SOFT SofTech Inc (CE)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

   X . QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2016

        . TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________ to ___________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  X . No       .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  X . No       .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes       . No  X .

The number of shares outstanding of registrant’s common stock at January 10, 2017 was 753,724 shares.

SOFTECH, INC.

INDEX

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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 period from May 31, 2014 through November 30, 2016:

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%. The estimated fair value at November 30, 2016 is based on the actual amount due from Mentor on or before April 1, 2017.

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 three and six month periods ended November 30, 2016 and 2015 was approximately $(5,000) and $(5,000), and $(61,000) and $(51,000), respectively.

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FOREIGN CURRENCY TRANSLATION

The functional currency of the Company’s foreign operations (primarily 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). There were no foreign currency gains (losses) arising from transactions that were included in operations (Other expense, net in the Consolidated Statement of Operations) in three and six month periods ended November 30, 2016. In the three and six month periods ended November 30, 2015 we recorded foreign currency losses of $23,000 and $16,000, respectively.

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 Income (Loss) for all periods.

RESEARCH AND DEVELOPMENT COSTS

The Company expenses all research and development costs as incurred.

NET INCOME (LOSS) PER COMMON SHARE

For the three and six month periods ended November 30, 2016, dilutive stock options added 638 and 1,123 additional common shares, respectively, to the basic weighted average shares outstanding calculation. For the three and six month periods ended November 30, 2015, 1,619 and 619, respectively, common shares related to stock options 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 November 30, 2016, 147,000 options were outstanding.

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The following table summarizes option activity under the 2011 Stock Option Plan:

The Company determined the volatility for options granted during the fiscal year ended May 31, 2016 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 three and six month periods ended November 30, 2016 the Company expensed approximately $2,000 and $3,000, respectively, of stock-based compensation as compared to $28,000 and $58,000 for the same periods in the prior fiscal year. Unamortized stock based compensation as of November 30, 2016 was approximately $3,000.

The 2011 Plan allows employees with stock options up to ninety days to exercise their options following their separation from the Company. For those employees that were offered employment by Essig in connection with the PLM Sale, we allowed them to continue to hold their stock options (all were fully vested at the transaction date) through the expiration date as if their employment with the Company had not ended conditioned on their acceptance of the employment offer and to the extent their employment continued. This change was made to encourage continued cooperation from that group in the development and launch of the HomeView technology subsequent to the completion of the transaction. As part of the transaction, the Company and Essig entered into an arrangement whereby employee resources shall be made available for at least a two year period following the completion of the transaction. In that these former employees will continue to provide services as needed for the ongoing benefit of the Company, the waiving of the ninety day exercise was deemed immaterial.

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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%. These 110,000 shares were repurchased by the Company on October 14, 2016 in connection with the PLM Sale at a discounted price of $722,700 or $6.57 per share.

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 quarter ended November 30, 2016, the New Investors exercised their repurchase rights. Three of the New Investors submitted their 40,000 shares they owned and the Company repurchased them for the agreed upon price of $280,000. The fourth New Investor agreed to submit his 20,000 shares for repurchase on April 1, 2017 in exchange for an additional payment of $10,000.

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 November 30, 2016, the redeemable common stockholders of the Company have the right to redeem shares with an aggregate redemption value of $210,000 within twelve months of the balance sheet date.

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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.

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.

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.

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.

In March 2016, the FASB issued ASU 2016-08, amending the new revenue recognition standard that it issued jointly with the IASB in 2014 - Revenue from Contracts with Customers , (Topic 606). The amendments in this ASU provide more detailed guidance to clarify certain aspects of the principal-versus-agent guidance in the original ASU. 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.

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In April 2016, the FASB issued ASU 2016-10, amending the new revenue recognition standard that it issued jointly with the IASB in 2014 - Revenue from Contracts with Customers , (Topic 606). The amendments in this ASU provide more detailed guidance, including additional implementation guidance and examples in the key areas of 1) identifying performance obligations and 2) licenses of intellectual property. 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. GEOGRAPHICAL INFORMATION

The Company operates in one reportable segment and is engaged in the development, marketing, distribution and 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 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):

D. 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.

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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.

On August 30, 2016, the Short Term Note was amended to increase the borrowings by $100,000.

The following summary details the changes in principal amount owed under each of the debt agreements with Essig (in thousands):

As detailed above, the total debt outstanding under the Note and the Short Term Note were fully satisfied upon completion of the PLM Sale on October 14, 2016 as described above.

SHORT TERM NOTE WITH RELATED PARTIES

Robert Anthonyson, an Officer, Director and beneficial owner of 19.9% of Company common shares as of November 30, 2016, loaned the Company $50,000 on July 29, 2015 which was repaid to Mr. Anthonyson in the second quarter of fiscal 2016. Joseph Mullaney, an Officer, Director and beneficial owner of 11.7% of Company common shares as of November 30, 2016, loaned the Company $19,300 on September 1, 2015 of which was repaid to Mr. Mullaney in the second quarter of fiscal year 2016. There was no interest charged on these short term advances.

E. 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.

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F. PLM SALE

On October 14, 2016, the Company sold substantially all of the assets of its ProductCenter and Connector technologies, including all intellectual property related to those technologies but specifically excluding cash, billed accounts receivable and liabilities other than the deferred maintenance and subscription liabilities associated with customer maintenance and subscription contracts for support services, to Essig. The Company recorded a gain on the PLM Sale of approximately $2.8 million. The gain was composed of the $3.25 million purchase price and the assumption by the buyer of approximately $1.0 million in support service obligations. This was partially offset by the assets sold in the transaction, the non-cash expenses related to goodwill that were written-off and transaction related expenses all of which in the aggregate totaled approximately $1.5 million. Intangible assets related to goodwill and capitalized software totaled approximately $949,000 of the $1.5 million. The proceeds from the PLM Sale were used to fully repay the outstanding debt under the Note and the Short Term Note of $1.25 million and to repurchase 110,000 common shares for approximately $722,700 that were subject to a put arrangement. Joseph Daly, Essig’s owner, is a related party.

The Company is due contingent payments based on the revenue generated by the PLM product lines for the two twelve month periods immediately following the completion of the transaction without regard to purchase accounting adjustments required under Generally Accepted Accounting Principles. The contingent payments will only be due if the revenue in the first twelve month period exceeds $3.2 million or if the revenue for the second twelve month period exceeds $3.75 million. If the revenue thresholds are met or exceeded in either period, the Company will earn a contingent payment of $75,000 plus 12.5% of the amount in excess of the revenue threshold plus $75,000. In that the revenue in each period cannot be reasonably estimated to exceed those minimal thresholds, the Company has determined that the fair value of the contingent payments due is zero. If the actual revenue for the PLM product lines exceeds the minimal threshold and contingent payments are earned, the Company will record such amounts due when the amounts are known.    

The Company has agreed to indemnify Essig for losses incurred by them resulting from (a) any inaccuracy of any of the Company’s representations or warranties in the Asset Purchase Agreement or any breach or non-fulfillment by the Company of any covenants, agreements or other obligations contained in the Asset Purchase Agreement; (b) any liability of the PLM business not assumed by Essig in the transaction; or (c) the Company’s pre-closing operations of the PLM business. The Company is not obligated to indemnify Essig for any losses unless they exceed $75,000, and then only to the extent such losses exceed $75,000. Except with respect to Excluded Liabilities, for which the Company’s indemnification obligation is not capped, the Company’s maximum aggregate liability under the Asset Purchase Agreement is $3.25 million. The Company’s indemnification obligations under the Asset Purchase Agreement with respect to breaches of representations and warranties survive for two years from the closing date of October 14, 2016 except for tax-related representations and warranties that survive until the expiration of the applicable statute of limitations. An escrow account of $162,500 has been established as part of the transaction to cover indemnification claims. This escrow cash account is included on the Company’s balance sheet under Other Assets. The escrow cash account is payable to the Company on October 14, 2018 subject to any claims for indemnification by Essig.

G. 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 available to be issued.

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The table below presents the comparative statements of operations for the six month periods ended November 30, 2016 and November 30, 2015 along with the dollar and percentage change amounts for each revenue and expense item (expressed in thousands, except percentages):

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The table below presents the relationship, expressed as a percentage, between income and expense items and total revenue, for the three month periods ended November 30, 2016 and November 30, 2015:

The table below presents the relationship, expressed as a percentage, between income and expense items and total revenue, for the six month periods ended November 30, 2016 and November 30, 2015:

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Overall, the revenue declines detailed above for the ProductCenter and Connector technologies are consistent with the fact that those product lines were sold half way through the second quarter of fiscal 2017. The CADRA revenue decline was due to a continued deterioration in activity for that product line due to its age which we anticipate will continue. The decline in third party revenue was due to a large contract with our largest European customer that was ultimately concluded in the current quarter. Service revenue generated from this project slowed over the two most recent quarters as the initial project concluded.

The following table summarizes total revenue by product line for the six month periods ended November 30, 2016 and November 30, 2015 (in thousands, except percentages):

The revenue declines detailed above for the six months ended November 30, 2016 as compared to the same period in the prior fiscal year for the ProductCenter, Connector and other third party products are for the same reasons cited for the quarter to quarter change above. The increase in CADRA revenue was due to a late maintenance renewal received in the first quarter of fiscal 2017 that allowed for the billing of maintenance services that had already been performed.

The product line revenue is further broken down by revenue type hereunder with explanations for changes in the three and six month periods ended November 30, 2016 as compared to the same periods in the prior fiscal year.

ProductCenter product revenue for the six weeks of the current fiscal quarter prior to the PLM Sale was zero. In the comparable quarter of the prior fiscal year we received several significant expansion orders from existing ProductCenter customers. We believe product revenue activity may have been negatively impacted by the announcement of the PLM Sale on August 24, 2016 through the transaction date as customers delayed purchase decisions until after the transaction.

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The table below details product revenue by product line for the six month periods ended November 30, 2016 and 2015 (in thousands, except percentages):

ProductCenter product revenue for the first quarter of the fiscal year was also below the quarterly run rate. When combined with the cessation of new activity from the PLM Sale announcement, the fiscal 2017 activity was well below expectations and recent product revenue trends for that product line. Minor increases in product revenue from the products we continue to offer through SofTech, Srl, namely CADRA and third party products, improved slightly although the amounts were negligible.

The decline in service revenue detailed above for the PLM Business was the direct result of the completion of the PLM Sale half way through the current quarter. Service revenue is generated from ongoing maintenance and subscription contracts and consulting projects that were not impacted by the announcement of the PLM Sale in the same way product revenue was impacted. Customers continued to renew their maintenance and subscription orders prior to the expiration at renewal rates comparable to recent renewal rates. The revenue declines for ProductCenter and Connector detailed above are simply the result of only earning half of the quarter’s maintenance and subscription revenue under these arrangements for the quarter ended November 30, 2016. Similarly, consulting revenue is earned as consulting services are performed so the current quarter consulting revenue is for six weeks as compared to twelve weeks in the prior year. The CADRA service revenue decline was due to the general deterioration of this aging technology. The third party service revenue decline was due to the completion of a consulting project at our largest European customer.

The table below summarizes service revenue by product line for the six months ended November 30, 2016 and 2015, (in thousands, except percentages):

Maintenance and subscription revenue was approximately $405,000 and $1,087,000 for the three and six month periods ended November 30, 2016, as compared to $657,000 and $1,304,000 for the same period in the prior fiscal year. Consulting revenue for the three and six months ended November 30, 2016 was $201,000 and $385,000 as compared to $293,000 and $573,000 for the comparable periods in the prior year. The most significant factor in the three and six month changes in revenue was the PLM Sale at the mid-point of the second quarter of fiscal 2017.

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Gross Margin

Gross margin as a percentage of revenue was 63.1% and 62.1% for the three and six month periods ended November 30, 2016, respectively, as compared to 66.0% and 62.8% in the same periods in the prior fiscal year. Gross margin on product revenue was 32.3% and 37.6% for the three and six months ended November 30, 2016, respectively, as compared to 95.2% and 88.7% for the same periods in the prior fiscal year. Gross margin on service revenue was 64.7% and 63.4% for the three and six months ended November 30, 2016, respectively, as compared to 55.2% and 57.2% for the same periods in the prior fiscal year.

Product revenue in fiscal 2017 was primarily composed of technologies we distribute on behalf of third party technology providers. Generally we offer these solutions at margins between 30% and 40%. The product revenue in fiscal 2016 was composed primarily of our own technology which carries gross margins of about 95%.

Gross margin on service revenue increased in fiscal 2017 as compared to the prior fiscal year because our consulting revenue in the prior fiscal year included services we subcontracted to domain experts for a significant project. The gross margin on this subcontracted work was about 15% which reduced our overall gross margin on service revenue during the project. That subcontract work diminished in fiscal 2017 relative to the prior fiscal year.

Research and Development Expenses

Research and development expenses were approximately $74,000 and $205,000 for the three and six month periods ended November 30, 2016, respectively, as compared to approximately $137,000 and $291,000 in the comparable periods in the prior fiscal year. During the three and six month period ended November 30, 2016 approximately $133,000 and $217,000 of software development costs related to the development of new products were capitalized. During the three and six month period ended November 30, 2015, approximately $113,000 and $231,000 of software development costs related to the development of new products were capitalized.

The decline in research and development expenses in the three and six month periods ended November 30, 2016 as compared to the same period in the prior fiscal year is due entirely to the PLM Sale at the mid-point of the second quarter of fiscal year 2017.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses were approximately $540,000 and $1,136,000 for the three and six month periods ended November 30, 2016, respectively, as compared to approximately $634,000 and $1,233,000 for the comparable periods in the prior fiscal year.

Gain on sale of product line

During the quarter ended November 30, 2016, the Company completed the PLM Sale and recorded a gain of approximately $2.8 million. The gain was composed of the $3.25 million purchase price and the assumption by the buyer of approximately $1.0 million in support services obligations. This was partially offset by the assets sold in the transaction, the non-cash expenses related to goodwill that were written off and transaction related expenses which in the aggregate totaled approximately $1.5 million.

The Company has determined that the two additional contingent payments have a fair value of zero as of November 30, 2016 because the PLM Revenue for those periods cannot be reasonably estimated to exceed the minimum threshold required to earn a contingent payment in either period. If the actual revenue for PLM product lines exceeds the minimal threshold and contingent payments are earned, the Company will record such amounts due when the amounts are known.

Interest Expense

Interest expense for the three and six month periods ended November 30, 2016 was approximately $16,000 and $42,000, respectively, as compared to approximately $28,000 and $41,000, for the comparable periods in the prior fiscal year. The payoff of all outstanding debt upon completion of the PLM Sale accounts for the decline in interest expense for the three month period ended November 30, 2016 as compared to the same period in the prior fiscal year. The Company had increased its borrowing during the first quarter of fiscal 2017 to meet its working capital requirements.  

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Net Income (Loss)

The net income for the three and six month periods ended November 30, 2016 was approximately $2,576,000 and $2,393,000 or $3.10 and $2.76 per share, respectively, as compared to net losses of approximately ($22,000) and ($196,000) or ($0.02) and ($.22) per share for the comparable periods in the prior fiscal year. The Company repurchased 150,000 shares that were subject to a put arrangement during the current fiscal quarter which reduced the weighted average shares outstanding.

Liquidity and Capital Resources

During the six month period ended November 30, 2016 the net cash used in operating activities totaled approximately $635,000 as compared to approximately $514,000 in the comparable prior period. Net income for the first six months of the current fiscal year adjusted for non-cash expenditures and the substantial gain from the PLM Sale used approximately $391,000 as compared to approximately $22,000 in the comparable prior period. The net change in current assets and liabilities used $244,000 during the six month period ended November 30, 2016 composed primarily of a reduction in the deferred maintenance liability partially offset by an increase in accounts payable and accrued expenses.

Net cash provided by investing activities for the six months ended November 30, 2016 was approximately $2.7 million composed of cash proceeds from the PLM Sale of $2.9 million partially offset by capitalized software development costs of $217,000. In the same period in the prior fiscal year, investing activities used $253,000 primarily composed on capitalized software development costs.

Net cash used by financing activities for the six months ended November 30, 2016 totaled approximately $1.9 million composed primarily of the repurchase of 150,000 shares under Repurchase Agreement for an aggregate amount of $1,003,000 and the repayment of outstanding debt of $1.25 million in connection with the completion of the PLM Sale. During the six month period ended November 30, 2016 the Company had borrowed $350,000 under the debt facility that was ultimately repaid. During the six month period ended November 30, 2015, financing activities provided cash of $523,000 primarily related to borrowings under debt agreements and the issuance of 10,000 shares in exchange for $50,000.

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 and a related party of the Company, as the lender. 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 was to be repaid 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.

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.

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.

On July 15, 2015, the Short Term Note was amended again to extend the due date by three months from July 10, 2015 to October 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 July 15, 2025 if not exercised.

On August 3, 2015, the Short Term Note was amended again to increase the borrowings from $300,000 to $500,000.

On October 16, 2015, the Short Term Note was amended again to increase the borrowings from $500,000 to $700,000 and to extend the due date from October 10, 2015 to January 10, 2016. On November 30, 2015, the Short Term Note was again amended to increase the borrowings from $700,000 to $754,000.

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.

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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.

On August 30, 2016, the Short Term Note was amended to increase the borrowings by $100,000.

The above described debt facility was fully repaid upon completion of the PLM Sale on October 14, 2016.

EssigPR 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.  EssigPR is an affiliate of SofTech Group Incorporated, the purchaser of our PLM Business, and each is owned by Joseph P. Daly, a related party of the Company.

BlueVine Capital, Inc.

In September 2015, the Company obtained a credit line of up to $80,000 from BlueVine Capital, Inc. (“BlueVine”). This facility allows for short term advances of up to 85% of the face value of customer invoices that meet certain parameters specified and approved by BlueVine. This facility has not been utilized since December 2015.

Capital Requirements for Business

As detailed above, under the caption “Overview – Developing HomeView™ Technology”, the Company has made a significant investment since fiscal year 2015 in the development of a new technology addressing the residential property market. We launched the solution in January 2016 and made it available for downloads on iTunes. The Company expects that additional capital will be required to fund this launch effectively.

As detailed in the proxy materials sent to the SofTech shareholders, the signing of the Asset Purchase Agreement with Essig on August 24, 2016 to sell the ProductCenter and Connector technologies provided the Company with necessary capital to both meet the Company’s near term working capital needs, to continue to develop the HomeView technology and to pursue the market opportunity. The Company will need to raise additional capital within the next twelve months to continue this effort.

The Company is currently seeking additional capital to increase both development and sales and marketing resources for the HomeView technology. The development resources will allow for more rapid introduction of planned features. The sales and marketing resources will be focused on the further development of distribution channels in market areas where we believe the HomeView technology is a natural strategic fit.  

Capital Requirements for Redeemable Common Stock

Following the closing of the sale of the PLM Business, certain shareholders of the Company have a contractual right to require the Company to repurchase from them up to an aggregate of 70,000 shares of common stock, at an aggregate repurchase price of $490,000, or $7.00 per share, upon the exercise by such shareholders of such put right. Mr. Robert Anthonyson, an executive officer and director of the Company, holds 30,000 of those shares. Such put rights will be exercisable in the second quarter of fiscal years 2017 (with respect to 60,000 of such shares) and 2018 (with respect to 10,000 of such shares). During the three month period ended November 30, 2016, 40,000 of those shares were repurchased in exchange for $280,000 including 20,000 shares owned by Mr. Anthonyson. The Company expects the remaining 30,000 shares to be repurchased within one year.

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.