and 2015, respectively.
F-11
ACCOUNTING FOR GOODWILL
The Company accounts for goodwill pursuant to ASC 350,
Intangibles – Goodwill and Other
. This requires that goodwill be reviewed annually, or more frequently as a result of an event or change in circumstances, for possible impairment with impaired assets written down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified within the standard’s criteria.
As of May 31, 2016, the Company conducted its annual impairment test of goodwill by comparing the fair value of the reporting unit to the carrying amount of the underlying assets and liabilities of its single reporting unit. The Company determined that the fair value of the reporting unit exceeded the carrying amount of the assets and liabilities, therefore no impairment existed as of the testing date.
LONG-LIVED ASSETS
The Company periodically reviews the carrying value of all intangible and other long-lived assets. If indicators of impairment exist, the Company compares the undiscounted cash flows estimated to be generated by those assets over their estimated economic life to the related carrying value of those assets to determine if the assets are impaired. If the carrying value of the asset is greater than the estimated undiscounted cash flows, the carrying value of the assets would be decreased to their fair value through a charge to operations. As of May 31, 2016 and 2015, the Company does not have any long-lived assets it considers to be impaired.
FINANCIAL INSTRUMENTS
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, Earn-Out Payments, related party notes receivable, accounts payable, accrued expenses, deferred maintenance and subscription revenue, long-term debt and capital lease obligations. The Company’s estimate of the fair value of these financial instruments approximates their carrying amounts at May 31, 2016.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the Company is required to classify certain assets based on the fair value hierarchy, which groups fair value-measured assets based upon the following levels of inputs:
·
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
·
Level 2 – Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;
·
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).
The assets maintained by the Company that are required to be measured at fair value on a recurring basis are the Earn-Out Payments associated with the Company’s sale of the CADRA product line. As of May 31, 2016, the maximum amount that could be received by the Company under the Asset Purchase Agreement totaled $223,000. The final Earn-Out Payment will be based on the CADRA revenue generated for the nine month period ended October 31, 2016. The average quarterly CADRA revenue for Mentor’s most recent fiscal year was approximately $500,000.
The following table summarizes the valuation of the Company's assets and liabilities measured at fair value on a recurring basis as of May 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Total
|
|
Quoted prices in active markets (Level 1)
|
|
Significant other observable inputs (Level 2)
|
|
Significant unobservable inputs (Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Earn-Out Payments
|
$
|
130
|
$
|
-
|
$
|
-
|
$
|
130
|
|
Total assets at fair value
|
$
|
130
|
$
|
-
|
$
|
-
|
$
|
130
|
F-12
The following table summarizes the valuation of the Company's assets and liabilities measured at fair value on a recurring basis as of May 31, 2015:
The table below provides a summary of the changes in fair value of the Level 3 classified Holdback Payment and Earn-Out Payments asset for the years ended May 31, 2015 and 2016:
|
|
|
|
|
|
(in thousands)
|
|
Fair value at May 31, 2014
|
$
|
895
|
|
Payments received
|
|
(604)
|
|
Change in fair value
|
|
85
|
|
Fair value at May 31, 2015
|
|
376
|
|
Change in fair value
|
|
(46)
|
|
Payments received
|
|
(200)
|
|
Fair value at May 31, 2016
|
$
|
130
|
The fair value of the Earn-Out Payments expected to be collected within twelve months of the balance sheet date have been classified as current assets and the remainder as non-current assets in the accompanying consolidated balance sheets. The Company has estimated the fair value of the Earn-Out Payments using a discounted cash flow approach. This valuation is based upon several factors including; i) management’s estimate of the amount and timing of future CADRA revenues, ii) the timing of receipt of payments from Mentor, and iii) a discount rate of 7%.
A change in any of these unobservable inputs can significantly change the fair value of the asset. The change in fair value of the Earn-Out Payments recognized in the Consolidated Statements of Operations for the year ended May 31, 2016 and 2015 was approximately $(46,000) and $85,000.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company’s foreign operations (Germany, and Italy) is the Euro. As a result, assets and liabilities are translated at period-end exchange rates and revenues and expenses are translated at the average exchange rates. Adjustments resulting from translation of such financial statements are classified in accumulated other comprehensive income (loss). Foreign currency gains and losses arising from transactions were included in operations in fiscal year 2016 and 2015. In fiscal years 2016 and 2015, the Company recorded a net gain (loss) from foreign currency related transactions of approximately $5,000 and $(114,000), respectively, to Other (income) expense in the Consolidated Statements of Operations.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is a more inclusive reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income (loss). To date, the Company’s comprehensive income and expense items include only foreign translation adjustments. Comprehensive income (loss) has been included in the Consolidated Statements of Comprehensive Loss for all periods.
RESEARCH AND DEVELOPMENT COSTS
The Company expenses all research and development costs as incurred.
F-13
NET INCOME (LOSS) PER COMMON SHARE
For the fiscal years ended May 31, 2016 and 2015, 3,192 and 1,003 respectively, options to purchase shares of common stock were anti-dilutive and were excluded from the basic and diluted earnings per share calculation.
STOCK-BASED COMPENSATION
Stock-based compensation expense for all stock-based payment awards made to employees and directors is measured based on the grant-date fair value of the award. The Company estimated the fair value of each share-based award using the Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates assumptions as to stock price volatility, the expected life of options, a risk-free interest rate and dividend yield. The Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period of the award.
In May 2011, the 2011 Equity Incentive Plan (the “2011 Plan”) was approved by the Company’s shareholders, pursuant to which 150,000 shares of our common shares are reserved for issuance. Any shares subject to any award under the 2011 Plan that expires, is terminated unexercised or is forfeited will be available for awards under the 2011 Plan. The Company may grant stock options, restricted stock, restricted stock units, stock equivalents and awards of shares of common stock that are not subject to restrictions or forfeiture under the 2011 Plan. As of May 31, 2016, 149,500 options were outstanding.
The following table summarizes option activity under the 2011 Stock Option Plan:
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
|
|
Weighted Average Exercise Price Per Share
|
|
Weighted-Average Remaining Life (in years)
|
|
Aggregate Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at May 31, 2014
|
|
129,500
|
|
1.88
|
|
9.74
|
|
20,825
|
|
Granted
|
|
30,000
|
|
1.30
|
|
10.00
|
|
-
|
|
Exercised
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Forfeited or expired
|
|
(12,500)
|
|
1.84
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at May 31, 2015
|
|
147,000
|
|
1.77
|
|
8.54
|
|
2,625
|
|
Granted
|
|
2,500
|
|
1.00
|
|
10.00
|
|
-
|
|
Exercised
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Forfeited or expired
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at May 31, 2016
|
|
149,500
|
$
|
1.75
|
|
7.56
|
$
|
4,325
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at May 31, 2016
|
|
143,653
|
$
|
1.77
|
|
7.53
|
$
|
4,269
|
The Company determined the volatility for options granted during the fiscal year ended May 31, 2016 and 2015 using the historical volatility of the Company’s common stock. The expected life of options has been determined utilizing the “simplified” method as prescribed in ASC 718
Compensation, Stock Compensation
. The expected life represents an estimate of the time options are expected to remain outstanding. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. The Company has not paid, and does not anticipate paying, cash dividends on its common stock; therefore, the expected dividend yield is assumed to be zero.
The weighted-average fair value of each option granted in the fiscal year ended May 31, 2016 was estimated to be $1.10 on the date of grant using the Black-Scholes model with the following weighted average assumptions:
Expected life 5.00 years
Assumed annual dividend growth rate 0%
Expected volatility 133%
Risk free interest rate 1.63%
For the years ended May 31, 2016 and 2015, the Company expensed approximately $108,000 and $115,000, respectively, of stock-based compensation. Unamortized stock based compensation as of May 31, 2016 was approximately $7,000.
F-14
REDEEMABLE COMMON STOCK
During the year ended May 31, 2013, the Company issued 50,000 shares of common stock, $0.10 par value (the “Common Stock”), at a purchase price of $5.00 per share to accredited investors (collectively, the “Investors”) in separate private placement transactions for total proceeds of $250,000. These transactions were completed pursuant to a Securities Purchase Agreement (the “Agreement”) which the Company entered into with each of the respective Investors. In lieu of registration rights, each $25,000 investment entitled the Investors to a fee of $6,000 (the “Fee”) to be paid in six equal quarterly installments during the eighteen month period following the investment. The Agreement also provided the Investors with the right to require the Company to redeem the Common Stock held by such Investors (the “Put Option”) for $5.50 per share in cash for a 30 day period ending between June 1, 2014 and June 30, 2014. Each of the Investors exercised their Put Option and the Common Stock was repurchased by the Company at the agreed upon Put Option price of $5.50 per share for a total of $275,000 during the first quarter of fiscal 2015.
During the fiscal quarter ended August 31, 2014, in a transaction structured in a similar fashion to the above described Agreement, the Company issued 110,000 shares of the Common Stock at a purchase price of $5.00 per share to Joseph P. Daly, an accredited investor and existing Company shareholder, in a private placement transaction for total proceeds of $550,000. This transaction was completed pursuant to a securities purchase agreement whereby Mr. Daly shall have the right to require the Company to repurchase some or all of the shares at $7.00 per share during the ninety (90) day period immediately following the three-year anniversary of the transaction. Upon completion of the transaction, the 110,000 shares of Common Stock issued pursuant to the security purchase agreement were recorded as redeemable common stock at its redemption value of $770,000 and accretion of $220,000 was recorded to additional paid in capital. In the event whereby the Company is unable to honor the agreement to repurchase the shares, in whole or in-part, the unpaid portion would revert into a loan obligation secured by all of the Company’s assets and bearing an annual interest rate of 20%.
During the fiscal quarter ended November 30, 2014, the Company issued an additional 60,000 shares of the Common Stock at a purchase price of $5.00 per share to four accredited investors (collectively, the “New Investors”) in private placement transactions for total proceeds of $300,000. These transactions were completed pursuant to Securities Purchase Agreements (the “New Agreements”) entered into with each of the respective New Investors. In lieu of registration rights, each $50,000 investment entitles the New Investors to a fee (the “New Investors’ Fees”) of $5,000 to be paid in eight equal quarterly installments during the twenty-four month period (the “Payment Period”) following the investment. The New Agreements also provide the New Investors with the right to require the Company to redeem the Common Stock held by such New Investors for $7.00 per share in cash for a 30 day period following the Payment Period. Upon completion of these transactions, the 60,000 shares of Common Stock issued pursuant to the New Agreements were recorded as redeemable common stock at its redemption value of $420,000 and accretion of $120,000 was recorded to additional paid in capital.
During the fiscal quarter ended November 30, 2015, the Company issued an additional 10,000 shares of the Common Stock at a purchase price of $5.00 per share to an accredited investor in private placement transactions for total proceeds of $50,000. This transaction was completed pursuant to a Securities Purchase Agreement entered into with the investor. In lieu of registration rights, the investor is entitled to a fee of $5,000 to be paid in eight equal quarterly installments during the twenty-four month period (the “Payment Period”) following the investment. The Securities Purchase Agreement also provides the investor with the right to require the Company to redeem the Common Stock held by such investor for $7.00 per share in cash for a 30 day period following the Payment Period. Upon completion of this transaction, the 10,000 shares of Common Stock issued pursuant to the Securities Purchase Agreement was recorded as redeemable common stock at its redemption value of $70,000 and accretion of $20,000 was recorded to additional paid in capital.
As of May 31, 2016, the redeemable common stockholders of the Company have the right to redeem shares with an aggregate redemption value of $420,000 within twelve months of the balance sheet date.
The Company first assessed the redeemable Common Stock to determine whether each of these instruments should be accounted for as a liability in accordance with ASC 480,
Distinguishing Liabilities from Equity
. In that the put option is optionally redeemable by the holder, the Common Stock was not required to be accounted for as a liability. Next, the Company assessed each put option within the redeemable Common Stock as a potential embedded derivative pursuant to the provisions of ASC 815,
Derivatives and Hedging,
and concluded that the put option did not meet the net settlement criteria within the definition of a derivative. Therefore, the Company has accounted for the redeemable Common Stock in accordance with ASC 480-10-S99,
Classification and Measurement of Redeemable Securities
, which provides that securities that are optionally redeemable by the holder for cash or other assets are classified outside of permanent equity in temporary equity.
F-15
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016, the FASB issued
ASU No. 2016-02, “Leases”. This ASU requires entities to recognize right-to-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. We are currently evaluating the potential
impact this standard will have on our financial statements and related disclosure.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting”, This ASU simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years.
We are currently evaluating the method of adoption and the potential impact this standard will have on our financial statements and related disclosure.
In May 2015, the FASB issued ASU No. 2015-08, "Business Combinations (Topic 805): Pushdown Accounting – Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115." The amendments in this ASU amend various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115, Topic 5: Miscellaneous Accounting, regarding various pushdown accounting issues, and did not have a material impact on the Company's consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement." The amendments in this ASU provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments do not change the accounting for a customer's accounting for service contracts. As a result of the amendments, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. The amendments in this ASU are effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. An entity can elect to adopt the amendments either: (1) prospectively to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. The Company is currently assessing the impact that ASU 2015-05 will have on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, "Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." The amendments in this ASU are intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments in this ASU are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company does not expect the adoption of ASU 2015-03 to have a material impact on its consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis." The amendments in this ASU are intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification and improves current GAAP by placing more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity ("VIE"), and changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. ASU 2015-02 may be applied retrospectively in previously issued financial statements for one or more years with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated. The Company does not expect the adoption of ASU 2015-02 to have a material impact on its consolidated financial statements.
F-16
Accounting Standards Update (ASU) 2014-16, “Derivatives and Hedging (Topic 815) – Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity” was issued by the FASB in November 2014. The primary purpose of the ASU is to eliminate the use of different methods in practice and thereby reduce existing diversity under GAAP in the accounting for hybrid financial instruments issued in the form of a share. ASU 2014-16 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company does not believe that this guidance will have a material impact on its consolidated results of operations or financial position or disclosures.
Accounting Standards Update (ASU) 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to ‘Continue as a Going Concern” was issued by the FASB in August 2014. The primary purpose of the ASU is to provide guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments should reduce diversity in the timing and content of footnote disclosure. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for the annual periods and interim periods thereafter. Early adoption is permitted. The Company is in the process of evaluating if this guidance will have a material impact on its consolidated results of operations or financial position or disclosures.
ASU 2014-12, “Compensation-Stock Compensation (Topic 718) – Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” was issued by the FASB in June 2014. ASU 2014-12 requires that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. ASU 2014-12 is effective for public business entities for annual periods and interim periods within the annual periods beginning after December 15, 2015. Early adoption is permitted. The Company does not believe this guidance will have a material impact on its consolidated results of operations or financial position.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, (Topic 606). The ASU is the result of a joint project by the FASB and the International Accounting Standards Board (“IASB”) to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”) that would: remove inconsistencies and weaknesses, provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices across entities, jurisdictions, industries, and capital markets, improve disclosure requirements and resulting financial statements, and simplify the presentation of financial statements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU is effective for annual and interim reporting periods beginning after December 15, 2017, based on ASU 2015-14
.
Early application is permitted but not before the original effective date of December 15, 2016. The Company is currently assessing the impact of this guidance.
C. INCOME TAXES
The provision for income taxes includes the following for the years ended May 31 (in thousands):
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Federal
|
$
|
-
|
$
|
-
|
|
Foreign
|
|
-
|
|
-
|
|
State and local
|
|
2
|
|
2
|
|
Total current provision
|
|
2
|
|
2
|
|
Deferred provision
|
|
27
|
|
85
|
|
Valuation allowance
|
|
(27)
|
|
(85)
|
|
Total deferred provision
|
|
-
|
|
-
|
|
Total provision
|
$
|
2
|
$
|
2
|
The domestic and foreign components of income (loss) before income taxes were as follows for the years ended May 31 (in thousands):
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Domestic
|
$
|
(503)
|
$
|
(975)
|
|
Foreign
|
|
(168)
|
|
(342)
|
|
|
$
|
(671)
|
$
|
(1,317)
|
F-17
At May 31, 2016, the Company had Federal net operating loss carryforwards of $22 million that begin expiring in 2022, and are available to reduce future taxable income. The utilization of the remaining net operating loss carryforwards may be subject to limitation based on past and future changes in ownership of the Company pursuant to Internal Revenue Code Section 382. The Company also has an alternative minimum tax credit of approximately $200,000 that has no expiration date that was available as of May 31, 2016.
The Company’s effective income tax rates can be reconciled to the federal and state statutory income tax rate for the years ended May 31 as follows:
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Federal statutory rate
|
|
34%
|
|
34%
|
|
State
|
|
-
|
|
-
|
|
Foreign
|
|
-
|
|
-
|
|
Permanent items
|
|
-
|
|
-
|
|
Valuation reserve
|
|
(34)
|
|
(34)
|
|
Effective tax rate
|
|
-
%
|
|
-
%
|
Deferred tax assets (liabilities) were comprised of the following at May 31 (in thousands):
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Deferred tax assets
|
|
|
|
|
|
Net operating loss carryforwards
|
$
|
7,597
|
$
|
7,498
|
|
Tax credit carryforwards
|
|
254
|
|
254
|
|
Receivables allowances
|
|
7
|
|
7
|
|
Vacation pay accrual
|
|
5
|
|
4
|
|
Depreciation
|
|
42
|
|
35
|
|
Differences in book and tax basis of assets of acquired businesses
|
|
(191)
|
|
(56)
|
|
Total gross deferred tax assets
|
|
7,714
|
|
7,742
|
|
Valuation allowance
|
|
(7,714)
|
|
(7,742)
|
|
Net deferred tax asset
|
$
|
-
|
$
|
-
|
Due to the uncertainties regarding the realization of certain favorable tax attributes in future tax returns, the Company has established a valuation reserve against the otherwise recognizable net deferred tax assets.
D. EMPLOYEE RETIREMENT PLANS
The Company has an Internal Revenue Code Section 401(k) plan covering substantially all U.S. based employees and offers an employer match of a portion of an employee’s voluntary contributions. The aggregate expense related to this employer match for fiscal years 2016 and 2015 was approximately $31,000 and $52,000, respectively.
F-18
E
.
GEOGRAPHICAL INFORMATION
The Company operates in one reportable segment and is engaged in the development, marketing, distribution and/or support of computer aided design and product data management and collaboration computer solutions. The Company’s operations are organized geographically with offices in the U.S. and foreign offices in Germany and Italy. Components of revenue and long-lived assets (consisting primarily of intangible assets, capitalized software and property, plant and equipment) by geographic location, are as follows (in thousands):
|
|
|
|
|
|
|
|
Years Ended
|
|
Revenue:
|
|
May 31, 2016
|
|
May 31, 2015
|
|
North America
|
$
|
3,311
|
$
|
3,223
|
|
Asia
|
|
12
|
|
7
|
|
Europe
|
|
919
|
|
767
|
|
Eliminations
|
|
(66)
|
|
(55)
|
|
Consolidated Total
|
$
|
4,176
|
$
|
3,942
|
|
|
|
|
|
|
Long-Lived Assets:
|
|
As of May 31, 2016
|
|
As of May 31, 2015
|
|
North America
|
$
|
2,086
|
$
|
1,797
|
|
Europe
|
|
40
|
|
41
|
|
Consolidated Total
|
$
|
2,126
|
$
|
1,838
|
F. DEBT
ESSIGPR
On June 20, 2014, the Company entered into a promissory note agreement (the “Note”) with EssigPR, Inc. (“EssigPR”), a Puerto Rico corporation and related party of the Company. The Note is a three (3) year borrowing arrangement with EssigPR as the lender. The Note is a $750,000 term loan maturing on April 1, 2017, that accrues interest at a 9.5% interest rate, paid quarterly in arrears. The principal on the Note was to be paid from the deferred payments (Holdback Payment and Earn-Out Payments) due over the next three years from Mentor in connection with their purchase of the CADRA product line.
On October 1, 2014, the Company entered into an additional short term borrowing arrangement with EssigPR (“Short Term Note”) whereby it was agreed that the Company would retain $300,000 of the Holdback Payment due from Mentor in October 2014 rather than utilize those monies to pay down the above described Note. The interest rate on the Short Term Note is 9.5%, payable quarterly in arrears. The Short Term Note can be repaid at any time without penalty and was due in full on April 10, 2015. EssigPR was awarded 5,000 fully vested stock options to purchase SofTech common stock at $1.00 per share. The stock options will expire on October 1, 2024 if not exercised. The Short Term Note arrangement did not increase the total principal amount of debt owed to EssigPR. Rather, the arrangement had the effect of establishing new payoff terms for that portion of the debt owed to EssigPR under the Note.
On April 2, 2015, the Short Term Note was amended to extend the due date by three months from April 10, 2015 to July 10, 2015. EssigPR was awarded 2,500 fully vested stock options to purchase SofTech common stock at $1.00 per share. The stock options will expire on April 2, 2025 if not exercised.
During the three months ended August 31, 2015, the Short Term Note was amended to extend the due date to October 10, 2015 and to increase the borrowings by $200,000 in exchange for 2,500 fully vested stock options to purchase SofTech common stock at $1.00 per share. The stock options will expire on July 15, 2025 if not exercised.
During the three months ended November 30, 2015, the Short Term Note was amended to extend the due date to January 10, 2016 and to increase the borrowings by $254,000.
On January 8, 2016, the Short Term Note was amended to extend the due date to April 10, 2016.
On April 11, 2016, the Short Term Note was amended to extend the due date to July 10, 2016.
On August 12, 2016, the Short Term Note was amended to increase the borrowings by $250,000, to extend the due date to October 10, 2016 and to increase the collateral to include the PLM product lines.
F-19
The following summary details the changes in principal amount owed under each of the debt agreements with Essig (in thousands):
|
|
|
|
|
|
|
|
|
|
Note
|
|
Short Term Note
|
|
Total
|
|
Balance at May 31, 2014
|
$
|
-
|
$
|
-
|
$
|
-
|
|
Borrowings
|
|
450
|
|
300
|
|
750
|
|
Repayments
|
|
(304)
|
|
-
|
|
(304)
|
|
Balance at May 31, 2015
|
|
146
|
|
300
|
|
446
|
|
Borrowing
|
|
-
|
|
578
|
|
578
|
|
Repayments
|
|
-
|
|
(124)
|
|
(124)
|
|
Balance at May 31, 2016
|
|
146
|
|
754
|
|
900
|
Interest expense was approximately $76,000 and $62,000 in fiscal years 2016 and 2015, respectively.
On the occurrence and continuance of an event of default under the Note that is not cured after written notice from EssigPR, all or any part of the indebtedness under the Note may become immediately due at the option of EssigPR. Under the Note, events of default are (1) a default in the payment of any money owed by the Company to EssigPR under the Note or in any other transaction or (2) a default in the Company’s performance of any obligation to EssigPR under the Note or any other agreement between the two parties, whether such agreement is presently existing or entered into in the future. If the Company dissolves, becomes insolvent, or makes an assignment for the benefit of creditors, all such indebtedness under the Note shall become automatically due and payable.
EssigPR is owned by Joseph P. Daly, a related party of the Company whose beneficial ownership was approximately 19.4% of the Company’s outstanding common stock as of May 31, 2016.
SHORT TERM ADVANCES FROM RELATED PARTIES
Robert Anthonyson, an Officer, Director and beneficial owner of 19.9% of the Company’s outstanding common stock as of May 31, 2016, loaned the Company $50,000 on July 29, 2015 which was repaid to Mr. Anthonyson during the second quarter of fiscal year 2016. Joseph Mullaney, an Officer, Director and beneficial owner of 11.7% of the Company’s outstanding common stock as of May 31, 2016, loaned the Company $19,300 on September 1, 2015 which was repaid during the second quarter of fiscal year 2016. There was no interest charged on these short term advances.
BLUEVINE
In September 2015, the Company arranged for a credit line of up to $80,000 with BlueVine Capital, Inc. (“BlueVine”). The borrowing arrangement with BlueVine as the lender allows the Company to receive an advance of 85% of the total value of specified invoices. During the fiscal year ended May 31, 2016, the Company received advances totaling approximately $55,000 against seven invoices from one customer. As of May 31, 2016 there were no outstanding borrowings under this debt facility.
PRIDES CROSSING CAPITAL
Prior to May 31, 2015, the Company had outstanding amounts owed under a former loan agreement with Prides Crossing Capital, L.P. and Prides Crossing Capital-A, L.P. (the “Lenders”). During the fiscal year ended May 31, 2015, the outstanding balance of $1,000,000 was paid in full and the agreement with the Lenders was terminated.
G. LEASE COMMITMENTS
OPERATING LEASES
The Company conducts its operations in office facilities leased through December 2018. Rental expense for both fiscal years 2016 and 2015 was approximately $152,000.
At May 31, 2016, minimum annual rental commitments under noncancellable leases were as follows (in thousands):
|
|
|
|
2017
|
$
|
110
|
|
2018
|
|
133
|
|
2019
|
|
77
|
|
Total future minimum lease commitments
|
$
|
320
|
F-20
CAPITAL LEASES
In fiscal years 2010, 2013, 2014 and 2016, the Company acquired capital equipment through capital lease agreements with financial institutions for terms of 48, 50 and 60 months, with a $1 purchase option. The assets are amortized over the life of the related lease or the asset if shorter and amortization of the assets is included in depreciation expense for fiscal years 2016 and 2015. The related leased assets had a cost basis of approximately $108,000 and $77,000, and accumulated depreciation of approximately $(69,000) and $(50,000) as of May 31, 2016 and 2015, respectively. Minimum annual future lease payments under the capital lease as of May 31, 2016 are as follows (in thousands):
|
|
|
|
2017
|
$
|
35
|
|
2018
|
|
26
|
|
2019
|
|
17
|
|
2020
|
|
11
|
|
2021
|
|
2
|
|
|
|
|
|
Minimum lease payment
|
|
91
|
|
Amount representing interest
|
|
(28)
|
|
|
|
|
|
Present value of minimum lease payments
|
$
|
63
|
|
|
|
|
|
Current
|
$
|
24
|
|
Long Term
|
$
|
39
|
H. NOTE RECEIVABLE, RELATED PARTY
Joseph Mullaney, the Company’s CEO, was extended a non-interest bearing note in the amount of $134,000 related to a stock transaction in May 1998. The note is partially secured by the Company stock acquired in that transaction.
I. SUBSEQUENT EVENTS
The Company has evaluated all events and transactions that occurred after the balance sheet and through the date that the financial statements were issued.
On August 12, 2016, the Company amended its Short Term Note with Essig to increase the maximum borrowings by $250,000, to extend the due date to October 10, 2016 and to increase the collateral to include the tangible and intangible assets of the PLM product lines. It is contemplated that this Short Term Note would be repaid in full upon completion of the transaction described below.
On August 23, 2016, we entered into an Asset Purchase Agreement pursuant to which we agreed to sell our ProductCenter and Connector product lines to Essig for a total of $3.25 million plus contingent payments based on revenue targets for the two twelve-month periods immediately following the transaction date. Essig is an affiliate of EssigPR, Inc., which is owned by Joseph P. Daly, an affiliate of the Company whose beneficial ownership was approximately 19.4% of the Company’s outstanding common stock as of August 24, 2016. The assets to be acquired by Essig include the properties and assets used exclusively in the PLM operations which is composed of the ProducCenter and Connector product lines. Essig will assume the contractual liabilities associated with maintenance and subscription support services. Specifically excluded from the sale and retained by SofTech are cash, billed accounts receivable and all remaining assets and liabilities not specifically identified, including the operations of SofTech Srl and HomeView. Approximately $1.15 million of indebtedness as of August 24, 2016 owed by the Company to Essig under existing debt agreements would be repaid as part of this transaction, thereby reducing the cash paid to the Company at the closing. In addition, at the closing of the transaction, the Company has agreed to repurchase from Mr. Daly 110,000 shares of its common stock at approximately $6.50 per share. These shares are currently subject to a $7.00 put right that, absent such repurchase, would have been exercisable by Mr. Daly in fiscal 2018. The closing of the PLM Sale, which is subject to approval by the SofTech shareholders and the satisfaction of other customary closing conditions (including a holdback of a portion of the purchase price to secure any indemnification claims arising under the Asset Purchase Agreement), is expected to occur by October 2016. The transaction is not subject to any financing condition.
F-21
