TMCnet News

SOFTECH INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[October 20, 2014]

SOFTECH INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) This report includes forward-looking statements. These forward-looking statements are often identified by words such as "may," "will," "should," "could," "would," "expect," "intend," "plan," "anticipate," "believe," "estimate," "project," "predict," "potential" and similar expressions. These statements are only predictions and involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed. You should not place any undue reliance on these forward-looking statements.



You should be aware that our actual results could differ materially from those contained in forward-looking statements due to a number of factors, including our ability to: · generate sufficient cash flow from our operations or other sources to fund our working capital needs and growth initiatives; · maintain good relationships with our lenders; · comply with the covenant requirements of our loan agreements; · successfully introduce and attain market acceptance of any new products and/or enhancements of existing products; · attract and retain qualified personnel; · prevent obsolescence of our technologies; · maintain agreements with our critical software vendors; · secure renewals of existing software maintenance contracts, as well as contracts with new maintenance customers; and · secure new business, both from existing and new customers.

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. References in this prospectus to the "Company," "we," "our," and "us" refer to the registrant, SofTech, Inc., and its wholly owned subsidiaries.


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 the previously filed Form 10-K. This discussion includes forward-looking statements that involve risk and uncertainties.

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"), which we described below as our CADRA product offering and Product Data Management ("PDM") and collaboration technologies, which we described below as our ProductCenter offering. In addition, we offer a technology platform that allows for data exchange between various third party technology offerings which we describe as our Connector offering. We deliver these enterprise-level PLM solutions, with comprehensive out-of-the-box capabilities, to meet the needs of manufacturers of all sizes quickly and cost-effectively. 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. For geographical information about our operating revenues and assets, see Note E to the consolidated financial statements for the fiscal year ended May 31, 2014.

Since the Recapitalization Transaction described in Note A to the condensed Consolidated Financial Statements in the previously filed Form 10-K, the Company has also been actively engaged in acquiring and filing new patent applications, evaluating alternatives for monetizing its existing patents and investigating the acquisition of specific patents already awarded that might enhance our value. It is expected that this kind of activity will become an increasing area of focus and investment over the coming years.

18 -------------------------------------------------------------------------------- Revenue from our ProductCenter technology has been experiencing year over year revenue declines for eight consecutive fiscal years due to several factors. In July 2007, Parametric Technology Corporation "PTC" informed us that it would not renew its partnership agreement with us when the agreement expired in January 2008. We had been a member of the PTC partnership program for 12 years. The PTC partnership agreement, among other things, provided us with the right to distribute certain information that allowed for our technology to directly interface with PTC's proprietary CAD tools. The non-renewal has essentially prevented us from marketing our ProductCenter solution to new customers that utilize PTC's technology and has negatively impacted our product revenue from this technology offering. In addition to the PTC partnership termination, ProductCenter revenue has been negatively affected by: (i) an increased number of competitive offerings in the marketplace, (ii) elongation of purchase decisions by customers of a technology that already has a long sales cycle, and (iii) uncertain economic conditions. Since PTC's decision we have focused on offering ProductCenter to the mid-range CAD market and we are exploring other opportunities to broaden the addressable market for this product.

For more than a decade through fiscal 2010, we had also experienced revenue declines in our CADRA product line. CADRA, which we acquired in 1998, is a 2D technology that was first introduced in the early 1980's. The revenue declines were due to the age of the product, the introduction of robust 3D solutions for less than $5,000 per unit and the dominance of AutoCAD in the 2D market, a product offered by Autodesk. However, in fiscal years 2011 and 2012 the CADRA revenue increased as compared to the immediately preceding fiscal year primarily driven by our existing non-maintenance CADRA customers that have had to repurchase licenses due to the upgrade of their operating system. Older versions of CADRA do not function properly on the Windows 7 operating system.

CADRA Sale CADRA is a drafting and design software package for the professional mechanical engineer. The CADRA family of CAD/CAM products includes CADRA Design Drafting, a fast and highly productive mechanical design documentation tool; CADRA NC, a comprehensive 2 through 5 axis NC programming application; and CADRAWorks, an integration with SolidWorks (defined below) providing for an integrated drawing production system and 3D solid modeler. The CADRA family of products includes an extensive collection of translators and software options that make it a seamless fit into today's multi-platform and multi-application organizations.

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, which is comprised of (i) $3.2 million, $2.88 million of which was paid on the closing date and $320,000 (representing a 10% holdback) payable on the one year anniversary of the closing date (subject to any indemnification claims), and (ii) earn-out payments of 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, subject to the terms of the Earn-Out Agreement dated August 30, 2013 (the "Earn-Out Agreement").

In conjunction with completing the CADRA Sale, the Company entered into a one-year, exclusive Distributorship Agreement with Mentor that will allow us to market and support the CADRA technology as a reseller throughout Europe (except Germany) at a thirty percent (30%) gross margin. The Company expects to renew the Distributorship Agreement for at least one year on terms not materially different from the current arrangement and is currently engaged in renewal negotiations, which are likely to result in a new Distributorship Agreement.

However, unless and until a definitive agreement is reached by the parties there can be no assurance with respect to whether a new Distributorship Agreement will be reached and, if so, the terms of any such agreement. The right to market the CADRA product line to Sikorsky Aircraft in North America was a one year arrangement only and expired on October 16, 2014. Due to the significant continued involvement in the sale and support of the CADRA product line, the sale of the CADRA product line did not qualify for presentation as discontinued operations.

We are in the process of restructuring our business subsequent to the CADRA Sale to enable us to successfully operate as a significantly smaller company and to seek new sources of revenue and possible new strategic initiatives. We currently contemplate pursuing the activities described below and other strategic initiatives that the board of directors may subsequently determine are in the best interests of the shareholders.

19 --------------------------------------------------------------------------------Activities following the CADRA Sale PLM Business Subsequent to the completion of the CADRA Sale, we will continue to offer our ProductCenter and Connector technologies to design and manufacturing companies.

Our ProductCenter technology manages the engineering data and electronic files of discrete parts designed in third party proprietary design technologies offered primarily by SolidWorks, PTC and Autodesk. The Connector platform is a technology that allows for a direct interface between Aras Innovator a PLM solution which features modern, web-based technology, and various well-established CAD technologies. The Aras technology is offered under a subscription revenue model as is our Connector technology. We entered into a partnership agreement with Aras in 2012, pursuant to which we provide distribution and consulting services, as further described below. For a description of the risks related to our PLM business, see "Risk Factors - Risks Related to Our Business" in our Form 10-K for fiscal year 2014.

Distribution Activity In connection with the CADRA Sale, we entered into a distribution agreement with Mentor to market and support the CADRA technology throughout Europe (except Germany), for a minimum of one year following the sale, through its wholly-owned subsidiary in Italy, SofTech, Srl. As described above, we are currently engaged in negotiations to renew this agreement. The margin to be earned by SofTech for this distribution activity pursuant to the existing Distributorship Agreement was consistent with the margin earned by distributors in the industry. In addition, we will continue to market and distribute third party technologies from Aras and SpaceClaim as we have since 2012.

Consulting SofTech has been engaged in the PLM market since 1993. Our consulting group is composed of deeply experienced, long tenured experts solving very complex problems relating to data migration, customization, data control, access, version control, connectivity between proprietary systems and a myriad of other problems encountered by our customers.

Exploring Strategic Initiatives A core tenet of the management team's strategy following the recapitalization transaction in 2011 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 or strategic partnerships.

Developing Remaining Patent Estate. The Company has filed three provisional patents and purchased the rights to one provisional patent since March 2011.

These patents remain in process at the United States Patent and Trademark Office, and the Company intends to continue to pursue the resolution to these filings. These patents generally relate to methods of accumulating buyers' information in a database in ways that allow the information to be shared with sellers so as to allow the sellers to make targeted, relevant offers to the buyers. While these patents, which could generally be considered eCommerce related, pertain to technologies that are not directly related to our historical revenue producing business activities, we believe they may have applications in those areas.

Analyzing the potential of the technologies described in these patents and the business case for us to invest in efforts to commercialize any of them is part of an ongoing evaluation. It is possible that our efforts will be limited to securing the patent awards and monetizing the patents as we did in fiscal year 2013 for our five patents in the PLM space. While many of these businesses would be new to us, we believe that we possess underlying competencies from our existing businesses, such as strong engineering and software capabilities especially in database technologies, and other attributes, such as numerous long-term client relationships with technology companies that may be complementary to developing new businesses around these technologies. However, any investment by us to attempt to commercialize the technologies described in these patents could be costly and prove to be unsuccessful.

Strategic Transactions. We will continue to evaluate business combinations and other sale opportunities. We believe that, in addition to our remaining businesses and prospects described above, our status as a publicly traded company and tax attributes could make us an attractive strategic partner. As of May 31, 2014, SofTech had approximately $20 million in federal tax attributes and approximately $7 million in state tax attributes. We will continue to seek strategic transactions for the benefit of our shareholders, but there can be no assurances in this regard.

20 --------------------------------------------------------------------------------Other Deferred CADRA Purchase Price. The sale of the CADRA assets includes a contingent earn-out payment equal to 10% of Mentor's revenue derived from the CADRA technology up to a maximum of $750,000 over the three year period following completion of the transaction. Therefore, SofTech has a direct financial interest in the continued success of the CADRA technology subsequent to the sale.

The foregoing are the currently anticipated activities of the Company following the CADRA Sale. There can be no assurances that our pursuit of these activities will be successful. Furthermore, we may pursue other opportunities that we subsequently determine to be in the best interests of the Company.

Critical Accounting Policies and Significant Judgments and Estimates The Securities and Exchange Commission ("SEC") issued disclosure guidance for "critical accounting policies." 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.

Our significant accounting policies are described in Note B to the consolidated financial statements for the fiscal year ended May 31, 2014 included in our previously filed Form 10-K. There have been no changes to the policies for the three months ended August 31, 2014.

Results of Operations Three Months Ended August 31, 2014, as Compared to Three Months Ended August 31, 2013 As described above, the Company sold its CADRA product line to Mentor in October 2013. Due to the Company's continued involvement with the CADRA product line under the Distributorship Agreement, the transaction did not qualify for discontinued operations presentation in the financial statements. During the first quarter of fiscal 2015, the Company's revenue included the CADRA revenue from its Italian subsidiary only with margins of 30% per the Distributorship Agreement. The first quarter of the prior fiscal year was before the CADRA Sale therefore the Company's revenue included CADRA's worldwide revenue. As a result, the comparative financial statements presented below may be less meaningful due to the change in ownership in the CADRA technology.

21 -------------------------------------------------------------------------------- The table below presents the comparative statements of operations for the three month periods ended August 31, 2014 and August 31, 2013 along with the dollar and percentage change amounts for each revenue and expense item (expressed in thousands, except percentages): Change in Change in August 31, 2014 August 31, 2013 $ % Revenue: Products $ 71 $ 241 $ (170) (70.5)% Services 793 1,134 (341) (30.1) Total revenue 864 1,375 (511) (37.2) Cost of revenue: Products 53 33 20 60.6 Services 355 307 48 15.6 Total cost of revenue 408 340 68 20.0 Gross margin 456 1,035 (579) (55.9) Research and development expenses 272 335 (63) (18.8) Selling, general and administration expenses 717 881 (164) (18.6) Gain on change in fair value of Earn-Out Payments and Holdback Payment (39) - (39) - Operating loss (494) (181) (313) (172.9) Interest expense 63 102 (39) (38.2) Gain on change in fair value of warrant liability - (9) 9 - Other (income) expense, net 15 (8) 23 287.5 Net loss $ (572) $ (266) $ (306) (115.0)% 22 -------------------------------------------------------------------------------- The table below presents the relationship, expressed as a percentage, between income and expense items and total revenue, for the three month periods ended August 31, 2014 and August 31, 2013: Items as a percentage of revenue August 31, August 31, 2014 2013 Revenue: Products 8.2% 17.5% Services 91.8 82.5 Total revenue 100.0 100.0 Cost of revenue: Products 6.1 2.4 Services 41.1 22.3 Total cost of revenue 47.2 24.7 Gross margin 52.8 75.3 Research and development expenses 31.5 24.4 Selling, general and administrative expenses 83.0 64.1 Gain on change in fair value of Earn-Out Payments and Holdback Payment (4.5) - Operating loss (57.2) (13.2) Interest expense 7.3 7.4 Gain on change in fair value of warrant liability - (0.7) Other (income) expense, net 1.7 (0.6) Net loss (66.2)% (19.3)% Revenue Total revenue for the three month periods ended August 31, 2014 and 2013 was approximately $864,000 and $1.4 million, respectively. The following table summarizes total revenue by product line for the three month periods ended August 31, 2014 and August 31, 2013 (in thousands, except percentages): August 31, 2014 2013 $ Change % Change Product Line ProductCenter $ 656 $ 737 $ (81) (11.0)% CADRA 156 627 (471) (75.1) Other 52 11 41 372.7 Total $ 864 $ 1,375 $ (511) (37.2)% The product line revenue is further broken down by revenue type hereunder with explanations for changes in the current quarter compared to the same period in fiscal 2014.

23 --------------------------------------------------------------------------------Product Revenue Product revenue for the three months ended August 31, 2014 was approximately $71,000, as compared to approximately $241,000 for the same period in the prior fiscal year, a decrease of about 71%. The table below details product revenue by product line for the three month periods ended August 31, 2014 and 2013 (in thousands, except percentages): August 31, 2014 2013 $ Change % Change Product Line ProductCenter $ 52 $ 66 $ (14) (21.2)% CADRA 19 175 (156) (89.1) Total $ 71 $ 241 $ (170) (70.5)% Our product revenue for ProductCenter for the first three months of fiscal year 2015 was consistent with the quarterly trend over the last eight quarters. It is our expectation based on outstanding proposals that the product revenue trend experienced over the last eight fiscal quarters will improve over the remainder of fiscal 2015.

Product revenue from the CADRA technology decreased by approximately 89% during the quarter ended August 31, 2014. This decrease is the direct result of the CADRA Sale during the second quarter of the prior fiscal year. We continued to offer this technology under the terms of the aforementioned Distributorship Agreement in limited markets.

Service Revenue Our service revenue is composed of both annual software maintenance contracts for previously licensed technology for both of our product lines and consulting revenue generated primarily from our ProductCenter technology. The table below summarizes service revenue by product line for the three months ended August 31, 2014 and 2013, (in thousands, except percentages): 2014 2013 $ Change % Change Product Line ProductCenter $ 604 $ 671 $ (67) (10.0)% CADRA 137 452 (315) (69.7) Other 52 11 41 372.7 Total $ 793 $ 1,134 $ (341) (30.1)% Maintenance revenue was approximately $635,000 for the three months ended August 31, 2014, as compared to $934,000 for the same period in the prior fiscal year, a decline of about 32%. ProductCenter maintenance revenue was down approximately 1% for the three month period ended August 31, 2014 compared to the same period in the prior fiscal year. The CADRA Sale, which was completed at the mid-point of the second quarter of the prior fiscal year, was primarily responsible for the current period maintenance revenue decline.

Consulting revenue was approximately $158,000 for the three months ended August 31, 2014, a decrease of approximately 21% from the same period in the prior fiscal year due to delays in the procurement process for several large projects that we expect will be awarded in the coming months.

Gross Margin Gross margin as a percentage of revenue was 52.8% for the three month period ended August 31, 2014 as compared to 75.3% in the same period in the prior fiscal year. The decrease in gross margin was due to a an increase in cost associated with reselling the CADRA product line and an 37.2% reduction in total revenue in the three month period ending August 31, 2014 as compared to the same periods in the prior fiscal year.

24 --------------------------------------------------------------------------------Research and Development Expenses Research and development expenses were approximately $272,000 for the three month period ended August 31, 2014 as compared to approximately $335,000 in the comparable period in fiscal 2014, a decrease of $63,000. The CADRA Sale and the resulting headcount reductions accounted for the majority of the decrease in R&D expenses.

Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses were approximately $717,000 for the three month period ended August 31, 2014 as compared to approximately $881,000 for the comparable period in fiscal year 2013, a decrease of $164,000. The CADRA Sale accounted for approximately $145,000 of the reduced SG&A expenses.

Gain on sale of product line 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 excluded cash, billed accounts receivable and liabilities other than the deferred maintenance liability associated with CADRA customer maintenance contracts for support services. The purchase price was $3.2 million of which the Company received $2.88 million at the close and an additional $320,000 is payable in October 2014 subject to offset for any indemnification claims Mentor may have under the Asset Purchase Agreement. In addition, the Company will receive royalty payments of up to $750,000 based on 10% of the revenue generated by Mentor during the three-year period immediately following the completion of the transaction. During the three months ended August 31, 2014, the Company recorded a change in the fair value of the Earn-Out Payments and Holdback Payment of approximately $39,000.

Interest Expense Interest expense for the three month period ended August 31, 2014 was approximately $63,000, as compared to approximately $102,000 for the comparable period in the prior fiscal year. The average debt outstanding for the quarter ended August 31, 2014 was $1.7 million as compared to $2.7 million for the quarter ended August 31, 2013, a decrease of 38%.

Net Loss The net loss for the three month period ended August 31, 2014 was approximately ($572,000) or ($0.64) per share as compared to approximately ($266,000) or ($0.30) per share for the comparable period in the prior fiscal year.

Liquidity and Capital Resources During the three month period ended August 31, 2014 the net cash used in operating activities totaled approximately $1.0 million as compared to approximately $249,000 in the comparable prior period. The net loss for the quarter adjusted for non-cash expenditures used approximately $485,000 as compared to approximately $216,000 in the comparable prior period. The net change in current assets and liabilities used $534,000 during the current quarter composed primarily of a reduction in the deferred maintenance liability and accounts payable. The decline in the deferred maintenance liability is cyclical with the majority of the annual maintenance contracts being billed in the third and fourth quarters of the fiscal year. The ProductCenter maintenance contracts renewal rates have been very stable. The reduction in accounts payable during the first quarter of the current fiscal year was primarily due to the normal payment on certain invoices from third party vendors that were accrued at fiscal year end and due in June 2014.

Net cash used in investing activities for the three months ended August 31, 2014 was approximately $2,000 compared to approximately $70,000 primarily composed of capitalized software development costs related to new products and capital expenditures in the prior period.

Net cash provided by financing activities totaled approximately $985,000 composed primarily of $750,000 of borrowing under a new three-year term loan with EssigPR, Inc., a Puerto Rico corporation ("EssigPR Note") and $550,000 in proceeds from the issuance of common stock under the terms of a Securities Purchase Agreement with Mr. Joseph P. Daly, an existing SofTech shareholder (the "Daly Purchase Agreement"), offset by the costs associated with the buyback of approximately 151,000 shares. EssigPR, Inc. is owned by the aforementioned Mr.

Daly. Each of the agreements is briefly described below.

25 -------------------------------------------------------------------------------- EssigPR Note. Under the terms of the EssigPR Note, SofTech entered into a three (3) year borrowing arrangement with EssigPR 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 will be paid from the Holdback Payment and Earn-Out Payments due over the next three years from Mentor in connection with their 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 due 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 is subject to offset by Mentor should they have any indemnity claims under the Asset Purchase Agreement; and · Up to an additional $706,000 (maximum Earn-Out Payments of $750,000 less initial payment of approximately $44,000 received in March 2014) due in three installments on each of April 1, 2015, 2016 and 2017. The actual amount due on each of those payment dates shall be equal to 10% of the actual revenue generated by Mentor from the CADRA product line during their fiscal years ended January 31, 2015, 2016 and 2017.

In the event whereby the total payments received from Mentor from the above described Holdback Payments and Earn-Out Payments are insufficient to fully satisfy all amounts due under the EssigPR 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 EssigPR 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 can be repaid at any time without penalty and is due in full on April 10, 2015. EssigPR was awarded 5,000 stock options to purchase SofTech common stock at $1.00 per share. The stock options will expire on October 1, 2024 if not exercised.

On the occurrence and continuance of an event of default under the EssigPR Note that is not cured after written notice from EssigPR, all or any part of the indebtedness under the EssigPR Note may become immediately due at the option of EssigPR. Under the EssigPR Note, events of default are (1) a default in the payment of any money owed by the Company to EssigPR under the EssigPR Note or in any other transaction or (2) a default in the Company's performance of any obligation to EssigPR under the EssigPR Note or any other agreement between the two parties, whether such agreement is presently existing or entered into in the future. If Company dissolves, becomes insolvent, or makes an assignment for the benefit of creditors, all such indebtedness under the EssigPR Note shall become automatically due and payable.

Daly Purchase Agreement. Under the Daly Purchase Agreement dated June 20, 2014, Mr. Daly purchased 110,000 shares of SofTech common stock, par value $0.10 per share, in a direct private placement. 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.

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. Accordingly, the Board of Directors of the Company approved in advance the purchase of the shares in this transaction as an "Exempt Transaction" as defined in Section 1(o) of the Company's Rights Agreement, dated February 3, 2012, between the Company and the Registrar and Transfer Company.

Mr. Daly had purchased 25,000 of the 50,000 shares of common stock sold with the Put Option during fiscal year 2013 under the Securities Purchase Agreement described above. Along with the other Investors, he exercised the right to have the Company repurchase the common stock at $5.50 per share in June 2014.

26 --------------------------------------------------------------------------------Upon completion by Mr. Daly of the exercise of the Put Option and the purchase of the new shares issued under the Daly Purchase Agreement, he owns 167,279 shares of Company common stock which represents approximately 20.1% of the 833,724 total common shares outstanding as of August 31, 2014.

Additional Shares Sold Subsequent to Quarter End. In four transactions subsequent to the end of the fiscal quarter, 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 accredited investors in separate private placement transactions.

These transactions were completed pursuant to Securities Purchase Agreements which the Company entered into with each of the investors as described in the table below.

The material terms of the Securities Purchase Agreements are summarized below.

· 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 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.

Our Loan Agreement with Prides Crossing Capital In addition to the EssigPR Note described above, as of August 31, 2014, we had $1.0 million of outstanding indebtedness under our loan agreement with Prides Crossing Capital ("Prides Loan"). The terms of the Prides Loan are detailed in Note D to the financial statements herein. The Prides Loan is due on or before January 1, 2015. The above described EssigPR Note, Daly Purchase Agreement and the sale of additional shares subsequent to the end of the fiscal quarter were completed in order to provide the Company with the liquidity to pay off the Prides Loan in full. The Company believes it has an excellent working relationship with Prides and is currently discussing an amendment to the Prides Loan that would result in repayment over the next several months. We anticipate completing this arrangement in the coming weeks.

We believe that our cash together with our credit facilities, proceeds from stock sales subsequent to the end of the fiscal quarter and cash provided by operations will be sufficient to meet our capital needs for at least the next twelve months.

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.

[ Back To TMCnet.com's Homepage ]