10-Q

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, 2013

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

For the transition period from _________________ to ___________________

Commission File Number

0-10665

SOFTECH, INC.

(Exact name of the Registrant as specified in its charter)

Massachusetts	04-2453033
(State or other jurisdiction of incorporation or organization)	(I.R.S Employer Identification No.)

650 Suffolk Street, Suite 415, Lowell, MA 01854

(Address of principal executive offices and zip code)

Telephone (978) 513-2700

(Registrant’s telephone number, including area code)

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.

Large accelerated filer . Accelerated filer . Non-accelerated filer . Smaller reporting company  X .

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 8, 2014 was 875,135 shares.

1

SOFTECH, INC.

INDEX

PART I.	Financial Information	Page Number
Item 1.	Financial Statements	3
	Consolidated Condensed Balance Sheets – November 30, 2013 (unaudited) and May 31, 2013	3
	Consolidated Condensed Statements of Operations – Three Months Ended November 30, 2013 and 2012 (unaudited)	4
	Consolidated Condensed Statements of Operations – Six Months Ended November 30, 2013 and 2012 (unaudited)	5
	Consolidated Condensed Statements of Comprehensive Income (Loss) – Three Months Ended November 30, 2013 and 2012 (unaudited)	6
	Consolidated Condensed Statements of Comprehensive Income (Loss) – Six Months Ended November 30, 2013 and 2012 (unaudited)	7
	Consolidated Condensed Statements of Cash Flows – Six Months Ended November 30, 2013 and 2012 (unaudited)	8
	Notes to Consolidated Condensed Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4.	Controls and Procedures	32
PART II.	Other Information
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	35

2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

SOFTECH, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

			(in thousands)
			(unaudited)
			November 30, 2013		May 31, 2013
ASSETS
Cash and cash equivalents		$	1,612	$	1,188
Restricted cash			1,406		100
Accounts receivable (less allowance for uncollectible accounts of $29 as of November 30, 2013 and May 31, 2013)			1,091		895
Receivable from product line sale			320		-
Prepaid and other assets			157		299
Total current assets			4,586		2,482
Property and equipment, net			70		61
Goodwill			992		4,249
Capitalized software development costs, net			384		376
Capitalized patent costs			103		101
Debt issuance costs, net			238		250
Notes receivable and other assets			178		195
TOTAL ASSETS	$		6,551	$	7,714
LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS’ EQUITY
Accounts payable	$		237	$	137
Accrued expenses			947		602
Other current liabilities			46		89
Deferred maintenance revenue			1,002		2,147
Current portion of capital lease			13		13
Current portion of debt			135		-
Total current liabilities			2,380		2,988
Capital lease, net of current portion			31		39
Long-term debt			2,520		2,700
Warrant liability			45		-
Total liabilities			4,976		5,727
Redeemable common stock, $0.10 par value, 50,000 shares issued and outstanding at November 30, 2013 and May 31, 2013			275		275
Shareholders’ equity :
Common stock, $0.10 par value 20,000,000 shares authorized, 875,135 and 1,045,135 issued and outstanding at November 30, 2013 and May 31, 2013, respectively			100		100
Treasury stock, $0.10 par value, 170,000 shares at cost			(63)		-
Capital in excess of par value			27,375		27,369
Accumulated deficit			(25,643)		(25,333)
Accumulated other comprehensive loss			(469)		(424)
Total shareholders’ equity			1,300		1,712
TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS’ EQUITY	$		6,551	$	7,714

See accompanying notes to unaudited consolidated financial statements.

3

SOFTECH, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

		(in thousands, except for share and per share data)
		For the Three Months Ended
		November 30,		November 30,
		2013		2012
Revenue:
Products	$	376	$	478
Services		1,038		1,194
Royalties from sale of patents		-		100
Total revenue		1,414		1,772
Cost of revenue:
Products		28		24
Services		264		323
Total cost of revenue		292		347
Gross margin		1,122		1,425
Research and development expenses		304		323
Selling, general and administrative expenses		866		789
Gain on sale of product line		(91)		-
Operating income		43		313
Interest expense		104		69
Other income		(17)		(8)
Net income (loss)	$	(44)	$	252
Basic and diluted net income (loss) per share:	$	(0.05)	$	0.25
Weighted average common shares outstanding-basic		875,135		995,468
Weighted average common shares outstanding-diluted		875,135		997,751

See accompanying notes to unaudited consolidated financial statements.

4

SOFTECH, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

		(in thousands, except for share and per share data)
		For the Six Months Ended
		November 30,		November 30,
		2013		2012
Revenue:
Products	$	618	$	693
Services		2,172		2,359
Royalties from sale of patents		-		290
Total revenue		2,790		3,342
Cost of revenue:
Products		62		49
Services		572		631
Total cost of revenue		634		680
Gross margin		2,156		2,662
Research and development expenses		639		567
Selling, general and administrative expenses		1,747		1,547
Gain on sale of product line		(91)		-
Operating income (loss)		(139)		548
Interest expense		199		134
Other income		(28)		(11)
Net income (loss)	$	(310)	$	425
Basic and diluted net income (loss) per share:	$	(0.35)	$	0.43
Weighted average common shares outstanding-basic		888,140		995,295
Weighted average common shares outstanding-diluted		888,140		996,572

See accompanying notes to unaudited consolidated financial statements.

5

SOFTECH, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF

COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

		(in thousands, except for share and per share data)
		For the Three Months Ended
		November 30,		November 30,
		2013		2012
Net income (loss)	$	(44)	$	252
Other comprehensive income (loss):
Foreign currency translation adjustment		(25)		12
Total other comprehensive income (loss)		(25)		12
Comprehensive income (loss)	$	(69)	$	264

See accompanying notes to unaudited consolidated financial statements.

6

SOFTECH, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF

COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

		(in thousands, except for share and per share data)
		For the Six Months Ended
		November 30,		November 30,
		2013		2012
Net income (loss)	$	(310)	$	425
Other comprehensive income (loss):
Foreign currency translation adjustment		(45)		6
Total other comprehensive income (loss)		(45)		6
Comprehensive income (loss)	$	(355)	$	431

See accompanying notes to unaudited consolidated financial statements.

7

SOFTECH, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

		( in thousands)
		For the Six Months Ended
		November 30,		November 30,
		2013		2012
Cash flows from operating activities:
Net income (loss)	$	(310)	$	425
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		111		102
Gain on CADRA sale		(91)		-
Stock-based compensation		4		4
Non-cash interest expense		6		-
Change in fair value of warrant liability		(6)		-
Change in current assets and liabilities:
Accounts receivable		(196)		(303)
Prepaid expenses and other assets		159		48
Restricted cash		(1,306)		-
Accounts payable, accrued expenses and other liabilities		402		(2)
Deferred maintenance revenue		(538)		(630)
Net cash used in operating activities		(1,765)		(356)
Cash flows from investing activities:
Proceeds from sale of product line, net of direct cash expenses		2,432		-
Capital expenditures		(37)		(2)
Capitalized software development costs		(57)		(159)
Capitalized patent costs		(2)		(6)
Net cash provided by (used in) investing activities		2,336		(167)
Cash flows from financing activities:
Cost of treasury shares		(63)		-
Capitalized debt issuance costs		(32)		-
Proceeds from issuance of redeemable common stock, net of issuance costs		-		98
Repayment under debt agreements		-		(360)
Borrowing under debt agreements		-		300
Repayments under capital lease		(8)		(4)
Net cash provided by (used in) financing activities		(103)		34
Effect of exchange rates on cash		(44)		3
Increase (decrease) in cash and cash equivalents		424		(486)
Cash and cash equivalents, beginning of period		1,188		595
Cash and cash equivalents, end of period	$	1,612	$	109
Supplemental disclosures of cash flow information:
Interest paid	$	153	$	84
Taxes paid	$	14	$	2
Noncash investing and financing activities:
Issuance of warrants	$	51	$	-
Purchase of property and equipment under capital lease	$	-	$	53
Accretion of redeemable common stock	$	-	$	36

See accompanying notes to unaudited consolidated financial statements

8

SOFTECH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

A.

Description of the Business and Basis of Presentation

SofTech, Inc. (the “Company”) was formed in Massachusetts on June 10, 1969. The Company is 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 European sales and customer support offices in Germany and Italy. The Company also has resellers in Asia and Europe.

Since the Recapitalization Transaction described hereunder, the Company has also 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 our value. It is expected that this kind of activity will become an increasing area of focus and investment over the coming years.

The consolidated financial statements of the Company include the accounts of SofTech, Inc. and its wholly-owned subsidiaries, Information Decisions, Inc., Workgroup Technology Corporation, SofTech, GmbH and SofTech, Srl. All significant intercompany accounts and transactions have been eliminated in consolidation.

The consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission without audit; however, in the opinion of management, the information presented reflects all adjustments which are of a normal recurring nature and elimination of intercompany transactions which are necessary to present fairly the Company’s financial position and results of operations. It is recommended that these consolidated condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2013.

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, 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) of which will be paid 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”).  

The Company will continue to offer the CADRA technology as a reseller throughout Europe (except Germany) and for a one-year period from the closing of the transaction to Sikorsky Aircraft, the largest CADRA user in the United States. Due to the significant continued involvement in the sale and support of CADRA product line subsequent to the sale, the transaction does not qualify for presentation as a discontinued operation.

Recapitalization Transaction

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. As part of that Recapitalization Transaction, Greenleaf accepted a payment of $2.7 million in cash and note for $250,000 in full satisfaction of the $10.6 million of indebtedness. The former CEO resigned after a short transition period, a new four person Board of Directors was appointed and the existing Board members resigned. In addition, Greenleaf gave the Company’s new Board of Directors voting control over its shares for a three year period immediately following the Recapitalization Transaction.

Refinancing of Debt

In May 2013, the Company entered into a new three year, $2.7 million loan agreement (the “Loan Agreement”) as detailed in Note F that replaced the Company’s prior debt facilities that were to expire in February 2014. The Loan Agreement required quarterly principal payments of $135,000 beginning on October 1, 2014 and carried a 14% interest rate due in arrears each calendar quarter beginning July 1, 2013.

9

The Loan Agreement was amended in July 2013 to allow the Company to repurchase 170,000 shares of common stock from Greenleaf and to increase a specified financial covenant ratio for Q4 of fiscal 2013 and Q1 and Q2 of fiscal 2014. In December 2013 the Loan Agreement was again amended pursuant to an agreement with the Lenders in connection with their consent to the CADRA Sale.

Stock Purchase Agreement with Greenleaf Capital and affiliates

In June 2013, the Company purchased 170,000 shares of common stock from Greenleaf, The Ronda E. Stryker and William D. Johnston Foundation, and The L. Lee Stryker 1974 Irrevocable Trust fbo Ronda E. Stryker, for a purchase price of $62,900 or $0.37 per share as detailed in Note K to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2013. The agreement provides an option for the Company to either make an offer to purchase the remaining 101,411 shares held by Greenleaf at $0.37 per share or to provide Greenleaf with registration rights with respect to the remaining shares as set forth in the Registration Rights Agreement dated March 8, 2011. Greenleaf is under no obligation to accept the Company’s offer to purchase the remaining shares on the terms set forth above, however, if the offer is made by the Company and rejected by Greenleaf, the Company will no longer be obligated to provide Greenleaf with registration rights with respect to the remaining shares. As part of the agreement, Greenleaf agreed not to sell or transfer the shares for a one year period from the purchase date.

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, and the valuation of long term assets including goodwill, intangibles, capitalized software development costs and deferred tax assets. Actual results could differ from those estimates.

REVENUE RECOGNITION

The Company follows the provisions of the Accounting Standards Codification (“ASC”) 985, Software 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, and a fixed fee and collectability has been determined. 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. 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.

The Company follows the provisions of ASC 605, Revenue Recognition for transactions that do not involve the licensing of software or software support services as in the case of the recent sale of our patents. Revenue from the sale of patents is recorded when persuasive evidence of an arrangement exists, delivery has taken place and a fixed fee and collectability has been determined. These conditions are no different from those when we license software. For multiple element arrangements, however, under ASC 605, total fees are allocated to each of the elements based upon the relative selling price method. Under that method the allocation of fees to the undelivered elements is based on VSOE, or if it doesn’t exist, then based on third party evidence of selling price. If neither exists, then the allocation is based on management’s best estimate of the selling price.

SOFTWARE DEVELOPMENT COSTS

The Company accounts for its software development costs in accordance with 985-20, Costs of Computer Software to Be Sold, Leased or Marketed.  Costs that are incurred internally 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.  Such 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 technological feasibility of a product is established as well as its economic life.

10

During the three and six months ended November 30, 2013, the Company capitalized approximately $18,000 and $57,000, respectively, of software development costs related to new products, as compared to approximately $48,000 and $159,000 for the comparable periods in the prior fiscal year. Amortization expense related to capitalized software development for the three and six months ending November 30, 2013 was approximately $24,000 and $49,000, respectively, as compared to approximately $16,000 and $28,000 for the comparable periods in the prior fiscal year.  

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.  Total direct costs incurred in establishing this debt agreement were approximately $291,000. These costs have been capitalized and are being amortized over the three year life of the loan. Unamortized debt issuance costs related to the Company’s previous debt agreement as of May 10, 2013 totaled approximately $108,000 and were expensed in Q4 of fiscal 2013. Amortization expense related to debt issuance costs for the three and six months ending November 30, 2013 were approximately $22,000 and $43,000, respectively, as compared to approximately $29,000 and $59,000 for the comparable periods in the prior fiscal year.

ACCOUNTING FOR GOODWILL

The Company accounts for goodwill pursuant to the provisions of the 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 statement’s criteria.

The Company operates in a single reporting unit.  Goodwill has been allocated to the CADRA product line based upon the estimated fair value of the CADRA product line based on the transaction with Mentor as compared to the estimated fair value of the Company as a whole. Goodwill allocated to the CADRA product line included in the derivation of the gain on sale was approximately $3.2 million.

As of May 31, 2013, 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. The Company concluded that no facts or circumstances arose during the six months ended November 30, 2013 to warrant an interim impairment test.

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 for the three and six month periods ending November 30, 2013 were approximately $ – and $2,000, respectively,  as compared to $ - and $6,000, respectively, for the three and six month periods ending November 30, 2012.

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 November 30, 2013, the Company does not have any long-lived assets it considers to be impaired.

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.

11

The Company’s 1994 Stock Option Plan provided for the granting of stock options at an exercise price not less than fair market value of the stock on the date of the grant and with vesting schedules as determined by the Board of Directors. No new options could be granted under the Plan after fiscal year 2004 and all stock options had vested prior to May 31, 2009. During fiscal 2012, all options awarded under the 1994 Stock Option Plan had expired. 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. Additionally, any future 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, 2013, 10,000 options were awarded and outstanding under the 2011 Plan.

The following table summarizes option activity under the 1994 Stock Option Plan and 2011 Plan:

			Weighted	Weighted-
			Average	Average
	Number of		Exercise Price	Remaining		Aggregate
	Options		Per Share	Life (in years)		Intrinsic Value
Outstanding options at May 31, 2012	10,000	$	2.40	9.02	$	-
Granted	-		-	-		-
Exercised	-		-	-		-
Forfeited or expired	-		-	-		-
Outstanding options at May 31, 2013	10,000		2.40	8.02		-
Granted	-		-	-		-
Exercised	-		-	-		-
Forfeited or expired	-		-	-		-
Outstanding options at November 30, 2013	10,000	$	2.40	7.52	$	-
Exercisable at November 30, 2013	8,056	$	2.40	7.52	$	-

The Company determined the volatility for options granted 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.

For each of the three and six month periods ended November 30, 2013 and 2012, the Company expensed approximately $2,000 and $4,000, respectively, of stock-based compensation.  

REDEEMABLE COMMON STOCK

During the year ending May 31, 2013, the Company issued 50,000 shares of common stock, $.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 entitles the Investors to a fee of $6,000 (the “Fee”) to be paid in six equal quarterly installments during the eighteen month period (the “Payment Period”) following the investment.  The Agreement also provides 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 following the Payment Period.

12

The Company first assessed the redeemable Common Stock to determine if the instrument should be accounted for as a liability in accordance with ASC 480. 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 the 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 Common Stock issued pursuant to the Agreement in accordance with ASC 480-10-S99-3A, 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. The 50,000 shares of Common Stock issued pursuant to the Agreement were recorded as redeemable common stock at an initial carrying value of $163,000. This amount is equal to the gross proceeds of $250,000, less $27,000 in issuance costs related to legal fees and the $60,000 Fee, which has been included in other liabilities. The Company elected to record the Common Stock at its redemption value of $275,000 immediately and accordingly recorded accretion of $112,000 to additional paid in capital during fiscal year 2013.

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 the statements of operations. For the three and six month periods ended November 30, 2013, the Company recorded a net gain from foreign currency related transactions of approximately $14,000, and $22,000, respectively, as compared to approximately $8,000 and $11,000 for the comparable periods in the prior fiscal year, to Other (income) expense in the Consolidated Condensed Statements of Operations.

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.

BALANCE SHEET COMPONENTS

Details of certain balance sheet captions are as follows:

		November 30, 2013		May 31, 2013
		(Amounts in thousands)
Property and equipment	$	1,095	$	1,869
Accumulated depreciation and amortization		(1,025)		(1,816)
Property and equipment, net	$	70	$	53

NET INCOME (LOSS) PER COMMON SHARE

Basic and diluted net income (loss) per share are computed by dividing the net income (loss) by the weighted-average number of common shares outstanding. Diluted net income per share is computed by dividing net income (loss) by the weighted-average number of common and equivalent dilutive common shares outstanding.  For periods in which losses are reported potentially dilutive common stock equivalents are excluded from the calculation of diluted loss per share because the effect is antidilutive.

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The following table details the derivation of weighted average shares outstanding used in the calculation of basic and diluted net income (loss) for each period:

		For the Three Months Ended
		November 30, 2013		November 30, 2012
		(amounts in thousands)
Net income (loss) available to common shareholders	$	(44)	$	252
Weighted average number of common shares outstanding
used in calculation of basic earnings per share		875,135		995,468
Incremental shares from the assumed exercise of
dilutive stock options		-		2,283
Weighted average number of common shares
outstanding used in calculating diluted earnings
per share		875,135		997,751

		For the Six Months Ended
		November 30, 2013		November 30, 2012
		(amounts in thousands)
Net income (loss) available to common shareholders	$	(310)	$	425
Weighted average number of common shares outstanding
used in calculation of basic earnings per share		888,140		995,295
Incremental shares from the assumed exercise of
dilutive stock options		-		1,277
Weighted average number of common shares
outstanding used in calculating diluted earnings
per share		888,140		996,572

For the three and six month periods ended November 30, 2013, 10,000 options to purchase common shares were anti-dilutive and were excluded from the above calculation. For the three and six month periods ended November 30, 2012, all options were included in the above calculation.  

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments consist of cash equivalents, accounts receivable, warrants to purchase shares of common stock, accounts payable and notes payable. The estimated fair values have been determined through information obtained from market sources and management estimates.  The estimated fair value of certain financial instruments including cash equivalents, accounts receivable and account payable, approximate the carrying value due to their short-term maturity.  The Company’s warrant liability is recorded at fair value. 

Fair Value Measurements

The fair value of the Company’s financial assets and liabilities are measured using inputs from the three levels of fair value hierarchy which are as follows:

Level 1	—	Quoted prices in active markets for identical assets or liabilities.
Level 2	—	Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3	—	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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The following summarizes the Company’s assets and liabilities measured at fair value as of November 30, 2013:

			Fair Value Measurements at Reporting Date Using:
			Quoted
			Prices
			in Active		Significant
			Markets for		Other		Significant
	Balance as of		Identical		Observable		Unobservable
	November 30,		Assets		Inputs		Inputs
Description (amounts in thousands)	2013		(Level 1)		(Level 2)		(Level 3)
Liabilities
Warrant liability	$	45	$	—	$	—	$	45
Total Liabilities	$	45	$	—	$	—	$	45

Activity for liabilities classified as Level 3:

	Subordinated Convertible Note
Balance at May 31, 2013	$	-
Issuance of warrant liability	51
Change in fair value	(6)
Fair value at November 30, 2013	$	45

Fair values for the Company’s warrant liability are determined by utilizing widely accepted valuation techniques including the Black-Scholes Pricing Model. The methods and significant inputs and assumptions utilized in estimating the fair value of the warrant liabilities as of the November 30, 2013 balance sheet date are discussed below. The warrants are categorized as Level 3 within the fair value hierarchy. In December 2013, the Company agreed to repurchase the outstanding warrant to purchase 25,000 shares of common stock at an exercise price of $1.00 per share in exchange for $19,000 (see Note I).

The Company estimated the fair value of each share-based award using the Black-Scholes option valuation model. The Black-Scholes Pricing Model incorporates assumptions as to stock price volatility, the expected life of options, a risk-free interest rate and dividend yield.

Input		July 9, 2013	November 30, 2013
Stock Price	$	2.11	$	1.90
Exercise Price		1.00		1.00
Expected Life (in years)		7.00	6.61
Stock Volatility		138%	138%
Risk-Free Interest Rate		2.28%	2.10%
Dividend Rate		0%	0%

The following are significant assumptions utilized in developing the inputs:

o

Shares of the Company’s common stock are traded on the OTC Bulletin Board. The stock price input is based upon bid prices as of the valuation dates due to the extremely thin trading volume, broker-driven market (vs. exchange market) and the wide bid/ask spread as of the valuation date;

o

Stock volatility was estimated by considering (i) the annualized monthly volatility of the Company’s stock price during the historical period preceding the respective valuation dates and measured over a period corresponding to the remaining life of the instruments (monthly data set is more relevant given the extremely thin trading volume of the Company’s common stock). Historical prices of the Company’s common stock were used to estimate volatility as the Company did not have traded options as of the valuation dates;

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o

Based upon the Company’s historical operations and management’s expectations for the foreseeable future, the Company’s stock was assumed to be a non-dividend-paying; and

o

The risk-free interest rate is based on the U.S. Treasury yield curve in effect as of the valuation date for the expected term.

C. Segment 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 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):

		Three Month Periods Ended
Revenue:		November 30, 2013		November 30, 2012
North America	$	1,255	$	1,215
Europe		290		604
Asia		330		120
Eliminations		(461)		(167)
Consolidated Total	$	1,414	$	1,772
		Six Month Periods Ended
Revenue:		November 30, 2013		November 30, 2012
North America	$	2,259	$	2,413
Europe		604		937
Asia		493		286
Eliminations		(566)		(294)
Consolidated Total	$	2,790	$	3,342

Long Lived Assets:		As of November 30, 2013		As of May 31, 2013
North America	$	1,922	$	5,119
Europe		43		113
Consolidated Total	$	1,965	$	5,232

D.  Note Receivable

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. The Company has accounted for the note as a fixed arrangement.

E. Sale of Patents

In June 2012, the Company sold to an unrelated third party (the “Buyer”) its rights, title and interests in three of its U.S. patents (the “Patents”) all entitled Method and System for Design and Drafting in exchange for a non-refundable, initial royalty payment of $200,000 (the “Initial Payment”). These Patents were derived from the Company’s development work related to the Company’s CADRA product line and the inventions are a key, time saving feature within that technology offering. The Company received a limited, non-exclusive, royalty-free license under the Patents to make, use, offer to sell, or sell the Company’s products or services.

In September 2012, the Patent agreement was amended to include two other U.S. patents (“Additional Patents”) both entitled Product Development System and Method Using Integrated Process and Data Management. These Additional Patents were derived from the development work related to the Company’s ProductCenter product line and are a core and essential capability within that product offering. The Company received a limited, non-exclusive, royalty-free license under the Additional Patents to make, use, offer to sell or sell the Company’s products or services. As a result of the amendment, the Initial Payment was increased by $100,000.

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The agreement gives the Buyer complete control over what, if any, actions shall be taken in the future to monetize the Patents through licensing, sale, enforcement or other means. In the event whereby monies are derived from the Patents, the Company is due 30% of the net proceeds (the “Net Proceeds”), as defined in the agreement. The Initial Payment shall be reimbursable from Net Proceeds to the extent any are due. There can be no assurance that the Company will derive any additional monies from the Patents, however.

The sale of the Patents is a multiple element arrangement as defined under ASC 605 and, as such, the Company allocated the Initial Payment between the sale of the Patents that were delivered during the fiscal quarter and support services that were undelivered. Support services include being available to the Buyer to assist them should they require such assistance in licensing or pursuing other means of monetizing the Patents to third parties. The allocation of the Initial Payment to the patent and support services elements was based on management’s best estimate of the selling price of each element. The Initial Payment was allocated as follows: Patents - $290,000; and Support Services - $10,000. Additional monies due the Company in the form of royalties from its 30% share of Net Proceeds will be recorded in the quarterly period in which the Buyer notifies the Company such payments are due. Such notification and payment, if any, are due thirty calendar days after the end of each calendar quarter. The revenue allocated to support services has been deferred and will be recognized as revenue when the services are performed.  There can be no assurance that the Company will derive any other monies from the Additional Patents, however.

The Company retained its U.S. patent applications that it acquired or filed since the Recapitalization Transaction in March 2011. These patent applications were not included in the above described agreement. The Company expects to be actively engaged with the U.S. Patent and Trademark Office for the foreseeable future with regard to those filings.

F. Debt

On May 10, 2013, the Company entered into the Loan Agreement with Prides Crossing Capital, L.P. and Prides Crossing Capital-A, L.P., (“Lenders”).  The Loan Agreement provided for a $2.7 million, three-year term Loan with interest only until October 1, 2014.

The Loan Agreement was amended on July 9, 2013 as described below to, among other things, allow the Company to repurchase 170,000 common shares from its largest shareholder as described in Note G below. On December 5, 2013, the Loan Agreement was again amended as described in Note I below. The December 2013 amendment was necessitated by the CADRA Sale.  

As of November 30, 2013, the Loan Agreement as amended on July 9, 2013 was in full force and effect and, as such, the balance sheet reflects the terms and conditions of that amended agreement which is described hereafter.

Prior to the amended and restated Loan Agreement in December 2013 as described in Note I, the Loan was to mature on May 1, 2016 and carried an interest rate of 14% paid in arrears on a calendar quarter basis commencing on July 1, 2013 and continuing throughout the life of the Loan. Commencing on October 1, 2014, and continuing on the last day of each calendar quarter thereafter through May 1, 2016, the Company was to make quarterly principal payments of $135,000 with the remaining principal balance to be due and payable on May 1, 2016.

The Company agreed to secure all of its obligations under the Loan by granting the Lenders a first priority security interest in all of the Company’s assets, including the Company’s intellectual property and pledges of (i) one hundred percent (100%) of the Company’s equity interests in its domestic subsidiaries and (ii) sixty-five percent (65%) of the Company’s equity interests in its foreign subsidiaries. In connection with the grant of the security interest in favor of the Lenders in the Company’s intellectual property, the Company had entered into an intellectual property security agreement with the Lenders and a source code escrow agreement with the Lenders and an independent third party.  In addition, the Company’s CEO provided the Lenders with a personal guaranty of up to $500,000 secured by his equity interests in the Company. The Company agreed to pay the CEO $80,000 in consideration for extending that personal guaranty. This payment was included as a part of capitalized debt issuance costs.

The Loan Agreement contained customary representations, warranties and covenants, including covenants by the Company limiting additional indebtedness, liens, guaranties, mergers and consolidations, substantial asset sales, investments and loans, sale and leasebacks, transactions with affiliates and fundamental changes in its business.  In addition, the Loan Agreement contained financial covenants by the Company that establish (i) a maximum ratio of indebtedness to recurring revenue; (ii) a maximum ratio of indebtedness to EBITDA; and (iii) a minimum liquidity test (defined as the Company’s cash plus amounts available under a line of credit of up to $250,000).  The Loan Agreement also imposed limits on capital expenditures for each calendar year during the term of the Loan Agreement.

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The Loan Agreement provided for events of default customary for credit facilities of this type, including but not limited to non-payment, defaults on other debt, misrepresentation, breach of covenants, representations and warranties, insolvency and bankruptcy.  Upon an event of default relating to insolvency, bankruptcy or receivership, the amounts outstanding under the Loan would become immediately due and payable and the Lenders commitments would be automatically terminated.  Upon the occurrence and continuation of any other event of default, the Lenders could accelerate payment of all obligations and terminate the Lenders’ commitments under the Loan Agreement.

On July 9, 2013, the Loan Agreement was amended (the “Amended Loan Agreement No. 1”) to allow the Company to repurchase 170,000 of its shares from Greenleaf and to increase the maximum ratio of indebtedness to EBITDA from 2.25:1 to 2.60:1 for the quarters ended May 31, 2013, August 31, 2013 and November 30, 2013. In consideration for entering into the Amended Loan Agreement No. 1, the Company issued the Lenders warrants to purchase 25,000 shares of common stock at an exercise price of $1.00 per share. The warrants were to vest monthly over three years, with accelerated vesting under certain circumstances including if the Loan was repaid prior to maturity, and terminate if not exercised on or before July 9, 2020.

Upon issuance, the warrants did not meet the requirements for equity classification, because such warrants provide a cash-out election allowing the holder to a one time right to require the Company to repurchase all or a portion of the warrants.  Therefore these warrants were required to be accounted for as a liability.  Changes in fair value are recognized as either a gain or loss in the consolidated statement of operations under the caption “Other income.”

The Company determined the fair value of the warrants using the Black-Scholes valuation model.  The grant date fair value of the warrant of approximately $51,000 was recorded a liability, with a corresponding discount recorded on the debt.  The debt discount was to be accreted through the remaining term of the Loan Agreement using the effective interest rate method.  Accretion  recorded as interest expense during the three and six months ended November 30, 2013 was approximately $4,000 and $6,000, respectively.  As of November 30, 2013 the warrants were adjusted to fair value of $45,000 resulting in $6,000 of other income recorded during the six months ended November 30, 2013.

In December 2013, the Company paid a pre-payment penalty of $81,000 and agreed to repurchase the outstanding warrant to purchase 25,000 shares of common stock at an exercise price of $1.00 per share in exchange for $19,000. (see Note I).

G.

Stock Purchase Agreement

In June 2013, the Company purchased 170,000 shares of common stock from Greenleaf, The Ronda E. Stryker and William D. Johnston Foundation, and The L. Lee Stryker 1974 Irrevocable Trust fbo Ronda E. Stryker, for a purchase price of $62,900 or $0.37 per share as detailed in Note G to the consolidated financial statements as of May 31, 2013.  The agreement provides an option for the Company to either make an offer to purchase the remaining 101,411 shares held by Greenleaf at $0.37 per share or to provide Greenleaf with registration rights with respect to the remaining shares as set forth in the Registration Rights Agreement dated March 8, 2011. Greenleaf is under no obligation to accept the Company’s offer to purchase the remaining shares on the terms set forth above, however, if the offer is made by the Company and rejected, the Company will no longer be obligated to provide Greenleaf with registration rights with respect to the remaining shares. As part of the agreement, Greenleaf agreed not to sell or transfer the shares for a one year period from the transaction date.

H.

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, to Mentor, pursuant to an Asset Purchase Agreement dated August 30, 2013.  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) of which will be paid 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 (the “Earn-Out Payments”), subject to the terms of the Earn-Out Agreement dated August 30, 2013.  

The Company will continue to sell and support the CADRA technology throughout Europe (except Germany) and, for a one year period from the closing, will retain the rights to sell and support the technology to the largest U.S. CADRA user, Sikorsky Aircraft.

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The transaction generated a gain during the current quarter which was composed of the following (000’s):

Proceeds from the sale of the CADRA technology	$	3,200
Liabilities assumed by Mentor related to deferred maintenance obligations		607
Professional fees and other expenses related to the transaction		(448)
Goodwill allocated to the CADRA product line		(3,261)
Net book value of equipment transferred in the sale		(7)
Gain on sale of CADRA product line	$	91

Any additional Earn-Out Payments received by the Company will be recorded during the periods in which Mentor reports amounts due under the Earn-Out Agreement so long as collectability has been determined.

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 available to be issued.  On December 5, 2013, the Company entered into an amended and restated loan agreement (the “Amended Loan Agreement No. 2”) between the Company, as borrower and Prides Crossing Capital Funding, L.P., (the “Lender”) whereby the parties agreed to amend and restate the Company’s existing $2.7 million Loan Agreement following the CADRA Sale. The Lender was the successor to Prides Crossing Capital, L.P. and Prides Crossing Capital-A, L.P., the Lenders under the Loan Agreement. Under the terms of the Amended Loan Agreement No. 2, the Company agreed to pay down the principal of the Loan Agreement from $2.7 million to $1.0 million (the “Term Note”) using a portion of the proceeds from the CADRA Sale. In addition, the Company paid a pre-payment penalty of $81,000 and agreed to repurchase the outstanding warrant to purchase 25,000 shares of common stock at an exercise price of $1.00 per share in exchange for $19,000.

The amended and restated Term Note matures on January 1, 2015 and bears an interest rate of 14% payable in arrears on a monthly basis throughout the life of the loan commencing on January 1, 2014. The Term Note may be repaid in full at any time but partial voluntary pre-payments are not allowed. If a pre-payment is made on or prior to September 30, 2014, the Company shall pay a yield maintenance fee equal to the interest that would have accrued under the Term Note from the date of pre-payment through September 30, 2014. No yield maintenance fee is due for a pre-payment made subsequent to September 30, 2014.

The Company agreed to secure all of its obligations under the Term Note by granting the Lender a first priority security interest in all of the Company’s assets, including the Company’s intellectual property and pledges of (i) one hundred percent (100%) of the Company’s equity interests in its domestic subsidiaries and (ii) sixty-five percent (65%) of the Company’s equity interests in its foreign subsidiaries.  In connection with the grant of the security interest in favor of the Lender in the Company’s intellectual property, the Company has entered into an intellectual property security agreement with the Lender and will enter into a source code escrow agreement with the Lender and an independent third party on a post-closing basis.  In addition, the Company’s Chief Executive Officer has provided the Lender with a personal guaranty of up to $500,000 secured by his equity interests in the Company.

The Amended Loan Agreement No. 2 contains customary representations, warranties and covenants, including covenants by the Company limiting additional indebtedness, liens, guaranties, mergers and consolidations, substantial asset sales, investments and loans, sale and leasebacks, transactions with affiliates and fundamental changes in its business.  In addition, the Amended Loan Agreement No. 2 contains financial covenants by the Company that establish (i) a month-end minimum consolidated cash balance of $1.0 million of which no less than $750,000 must be held in the Company’s main operating account that is subject to a deposit account control agreement; (ii) a minimum of $750,000 of consolidated cash at all times; (iii) a quick ratio covenant, which provides that on the last day of each fiscal quarter the ratio of the Company’s cash plus accounts receivable divided by accounts playable plus accrued expenses shall not be less than 2.7:1; and (iv) a covenant that provides that the Company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) for Q3 and Q4 of fiscal 2014 shall not exceed  a loss of $200,000 for each of those fiscal quarters and shall be greater than positive EBITDA of $100,000 for each subsequent fiscal quarter. The Amended Loan Agreement No. 2 also imposes limits on capital expenditures for each fiscal year during the term of the Amended Loan Agreement No. 2. As part of the Amended Loan Agreement No. 2 the Company, the Lender and First Republic Bank entered into a deposit account control agreement pursuant to which the Lender will perfect its security interest in the assets held in the Company’s main operating account at First Republic Bank.

The Amended Loan Agreement No. 2 provides for events of default customary for credit facilities of this type, including but not limited to non-payment, defaults on other debt, misrepresentation, breach of covenants, representations and warranties, insolvency and bankruptcy.  Upon an event of default relating to insolvency, bankruptcy or receivership, the amounts outstanding under the Amended Loan Agreement No. 2 will become immediately due and payable and the Lender commitment will be automatically terminated.  Upon the occurrence and continuation of any other event of default, the Lender may accelerate payment of all obligations and terminate the Lender’s commitments under the Amended Loan Agreement No. 2.

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

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 lender;

·

comply with the covenant requirements of our loan agreement;

·

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”), Product Data Management (“PDM”) and Collaboration technologies, all of which fit under the broadly defined PLM industry. Pursuant to the terms of the sale of the CADRA product line on October 18, 2013, we will continue to sell and support that technology in certain limited markets. Our operations are organized geographically in the U.S. and Europe. We have sales and customer support offices in the U.S., Germany and Italy. We also operate through resellers in Europe and Asia. Components of revenue and long-lived assets by geographic location are outlined in Note E to the consolidated financial statements for the fiscal year ended May 31, 2013.

Since the Recapitalization Transaction described in Note A to the condensed Consolidated Financial Statements herein, 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.

Revenue from our ProductCenter technology has been experiencing year over year revenue declines for six 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.

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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. Fiscal 2013 CADRA revenue declined by about 1% as compared to fiscal 2012.

Refinancing of Debt

In May 2013, the Company entered into a new three year, $2.7 million loan agreement (the “Loan Agreement”) that replaced the Company’s prior debt facilities that were to expire in February 2014. The Loan Agreement required quarterly principal payments of $135,000 beginning on October 1, 2014 and carried a 14% interest rate due in arrears each calendar quarter beginning July 1, 2013.

On July 9, 2013, the Loan Agreement was amended (the “Amended Loan Agreement No. 1”) to allow the Company to repurchase 170,000 of its shares from Greenleaf and to increase the maximum ratio of indebtedness to EBITDA from 2.25:1 to 2.60:1 for the quarters ended May 31, 2013, August 31, 2013 and November 30, 2013. In consideration for entering into Amended Loan Agreement No. 1, the Company issued the Lenders warrants to purchase 25,000 shares of common stock at an exercise price of $1.00 per share. The warrants vest monthly over three years, with accelerated vesting under certain circumstances including if the loan was repaid prior to maturity, and terminate if not exercised on or before July 9, 2020.

Furthermore, on December 5, 2013, the Loan Agreement was again amended (the “Amended Loan Agreement No. 2”) in accordance with a prior agreement with the Lenders in connection with their consent to the sale of the CADRA product line. The terms of Amended Loan Agreement No. 2 are detailed in Note I and in the Liquidity and Capital Resources section below.

CADRA Sale

On October 18, 2013, SofTech sold its CADRA product line to Mentor Graphics Corporation (“Mentor”) for a purchase price of $3.2 million (subject to any indemnification claim), plus potential earn-out payments of up to an additional $750,000 based on 10% of CADRA revenue generated by Mentor in the three year period following the closing (the “CADRA Sale”).

The assets sold related to the CADRA product line include (i) rights to, and interest in, all computer software; (ii) specified physical assets; (iii) all customer information; and (iv) purchase orders in backlog and customer support agreements. The liabilities to be assumed by Mentor are limited to customer support obligations.  Specifically excluded from the sale and retained by SofTech are all remaining assets and liabilities not specifically identified and all billed accounts receivable of the CADRA product line through the closing date.

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.

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 2013.

Recently, SofTech has developed for one of its largest customers an easy to use product offering combining a third party analysis solution with a 2D solution that allows a mechanical design engineer to simulate the movement of his or her design with limited training. Giving the mechanical design engineer the ability to detect design flaws and correct them with this easy to use technology represents an advancement, we believe, and one we hope to capitalize on in the coming years. We will seek to further develop this solution and introduce it to our customers over the coming fiscal year.

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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.   In addition, pursuant to the terms of the distribution agreement, for a period of one year from the closing, we will be the account representative for Sikorsky Aircraft, the largest CADRA user in the United States. The margin to be earned by SofTech for this distribution activity will be 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. Our revenue from consulting activities for fiscal year 2013 was about $875,000, representing an increase of 19% over the prior year period.  For the first six months of fiscal 2014, our consulting revenue increased by 6% as compared to the same period in fiscal 2013. This increase in consulting revenue was driven partly by our new partnership agreement with Aras, a rapidly growing PLM company that is disrupting the status quo. We intend to continue to grow and invest in our consulting business following the CADRA Sale.

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, 2013, SofTech had approximately $20 million in federal tax attributes and approximately $7 million in state tax attributes. We expect to generate taxable income in fiscal year 2014 from the CADRA Sale, which we believe will be significantly or completely offset from federal and state taxation by use of these tax assets. We will continue to seek strategic transactions for the benefit of our shareholders, but there can be no assurances in this regard.

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. These contingent payments are due on or before April 1, 2014, 2015, 2016 and 2017 based on the revenue recorded during Mentor’s fiscal years ending January 31, 2014, 2015, 2016 and 2017.

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Contingent Rights with Respect to Transferred Patents.  In addition to our technology offerings, the Company retained its financial interest in the patents sold to Acacia Research Group (“Acacia”) in June 2012. In December 2012, Acacia filed infringement lawsuits in East Texas against Dassault Systemes SolidWorks (“Dassault”), Autodesk and Siemens seeking treble damages for the unauthorized use of the technology described in those patents. SofTech received $300,000 as a non-recoverable advance payment against 30% of the net proceeds received by Acacia. A trial date has been set for November 2015. We believe there are other technology companies other than the three that have been sued that are also using the ideas protected by these patents. Acacia has complete control with regard to actions it may take or not take with regard to enforcing these patents. SofTech has a contractual obligation to support Acacia in its legal proceedings.  In July 2013, Dassault filed a third party claim against SofTech in connection with the above described suit by Acacia against them. Dassault alleges that SofTech promised an arrangement that would protect Dassault from claims of infringement of the patents in question. Among other things, Dassault is seeking reimbursement from SofTech of any amounts it may have to pay for infringing the patents, including legal fees. SofTech believes that Dassault’s claims are without merit and intends to vigorously defend itself against them.

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, 2013 included in our previously filed Form 10-K. There have been no material changes to the accounting policies for the six months ended November 30, 2013.

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Results of Operations

Three and Six Months Ended November 30, 2013, as Compared to Three and Six Months Ended November 30, 2012

The table below presents the comparative income statements for the three month periods ended November 30, 2013 and November 30, 2012 along with the dollar and percentage change amounts for each revenue and expense item (expressed in thousands, except percentages):

		November 30, 2013		November 30, 2012		Change in $	Change in %
Revenue:
Products	$	376	$	478	$	(102)	(21.3)%
Services		1,038		1,194		(156)	(13.1)
Royalties from sale of patents		-		100		(100)	(100.0)
Total revenue		1,414		1,772		(358)	(20.2)
Cost of revenue:
Products		28		24		4	16.7
Services		264		323		(59)	(18.3)
Total cost of revenue		292		347		(55)	(15.9)
Gross margin		1,122		1,425		(303)	(21.3)
Research and development expenses		304		323		(19)	(5.9)
Selling, general and administration expenses		866		789		77	9.8
Gain on sale of product line		(91)		-		(91)	-
Operating income		43		313		(270)	(86.3)
Interest expense		104		69		35	50.7
Other income		(17)		(8)		(9)	112.5
Net income (loss)	$	(44)	$	252	$	(296)	(117.5)%

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The table below presents the comparative income statements for the six month periods ended November 30, 2013 and November 30, 2012 along with the dollar and percentage change amounts for each revenue and expense item (expressed in thousands, except percentages):

		November 30, 2013		November 30, 2012		Change in $	Change in %
Revenue:
Products	$	618	$	693	$	(75)	(10.8)%
Services		2,172		2,359		(187)	(7.9)
Royalties from sale of patents		-		290		(290)	(100.0)
Total revenue		2,790		3,342		(552)	(16.5)
Cost of revenue:
Products		62		49		13	26.5
Services		572		631		(59)	(9.4)
Total cost of revenue		634		680		(46)	(6.8)
Gross margin		2,156		2,662		(506)	(19.0)
Research and development expenses		639		567		72	12.7
Selling, general and administration expenses		1,747		1,547		200	12.9
Gain on sale of product line		(91)		-		(91)	-
Operating income (loss)		(139)		548		(687)	(125.4)
Interest expense		199		134		65	48.5
Other income		(28)		(11)		(17)	154.5
Net income (loss)	$	(310)	$	425	$	(735)	(172.9)%

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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, 2013 and November 30, 2012:

	Items as a percentage of revenue
	November 30,	November 30,
	2013	2012
Revenue:
Products	26.6%	27.0%
Services	73.4	67.4
Royalties from sale of patents	-	5.6
Total revenue	100.0	100.0
Cost of revenue:
Products	2.0	1.4
Services	18.7	18.2
Total cost of revenue	20.7	19.6
Gross margin	79.3	80.4
Research and development expenses	21.5	18.2
Selling, general and administrative expenses	61.2	44.5
Gain on sale of product line	(6.4)	-
Operating income	3.0	17.7
Interest expense	7.4	3.9
Other income	(1.2)	(0.5)
Net income (loss)	(3.1)%	14.2%

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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, 2013 and November 30, 2012:

	Items as a percentage of revenue
	November 30,	November 30,
	2013	2012
Revenue:
Products	22.2%	20.7%
Services	77.8	70.6
Royalties from sale of patents	-	8.7
Total revenue	100.0	100.0
Cost of revenue:
Products	2.2	1.5
Services	20.5	18.9
Total cost of revenue	22.7	20.3
Gross margin	77.3	79.7
Research and development expenses	22.9	17.0
Selling, general and administrative expenses	62.6	46.3
Gain on sale of product line	(3.3)	-
Operating income (loss)	(5.0)	16.4
Interest expense	7.1	4.0
Other income	(1.0)	(0.3)
Net income (loss)	(11.1)%	12.7%

Revenue

Total revenue for the three month periods ended November 30, 2013 and 2012 was approximately $1.4 million and $1.8 million, respectively. The following table summarizes total revenue by product line for the three month periods ended November 30, 2013 and November 30, 2012 (in thousands, except percentages):

	November 30,
		2013		2012		$ Change	% Change
Product Line
ProductCenter	$	731	$	766	$	(35)	(4.6)%
CADRA		637		898		(261)	(29.1)
Royalties from sale of patents		-		100		(100)	(100.0)
Other		46		8		38	475.0
Total	$	1,414	$	1,772	$	(358)	(20.2)%

Total revenue for the six month periods ended November 30, 2013 and 2012 was approximately $2.8 million and $3.3 million, respectively. The following table summarizes total revenue by product line for the six month periods ended November 30, 2013 and November 30, 2012 (in thousands, except percentages):

	November 30,
		2013		2012		$ Change	% Change
Product Line
ProductCenter	$	1,469	$	1,482	$	(13)	(0.9)%
CADRA		1,265		1,536		(271)	(17.6)
Royalties from sale of patents		-		290		(290)	(100.0)
Other		56		34		22	64.7
Total	$	2,790	$	3,342	$	(552)	(16.5)%

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The product line revenue is further broken down by revenue type hereunder with explanations for changes in the current periods compared to the same periods in fiscal 2013.

Product Revenue

Product revenue for the three and six month periods ended November 30, 2013 was approximately $376,000 and $618,000, respectively, as compared to approximately $478,000 and $693,000, respectively, for the same periods in the prior fiscal year.

The table below details product revenue by product line for the three month periods ended November 30, 2013 and 2012 (in thousands, except percentages):

	November 30,
		2013		2012		$ Change	% Change
Product Line
ProductCenter	$	43	$	45	$	(2)	(4.4)%
CADRA		325		433		(108)	(24.9)
Other		8		-		8	-
Total	$	376	$	478	$	(102)	(21.3)%

The table below details product revenue by product line for the six month periods ended November 30, 2013 and 2012 (in thousands, except percentages):

	November 30,
		2013		2012		$ Change	% Change
Product Line
ProductCenter	$	110	$	62	$	48	77.4%
CADRA		500		613		(113)	(18.4)
Other		8		18		(10)	(55.6)
Total	$	618	$	693	$	(75)	(10.8)%

Our product revenue for ProductCenter experienced an improvement for the first half of fiscal year 2014 as compared to the same period in fiscal 2013. The increase which occurred in the first quarter was significant as a percentage but only because the comparative fiscal year results were so low, and does not signal a strengthening in demand for this technology. This product line’s challenges both from a macro-economic and from a competitive standpoint as detailed above make it difficult to reliably forecast receipt of purchase orders from customers.

Product revenue from our CADRA technology declined in the current quarter as compared to the same period in the prior fiscal year. The CADRA Sale occurred in the middle of the second quarter of fiscal 2014 and is responsible for the decline in product revenue for that technology for both the three and the six month periods ended November 30, 2013 as compared to the prior fiscal year.

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 November 30, 2013 and 2012, (in thousands, except percentages):

		2013		2012		$ Change	% Change
Product Line
ProductCenter	$	688	$	721	$	(33)	(4.6)%
CADRA		312		465		(153)	(32.9)
Other		38		8		29	362.5
Total	$	1,038	$	1,194	$	(157)	(13.1)%

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The table below summarizes service revenue by product line for the six months ended November 30, 2013 and 2012, (in thousands, except percentages):

		2013		2012		$ Change	% Change
Product Line
ProductCenter	$	1,359	$	1,420	$	(61)	(4.3)%
CADRA		764		923		(159)	(17.2)
Other		49		16		33	206.3
Total	$	2,172	$	2,359	$	(187)	(7.9)%

Maintenance revenue was approximately $795,000 and $1.7 million for the three and six month periods ended November 30, 2013, as compared to $1.0 and $2.0 million for the same periods in the prior fiscal year. The CADRA Sale at the mid-point of the second quarter of fiscal year 2014 was primarily responsible for the maintenance revenue declines for the current year as compared to fiscal year 2013. ProductCenter maintenance revenue was down approximately 5.8% and 6.7% for the three and six month periods ended November 30, 2013, respectively, compared to the same periods in the prior fiscal year. The decline was due to non-renewal of maintenance contracts in fiscal 2013 at a slightly higher rate than we have experienced in the recent past. New licenses that are always sold with one-year maintenance contracts were insufficient to offset the non-renewals.

Consulting revenue was approximately $242,000 and $442,000 for the three and six month periods ended November 30, 2013, an increase of approximately 8% and 6%, respectively, from the same periods in the prior fiscal year. The current year increases follow an increase of almost 19% in fiscal 2013 as compared to fiscal year 2012. Over the last few years the Company has expanded its consulting opportunities by partnering with other technology companies such as Aras and Spaceclaim.

Royalties from sale of patents

During the three and six months ended November 30, 2013, there were no royalties received from the sale of patents.  Royalties from sale of patents was approximately $100,000 and $290,000 for the three and six months ended November 30, 2012, respectively.  

Since the Recapitalization Transaction described hereunder, the Company has been actively engaged in acquiring and filing U.S. patents 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.

In June 2012 the Company sold its rights, title and interests in three of its U.S. patents (“Patents”) in exchange for a non-refundable, initial royalty payment of $200,000 (the “Initial Payment”) and in September 2012, the agreement was amended to include two other U.S. patents (“Additional Patents”) and the Initial Payment was increased by $100,000.  The agreement gives the Buyer complete control over what, if any, actions shall be taken in the future to monetize the Patents through licensing, sale, enforcement or other means. In the event whereby monies are derived from the Patents, the Company is due 30% of the net proceeds (the “Net Proceeds”), as defined in the agreement. The Initial Payment shall be reimbursable from Net Proceeds to the extent any are due. There can be no assurance that the Company will derive any additional monies from the Patents, however.

The sale of the Patents is a multiple element arrangement as defined under ASC 605 and, as such, the Company allocated the Initial Payment between the sale of the Patents that were delivered during the fiscal quarter and support services that were undelivered. Support services include being available to the Buyer to assist them should they require such assistance in licensing or pursuing other means on monetizing the "Patents" to third parties. The allocation of the Initial Payment to the patent and support services elements was based on management’s best estimate of the selling price of each element. The Initial Payment was allocated as follows: Patents - $290,000; and Support Services - $10,000. The revenue allocated to support services has been deferred and will be recognized as revenue when the services are performed.

Gross Margin

Gross margin as a percentage of revenue was 79.3% and 77.3% for the three and six month periods ended November 30, 2013, respectively, as compared to 80.4% and 79.7% in the same periods in the prior fiscal year. The decrease in gross margin was due to a 20.2% and 16.5% reduction in revenue in the three and six month periods ending November 30, 2013 as compared to the same periods in the prior fiscal year.  As noted above, during the three and six month periods ended November 30, 2012, the Company sold three of its Patents resulting in $100,000 and $290,000, respectively, of revenue recorded in the prior fiscal year. In addition, revenue declined as a result of the CADRA Sale during the second quarter of fiscal 2014.

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Research and Development Expenses

Research and development expenses were approximately $304,000 and $639,000 for the three and six month periods ended November 30, 2013, respectively, as compared to approximately $323,000 and $567,000 in the comparable periods in fiscal 2013. The majority of the increase in R&D expenses for the six month periods ended November 30, 2013 as compared to the prior fiscal year was the result of more development resources being allocated towards upgrading and maintaining our ProductCenter and CADRA product offerings in the current fiscal year, activities that are expensed as incurred, as compared to new product development in fiscal 2013, activities that are subject to capitalization. Specifically, capitalized software development expenditures were $48,000 and $159,000 for the three and six month periods ended November 30, 2012, respectively, as compared to $18,000 and $57,000 for the three and six month periods ended November 30, 2013, respectively. The CADRA Sale and the resulting reduction in R&D personnel in the current quarter offset the impact of the change in capitalized costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were approximately $866,000 and $1.7 million for the three and six month periods ended November 30, 2013, respectively, as compared to approximately $789,000 and $1.5 million for the comparable periods in fiscal year 2013. These increased expenses were due primarily to professional fees related to the SolidWorks legal proceedings (see PART II. OTHER INFORMATION), the debt amendments as described in Notes F and I, and the negotiation of our headquarters office lease.

Gain on sale of product line

The Company recorded a gain on the sale of CADRA product line of approximately $91,000 which was completed 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 purchase price was $3.2 million of which the Company received $2.88 million at the close and will receive an additional $320,000 on October 18, 2014 subject to offset for any indemnification claims Mentor may have under the Asset Purchase Agreement. In addition, Mentor assumed contractual obligations related to maintenance contracts totaling approximately $607,000. Goodwill totaling $3.26 million was allocated to the CADRA product line and was included in the derivation of the gain on sale of the product line. Professional fees and other expenses related to the transaction totaled approximately $448,000. Finally, tangible assets with a net book value of approximately $7,000 were transferred to Mentor. Any contingent payments of up to $750,000 based on 10% of the revenue generated by Mentor from CADRA over the next three years will be recorded as earned.

The Company will continue to market and support the CADRA technology throughout Europe (except Germany) and for a specified customer in the U.S. for at least one year from the transaction date under a Distribution Agreement signed on October 18, 2013 between the Company and Mentor. The Distribution Agreement is subject to renewal thereafter by mutual agreement. Due to the material nature of the Company’s continued involvement, the transaction did not qualify for discontinued operations treatment.

Interest Expense

Interest expense for the three and six month periods ended November 30, 2013 was approximately $104,000 and $199,000, respectively, as compared to approximately $69,000 and $134,000 for the comparable periods in the prior fiscal year. This increase was due to an increased balance outstanding on our term loan as of a result of refinancing our debt facility in May 2013. The average debt outstanding for the three and six month periods ended November 30, 2013 was $2.7 million as compared to $1.8 million for the comparable periods in fiscal year 2013, an increase of 50%.

Net Income

Net income (loss) for the three and six month periods ended November 30, 2013 was approximately ($44,000) and ($310,000) or ($.05) and ($.35) per share as compared to approximately $252,000 and $425,000 or $0.25 and $0.43 per share for the comparable periods in the prior fiscal year.

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Liquidity and Capital Resources

During the six month period ended November 30, 2013 operating activities used approximately $1.8 million in cash. Approximately $1.3 million of the proceeds from the CADRA Sale was placed in a restricted cash account for the benefit of the Lender pending an amendment to the Loan Agreement. The liability related to deferred maintenance revenue used cash of approximately $538,000. This decrease is the normal cycle as the majority of the annual contracts renew in Q3 and Q4. Receivables increased by approximately $196,000 due to a significant CADRA order received under the Distribution Agreement with Mentor. Accounts payable, accrued expenses and other liabilities increased by approximately $402,000 thereby partially offsetting the aforementioned cash uses primarily as a result of the large CADRA order taken as a reseller and certain accruals related to the CADRA Sale.

During the comparable period in fiscal year 2013, operating activities used $356,000. Net income adjusted for non-cash expenses provided $531,000 which was more than offset by an increase in accounts receivable that used $303,000 and a seasonal decrease in deferred maintenance revenue that used $630,000. These uses of cash in fiscal 2013 are consistent with the uses in fiscal 2014 as described above.

Net cash provided by investing activities for the six months ended November 30, 2013 was approximately $2.3 million primarily composed of the proceeds from the CADRA Sale net of transaction costs.

Net cash used in financing activities totaled approximately $103,000 composed primarily of $63,000 of costs associated with the buyback of 170,000 Treasury shares during the first quarter of fiscal 2014 as described in Note G herein.

Our Credit Facility  

As of November 30, 2013, we had $2.7 million of outstanding indebtedness under our Loan Agreement with Prides Crossing Capital. The terms of that Loan Agreement are detailed in Note F to the financial statements herein. On December 5, 2013, the Loan Agreement was amended in accordance with an agreement with our Lenders in connection with their consent to the CADRA Sale. Under the terms of the Amended Loan Agreement No. 2 we agreed to pay down the principal of the Loan Agreement from $2.7 million to $1.0 million (the “Term Note”) using a portion of the proceeds from the CADRA Sale. In addition, we paid a pre-payment penalty of $81,000 and agreed to repurchase 25,000 warrants with an exercise price of $1.00 per share in exchange for $19,000.

The amended and restated Term Note matures on January 1, 2015 and bears an interest rate of 14% payable in arrears on a monthly basis throughout the life of the loan commencing on January 1, 2014. The Term Note may be repaid in full at any time but partial voluntary pre-payments are not allowed. If a pre-payment is made on or prior to September 30, 2014, we shall pay a yield maintenance fee equal to the interest that would have accrued under the Term Note from the date of pre-payment through September 30, 2014. No yield maintenance fee is due for a pre-payment made subsequent to September 30, 2014.

We agreed to secure all of its obligations under the Term Note by granting the Lender a first priority security interest in all of our assets, including our intellectual property and pledges of (i) one hundred percent (100%) of our equity interests in its domestic subsidiaries and (ii) sixty-five percent (65%) of our equity interests in its foreign subsidiaries.  In connection with the grant of the security interest in favor of the Lender in our intellectual property, we entered into an intellectual property security agreement with the Lender and will enter into a source code escrow agreement with the Lender and an independent third party on a post-closing basis.  In addition, our Chief Executive Officer has provided the Lender with a personal guaranty of up to $500,000 secured by his equity interests in the Company.

The Amended Loan Agreement No. 2 contains customary representations, warranties and covenants, including covenants by us limiting additional indebtedness, liens, guaranties, mergers and consolidations, substantial asset sales, investments and loans, sale and leasebacks, transactions with affiliates and fundamental changes in our business.  In addition, the Amended Loan Agreement No. 2 contains financial covenants by us that establish (i) a month-end minimum consolidated cash balance of $1.0 million of which no less than $750,000 must be held in our main operating account that is subject to a deposit account control agreement; (ii) a minimum of $750,000 of consolidated cash at all times; (iii) a quick ratio covenant, which provides that on the last day of each fiscal quarter the ratio of our cash plus accounts receivable divided by accounts playable plus accrued expenses shall not be less than 2.7:1; and (iv) a covenant that provides that our earnings before interest, taxes, depreciation and amortization (“EBITDA”) for Q3 and Q4 of fiscal 2014 shall not exceed  a loss of $200,000 for each of those fiscal quarters and shall be greater than positive EBITDA of $100,000 for each subsequent fiscal quarter. The Amended Loan Agreement No. 2 also imposes limits on capital expenditures for each fiscal year during the term of the Amended Loan Agreement No. 2. As part of the Amended Loan Agreement No. 2 we entered into a deposit account control agreement pursuant to which the Lender will perfect its security interest in the assets held in our main operating account at First Republic Bank.

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The Amended Loan Agreement No. 2 provides for events of default customary for credit facilities of this type, including but not limited to non-payment, defaults on other debt, misrepresentation, breach of covenants, representations and warranties, insolvency and bankruptcy.  Upon an event of default relating to insolvency, bankruptcy or receivership, the amounts outstanding under the Amended Loan Agreement No. 2 will become immediately due and payable and the Lender commitment will be automatically terminated.  Upon the occurrence and continuation of any other event of default, the Lender may accelerate payment of all obligations and terminate the Lender’s commitments under the Amended Loan Agreement No. 2.

We believe that our cash together with our new credit facility and cash provided by operations will be sufficient to meet our capital needs for at least the next twelve months.

Sources of Cash

As of November 30, 2013, we had cash on hand of approximately $3.0 million, of which approximately $1.4 million was restricted in an escrow account for the benefit of our Lender pursuant to the amendment to the Loan Agreement. This represents an increase of approximately $1.7 million from May 31, 2013 resulting primarily from the CADRA Sale offset by cash used in operating, investing and financing activities the most significant of which are described above.  

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.

Item 3. 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 4. Controls and Procedures

Evaluation of 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 Chief Executive Officer 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 the end of the period covered by this report (November 30, 2013), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting. There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On July 19, 2013, Dassault Systemes SolidWorks Corporation (“SolidWorks”) filed a complaint (the “Complaint”) against the Company in the United States District Court for the Eastern District of Texas Tyler Division alleging fraud and false assurances. The Complaint is connected to a patent infringement suit brought by Auto-Dimensions LLC, a wholly-owned subsidiary of Acacia Research Group, against SolidWorks in December 2012. The Company owned those patents in question and sold them to Auto-Dimensions LLC in June 2012. SolidWorks is seeking reimbursement from the Company of attorneys’ fees and any judgments or settlement monies it may incur under the infringement suit, as well as punitive and multiple damages.  The Company believes the Complaint is without merit and is vigorously defending itself in this action.

Item 1A. Risk Factors

In addition to the other information set forth in this report and the risk factors below, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors" in our Annual Report on Form 10-K for the year ended May 31, 2013, which could materially affect our business, financial condition or future results. Our business is subject to numerous risks. We caution you that the following important factors, among others, could cause our actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf in filings with the SEC, press releases, communications with investors and oral statements. Any or all of our forward-looking statements in the Quarterly Report on Form 10-Q and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Any factors mentioned in the discussion below will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may differ materially from those anticipated in forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosure we make in our reports filed with the SEC.

General Risks

Failure to comply with financial covenants in our Amended Loan Agreement No. 2 could adversely affect us.

Our Amended Loan Agreement No. 2 includes enhanced financial covenants which require us to maintain compliance with certain financial ratios during the term of the agreement and other restrictions on our use of cash, such as maintaining a month-end minimum consolidated cash balance of $1.0 million, of which no less than $750,000 must be held in our main operating account that is subject to a deposit account control agreement with our Lender.  Failure to comply with the financial covenants or other restrictions is an event of default under the agreement. In an event of default, the Lender has the right to accelerate repayment of all sums due and take any and all action, at its sole option, to collect monies owed to it, including to enforce and foreclose on its security interest on all of our assets. If our Lender were to accelerate our debt payments, our assets may not be sufficient to fully repay the debt and we may not be able to obtain capital from other sources at favorable terms or at all.  

We may not have sufficient funds to repurchase common stock pursuant to the put right feature in our recent private placement if exercised when we are required to do so.

Investors in our private placement in Q2 and Q3 of fiscal year 2013 have certain contractual rights, such as the right to require us to repurchase the common stock for an aggregate purchase price of $275,000 for a 30-day period commencing in May 2014 and the right to receive quarterly fees. Funds required to repurchase the common stock, if the repurchase right is exercised by investors, must be generated from a combination of cash flow from operations and cash on hand while maintaining liquidity levels required under our Amended Loan Agreement No. 2. There can be no assurance that the Company will generate positive cash flow from operations to meet this cash requirement while also remaining in compliance with its debt agreement.

33

Risks Related to SofTech Following the Sale of the CADRA business

Following the sale of the CADRA business, we will need to restructure our business to enable us to successfully operate as a significantly smaller company and to seek new sources of revenue and possible new strategic initiatives. SofTech operating results subsequent to the sale of the CADRA business may not be profitable, and we may be unsuccessful in developing new business opportunities.

The CADRA business was responsible for about half of the consolidated revenue in fiscal 2013 and the majority of the profitability and cash flow.  The importance of the CADRA business to the consolidated results in fiscal 2013 was similar in at least the two immediately preceding fiscal years. The remaining product lines following the CADRA Sale, namely ProductCenter and the Connector technologies, are product lines that have historically been less profitable than the CADRA business, have fewer customers and have a more complex sales cycle. It is likely that the Company will need to reduce spending in order to achieve profitability, and ultimately will need to find new strategic directions and find new sources of business revenue in order to meaningfully increase the size of its business. The new product ideas that the management team has interest in pursuing as described in the patent filings over the last few years are speculative in that the products are still in development and the management team may not have the depth of experience required to be successful in those new markets.

A portion of the purchase price is contingent and we may not receive those payments.

A portion of the purchase price, an amount equal to $320,000, will be held back by the Mentor to secure any indemnification claims under the Asset Purchase Agreement. If indemnification claims are asserted, we may not receive all or any of the $320,000 payable to us.

In addition, up to $750,000 of the total purchase price is subject to an earn-out arrangement relating to the revenues generated by the CADRA business during the three-year period following the asset sale. The Asset Purchase Agreement also allows Mentor to withhold monies due under the earn-out arrangement if indemnification claims are asserted. Mentor has broad discretion to operate its post-closing business, and may choose to do so in a manner which may or may not result in the payment of all of the CADRA royalties pursuant to the Earn-Out Agreement.

We will continue to incur the expenses of complying with public company reporting requirements following the closing of the CADRA Sale.

After the CADRA Sale, we will continue to be required to comply with the applicable reporting requirements of the Securities Exchange Act of 1934, as amended, even though compliance with such reporting requirements is economically burdensome and will represent an even greater percentage of our expenses post-closing as we will be a significantly smaller company following the sale of the CADRA business.

Risks Related to the Asset Purchase Agreement

Buyer is not assuming any of the excluded liabilities under the Asset Purchase Agreement.

Under the Asset Purchase Agreement, Mentor is not assuming all of the liabilities associated with the CADRA business. Certain liabilities will remain with the Company post-closing. For example, Mentor is only assuming customer support obligations and obligations for performance under the certain assigned contracts that arise after the closing, and is not assuming liability for any obligation or breach by the Company occurring or arising prior to the closing. While the Company believes that it has adequately accrued for these liabilities or is adequately insured against certain of the risks associated with such excluded liabilities, there can be no assurances that additional expenditures will not be incurred in resolving these liabilities.

The Asset Purchase Agreement may expose us to contingent liabilities.

We have agreed to indemnify Mentor for certain breaches of representations, warranties or covenants made by us in the Asset Purchase Agreement up to $3.95 million. Significant indemnification claims by the Mentor could materially and adversely affect our business, financial condition and results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

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Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits

See Exhibit Index on page 37.

35

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SOFTECH, INC.
Date: January 14, 2014	/s/ Amy E. McGuire
	Amy E. McGuire
	Chief Financial Officer
Date: January 14, 2014	/s/ Joseph P. Mullaney
	Joseph P. Mullaney
	President & Chief Executive Officer

36

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 on Form S-1, filed on June 9, 2011).
3.1.2	Articles of Amendment to Articles of Organization, effective June 7, 2011 (incorporated by reference to Exhibit 3.1.2 to the Company’s Registration Statement on Form S-1, filed 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).
10.1	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.
10.2	Amended and Restated Loan, Pledge and Security Agreement, dated December 5, 2013, by and among Prides Crossing Capital Funding, L.P. and the Company
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
**	XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

37

EX-10.1

October 17, 2013

SofTech, Inc.

59 Lowes Ways

Lowell, Massachusetts 018512

Attention:  Joseph P. Mullaney, Chief Executive Officer

Prides Crossing Capital GP, LLC

Prides Crossing Capital, L.P.

Prides Crossing Capital-A, L.P.

800 Boylston Street, Suite 2220

Boston, Massachusetts 02199
Attention: Peter M. Sherwood, Manager

Re:

Consent to Sale of Assets and Amendment to Loan, Pledge and Security Agreement

To Whom It May Concern:

Reference is made to that certain Loan, Pledge and Security Agreement dated as of May 10, 2013 (as amended, modified, supplemented, extended, renewed, restated or replaced from time to time, the “Loan Agreement”), by and among SofTech, Inc., a Massachusetts corporation (the “Borrower”), Prides Crossing Capital, L.P. (“PCC”), and Prides Crossing Capital-A, L.P. (“PCCA” and collectively with PCC, the “Lenders”).  Capitalized terms used herein but not otherwise defined herein shall have the respective meanings assigned to such terms in the Loan Agreement.

The Borrower has notified the Lenders that the Borrower has entered into an Asset Purchase Agreement dated as of August 30, 2013 (the “CADRA Sale Agreement”) with Mentor Graphics Corporation, an Oregon corporation (the “Purchaser”), pursuant to which the Borrower has agreed to sell (the “CADRA Sale”) to Purchaser certain assets of the Borrower comprising the Borrower’s CADRA product line (collectively, the “CADRA Sale Assets”) for a net cash purchase price payable on the closing date of approximately $2,880,000.    

The Borrower has requested that the Lenders (i) consent to the consummation of the CADRA Sale, (ii) waive the provisions of Section 10.12 of the Loan Agreement to the extent necessary to permit the consummation of the CADRA Sale, and (iii) release their liens and security interests in and to the CADRA Sale Assets upon consummation of the CADRA Sale.

1.

Consent, Waiver and Release.  Subject to the terms and conditions set forth in this Section 1, the Lenders hereby (a) consent to the CADRA Sale, (b) waive the provisions of Section 10.12 of the Loan Agreement solely to the extent necessary to permit SofTech to consummate the CADRA Sale and (c) agree that upon (x) the consummation of the CADRA Sale and (y) the remittance by the Purchaser to the Lenders cash equal to $1,350,000 of the net proceeds of the CADRA Sale (such cash, the “Deposit Amount”), all liens and security interests granted in favor of the Lenders in the CADRA Sale Assets shall be automatically released and terminated.  In furtherance of clause (c) of the foregoing sentence, the Lenders (i) agree to deposit and hold the Deposit Amount at U.S. Bank, N.A., in a non-interest bearing escrow account (the “Escrow Account”), subject to the Lender’s continuing security interest under the Loan Agreement, and (ii) authorize the Borrower, or its counsel, to file with the Secretary of State of the Commonwealth of Massachusetts UCC-3 amendments in substantially the form of the UCC-3 amendment attached as Exhibit A hereto, releasing such liens and security interests, (ii) agree to promptly execute and deliver at the Borrower’s expense such other documents that release Lenders’ liens and security interests on file at the U.S. Patent and Trademark Office, and (iii) agree to promptly execute and deliver, at Borrower’s expense, amendments and agreements that release the CADRA Sale Assets from the Source Code Escrow Agreement.

2.

Escrow of Deposit Amount.  By their execution of this consent letter (this “Consent”), the Borrower and the Lenders hereby agree that the Deposit Amount and Escrow Account shall be held as cash collateral and security for all outstanding amounts due under the Loan Agreement and Term Notes until the earlier of (i) thirty (30) days after the date of this Consent, or (ii) the date on which the Borrower and the Lenders shall have executed an amendment to the Loan Agreement, and any related documents (collectively the “Restructuring Amendment”), which Restructuring Amendment shall restructure the terms of the Loan Agreement, Term Notes and all other Loan Documents on terms and conditions reasonably satisfactory to the Borrower and the Lenders.  If the Borrower and the Lenders fail to execute the Restructuring Amendment within thirty (30) days after the date of this Consent (the “Restructuring Amendment Agreement Deadline”), (i) the escrow established by this Consent and subsequent agreements shall automatically terminate, the Escrow Account shall terminate and the Deposit Amount shall be transferred to the Lenders, who shall apply such funds in accordance with the terms of the Loan Agreement, and (ii) all amounts which are then unpaid under the Loan Agreement, Term Notes, and all other Loan Documents (including unpaid principal, accrued and unpaid interest, and accrued and unpaid fees) shall be immediately due and payable on the Restructuring Amendment Agreement Deadline.

3.

Effectiveness of Consent.  This Consent shall become effective upon receipt by the Lenders of counterparts of this Consent duly executed by each of the Borrower and the Lenders.  

4.

Effect on Loan Documents.  Except as specifically set forth herein, the Loan Documents shall remain in full force and effect against the Borrower and are hereby ratified and confirmed by the Borrower in all respects.  Except as otherwise expressly set forth herein, the execution, delivery and effectiveness of this Consent shall not operate as a waiver of any right, power or remedy of any Lender under the Loan Documents, nor constitute a waiver, amendment or modification of any provision of the Loan Documents except as specifically set forth herein.  This Consent shall be deemed to be a Loan Document.

5.

Miscellaneous.  This Consent shall be governed by, and construed in accordance with, the laws of the Commonwealth of Massachusetts.  This Consent may be executed in one or more counterparts, each of which shall be deemed an original and all of which when taken together shall be one agreement.  

[Signature pages follow]

IN WITNESS WHEREOF, the undersigned have executed this Consent as of the date first set forth above.  

BORROWER

SOFTECH, INC.

By: /s/ Joseph P. Mullaney

Name:  Joseph P. Mullaney

Title:  Chief Executive Officer

LENDERS

PRIDES CROSSING CAPITAL, L.P.

By:  PRIDES CROSSING CAPITAL GP, LLC, its General Partner

By:/s/ Peter M. Sherwood

Name: Peter M. Sherwood  

Title: Manager    

PRIDES CROSSING CAPITAL-A, L.P.

By:  PRIDES CROSSING CAPITAL GP, LLC, its General Partner

By:/s/ Peter M. Sherwood

Name: Peter M. Sherwood  

Title: Manager    

All consents, terms, conditions, amendments, modifications and releases set forth herein are acknowledged and agreed to by Joseph P. Mullaney (“Guarantor”).  Further, the Consent shall not operate as a waiver of any right, power or remedy of any Lender under that certain Guaranty Agreement, dated May 10, 2013 (the “Guaranty”), by Guarantor in favor of the Lenders, nor constitute a waiver, amendment or modification of any provision of the Guaranty, except as specifically set forth herein.  This Consent shall be deemed to be a Loan Document under the Guaranty, and such Guaranty continues to covers, includes and guaranties all Loan Documents as amended and modified herein.

By: /s/ Joseph P. Mullaney

Name: Joseph P. Mullaney

cc: Mr. Joseph P. Mullaney

EXHIBIT A

Form of UCC-3 Financing Statement Amendments

EX-10.2

AMENDED AND RESTATED

LOAN, PLEDGE AND SECURITY AGREEMENT

THIS AMENDED AND RESTATED LOAN, PLEDGE AND SECURITY AGREEMENT (the “Loan Agreement”) dated as of this 5th day of December, 2013, by and among SOFTECH, INC., a Massachusetts corporation with offices at 650 Suffolk Street, Suite 415, Lowell, Massachusetts (the “Borrower") and PRIDES CROSSING CAPITAL FUNDING, L.P. (the “Lender”), as successor to  PRIDES CROSSING CAPITAL, L.P. (“PCC”) and PRIDES CROSSING CAPITAL-A, L.P. (“PCCA”), each with offices at  800 Boylston Street, Suite 2220, Boston, Massachusetts 02199 (PCC and PCCA are collectively the “Original Lenders”)  amends and restates in its entirety that certain Loan, Pledge and Security Agreement dated as of May 10, 2013 (as amended, the “Original Loan Agreement”) by and between the Borrower and the Lender (as successor to the Original Lenders).

RECITALS

WHEREAS, on May 10, 2013 the Borrower executed that certain (i) $1,426,410 Term Note, dated as of the date herein, in favor of PCC (“Term Note I”), (ii) $1,273,590 Term Note, dated as of the date herein, in favor of PCCA (“Term Note II”) and (iii) the Original Loan Agreement.  To secure all obligations under Term Note I and Term Note II (each a “Term Note”, and collectively the “Original Term Notes”), as well as all obligations under the Original Loan Agreement and all other Loan Documents, the Borrower granted the Original Lenders a security interest in all of the Borrower’s assets, and pledged one hundred percent (100%) of all equity interests owned by the Borrower in its Domestic Subsidiaries, and sixty-five percent (65%) of all equity interests owned by the Borrower in its Foreign Subsidiaries.

WHEREAS, on December 1, 2013 the Original Lenders and the Lender executed that certain Master Assignment Agreement, pursuant to which the Original Lenders assigned, sold, transferred and conveyed to the Lender all Loan Documents, including without limitation the Original Term Notes and Original Loan Agreement.

WHEREAS, the Borrower acknowledged and agreed to the assignment of the Loan Documents from the Original Lenders to the Lender, agreed to pay down principal under the Original Term Notes, combine the Original Term Notes into a single amended and restated term note, and purchase the Warrants from the Original Lenders.

WHEREAS, the Borrower and Lender agreed to enter into this Loan Agreement, which shall govern all terms, conditions, obligations and agreements under the new amended and restated term note, as well as continue the existing security interests in Borrower’s assets to secure all Indebtedness under the Loan Documents.

AGREEMENT

In consideration of the premises and of the mutual covenants herein contained and to induce Lender to continue the extension of credit to the Borrower, the parties agree as follows:

SECTION 1

DEFINITIONS

1.1

Definitions.

Capitalized terms that are not otherwise defined herein shall have the meanings set forth in Exhibit 1.1 attached hereto. Terms not otherwise defined herein or in Exhibit 1.1 shall have the meanings ascribed to them, if any, in the Code.

SECTION 2

TERM LOAN

2.1

Amended and Restated Term Note.  On the date hereof the Borrower shall execute and deliver to the Lender the Term Note, which replaces, amends and restates the Original Term Notes.

2.2

Payments.  On the date hereof the Borrower agrees to pay the Lender the following:

(a)

One Million Three Hundred and Fifty Thousand Dollars ($1,350,000), by authorizing Lender’s set off of all funds held in escrow by the Original Lender pursuant to the October Consent Letter and the November Escrow Letter, plus Three Hundred and Fifty Thousand Dollars ($350,000) in immediately available funds, via wire transfer.  All amounts paid under this Subsection (a) shall be applied towards Principal due under the Term Note.

(b)

Eighty- One Thousand Dollars ($81,000) in immediately available funds, via wire transfer.  The payment under this Subsection (b) satisfies the yield maintenance fee under Section 2.8 of the Original Loan Agreement.

(c)

Nineteen Thousand Dollars ($19,000) in immediately available funds, via wire transfer.  The payment under this Subsection (c) is in consideration for the Original Lenders’ transfer and return of the Warrants issued under the Warrant Agreement, and termination of the Warrant Agreement.

(d)

Sixty-Eight Thousand Three Hundred Dollars ($68,300) in immediately available funds, via wire transfer.  The payment under this Subsection (d) pays interest that accrued under the Original Notes from October 1, 2013 through December 5, 2013.

(e)

Twenty Thousand Six Hundred and Eighty-One Dollars and Thirty-Four Cents ($20,681.34) in immediately available funds, via wire transfer.  The payment under this Subsection (e) pays all legal fees and expenses of the Original Lenders and the Lender incurred through the date hereof, and due under the Loan Documents.

2.3

Interest Accrual.  Interest shall accrue on unpaid principal under the Term Note at the annual rate of fourteen percent (14%).  Detailed terms and conditions relating to the accrual of interest, accrual of default interest, late charges and payment terms are set forth in the Term Note.

2.4

Payment of Accrued Interest. Commencing January 1, 2014, and continuing through December 1, 2014, on the first day of each calendar month the Borrower shall pay the Lender interest that accrued during the preceding month.

2.5

Maturity.  On January 1, 2015 (the “Maturity Date”) the Borrower shall pay Lender all unpaid principal, accrued and unpaid interest, and all other unpaid amounts due under the Term Note, this Loan Agreement and all other Loan Documents in full.

2.6

Payment Terms.  All payments under the Term Note, this Loan Agreement and under all other Loan Documents, shall be made by the Borrower to the Lender, in United States currency, at Lender’s address specified above, or at such other address as Lender may specify in writing, in immediately available funds.  At any time after the date herein, the Lender shall have the right to require that the Borrower authorize automatic deductions of any and all payments due from the Deposit Account.  If the automatic deduction is established, yet insufficient funds exist in the Deposit Account to fund a payment due under any of the Loan Documents the Borrower remains liable for such payment, and shall pay it in accordance with the terms of the Term Note, this Loan Agreement and all other Loan Documents.  

2.7

Application of Payments.  Payments received before an Event of Default will be applied (i) first to fees, expenses and other amounts due under the Term Note, this Loan Agreement and any other Loan Document, (ii) second, to accrued interest under the Term Note, and (iii) third to outstanding Principal under the Term Note.  Payments received after an Event of Default will be applied to the amounts due under the Term Note, this Loan Agreement and all other Loan Documents, as the Lender determines in its sole discretion.

2.8

Prepayment.  The Borrower may, at any time prior to the Maturity Date, pre-pay all outstanding Principal due under the Term Note.  Partial voluntary pre-payments of Principal are not allowed.  If a pre-payment is made on or prior to September 30, 2014, Borrower shall pay the Lender a yield maintenance fee equal to the interest that would have accrued under the Term Note from the date of such prepayment through and including September 30, 2014.  If a pre-payment is made on or after October 1, 2014, no yield maintenance fee shall be due.  The Borrower may pre-pay accrued interest, accrued default interest, accrued late charges, fees, charges and expenses at any time, in each case without penalty.  All mandatory prepayments of principal shall be applied in accordance with Section 2.7.  Pre-paid Principal may not be reborrowed.  

2.9

Cross Default.  A Default under any obligation of the Borrower under one or more of the Loan Documents shall constitute a simultaneous default under the Term Note and this Loan Agreement.  

2

2.10

Loan Security.  The Term Note, this Loan Agreement and all obligations under the other Loan Documents shall be secured by (i) a first priority security interest, subject to Permitted Liens, on all of the Collateral (the “Security Interest”) on the terms set forth in Section 3, (ii) a deposit account control agreement, by and between the Borrower, Lender and First Republic Bank, (iii) a source code escrow agreement, with an independent third party, in a form and substance reasonably acceptable to the Lender, (iii) a pledge of one hundred percent (100%) of all equity interests of Borrower’s domestic subsidiaries, and (iv) a pledge of sixty-five percent (65%) of all equity interests owned by the Borrower in the Foreign Subsidiaries.  Up to Five Hundred Thousand Dollars ($500,000) of the Indebtedness shall be personally guaranteed by Joseph Mullaney, pursuant to the Personal Guaranty.  The Personal Guaranty shall be secured by a pledge by Mr. Mullaney of all equity interests he owns in the Borrower.  In addition to the foregoing, Borrower will use its commercially reasonable efforts to obtain and deliver to the Lender, within ninety (90) days hereof, an unconditional assignment of Borrower’s payments and payment rights under the Mentor Contract. Notwithstanding anything to the contrary in the Loan Agreement, or under applicable law, if the grant of any security interests herein, the Guaranty, Mr. Mullaney’s pledge of SofTech Stock, or assignment of payments and payment rights under the Mentor Contract would result in the termination or breach of a Contract to which the Borrower is a party, or the Intellectual Property, then the applicable Contract or Intellectual Property will not be subject to the Security Interest and will not be considered a part of the Collateral, but in each case only to the extent, and for as long as, such relevant term is not terminated or rendered unenforceable or otherwise deemed ineffective by the Code or any other applicable law or a consent or waiver to such grant with respect to such term is not obtained.  Immediately upon the lapse, termination, unenforceability or ineffectiveness of any such term or the grant of a consent or waiver to such grant with respect to such term, the Collateral shall include, and the Borrower shall be deemed to have automatically granted a security interest in, any such Contract or Intellectual Property.

2.11

Insurance. Prior to the date of this Loan Agreement the Borrower shall obtain insurance on all of the Collateral on the terms set forth in Section 7.4.  All such insurance policies shall contain a standard lenders loss payment endorsement, and name the Lender as the first loss payee and an additional insured, as applicable, on terms satisfactory to the Lender.  If the Borrower receives any insurance proceeds arising from the loss, damage or theft of any of its assets, the Lender shall apply the amount received (i) first to amounts due under the Term Note in accordance with Section 2.7, (ii) second to amounts due under this Loan Agreement, and (iii) third, to amounts due under the other Loan Documents.  Notwithstanding anything herein to the contrary,  in the event of an insured loss, damage or theft of any assets having a value of ten thousand dollars ($10,000) or less, the Borrower may use the insurance proceeds received to replace such assets, and shall apply all excess proceeds in accordance with Section 2.11.

2.12

Lender’s Records and Statement of Account.  All Advances of Principal, and interest thereon, and all default interest, late charges, fees and expenses shall be recorded in the books of the Lender, and shall be deemed accurate and correct, absent manifest error.  If the Lender provides the Borrower with a statement of account, such statement will be presumed complete and accurate and will, absent manifest error, be definitive and binding on the Borrower, unless objected to with specificity by the Borrower in writing within thirty (30) days after receipt.

2.13

Increased Costs.  If the adoption or change in any law or regulation, or the interpretation or application thereof, or compliance by the Lender with any request or directive from any central bank, governmental authority or the London interbank market shall impose either (i) a tax on either Term Note, the Loan Agreement, the other Loan Documents, any loan by the Lender to the Borrower, (ii) or modify any reserve, special deposit, compulsory loan or similar requirement against assets, deposits or other liabilities arising from advances, loans or other extensions of credit by the Lender, or (iii) any other condition that results in an increase in the Lender’s costs or reduces the Lender's rate of return on capital, which such Lender deems material, then the Borrower shall promptly pay such Lender, upon demand, additional amounts necessary to compensate the Lender for such increased costs or reduced rate of return.  The protection of this Section 2.13 shall be available to the Lender regardless of any possible contention of invalidity or inapplicability with respect to the applicable law, regulation or condition provided it applies to all borrowers on a non-discriminatory basis.  Any notice from the Lender setting forth the amount or amounts necessary to compensate such Lender under this Section 2.13, when delivered to the Borrower, shall be conclusive absent manifest error.  This provision shall survive the termination of this Loan Agreement.

3

SECTION 3

SECURITY AGREEMENT

3.1

The Borrower’s Grant of Security Interest.  As security for the payment and performance of any and all of the Indebtedness, including without limitation all amounts due under the Term Note, this Loan Agreement and all other Loan Documents, and the performance of all obligations and covenants of the Borrower hereunder and under the Loan Documents, certain or contingent, now existing or hereafter arising, which are now, or may at any time or times hereafter be owing by the Borrower to the Lender pursuant to the Loan Documents, the Borrower hereby pledges to the Lender and grants the Lender a continuing security interest in and general Lien upon and right of set-off against, all right, title and interest of the Borrower in and to the Collateral, including without limitation all security deposits, all Deposit Accounts and all Intellectual Property, whether now owned or hereafter acquired by the Borrower. The Borrower further grants the Lender a right of set-off against the Borrower’s property held by the Lender, now or hereinafter in the possession, custody or control or in transit to the Lender.

3.2

Exercise of Rights.  Except as set forth herein, or under applicable law, The Lender shall not be obligated to exercise any degree of care greater than the degree of care as it relates to its own assets in connection with any Collateral in their possession, to take any steps necessary to preserve any rights in any of the Collateral or to preserve any rights therein of or against all other parties.  No segregation or specific allocation by the Lender of specified items of Collateral against any liability of the Borrower shall waive or affect any security interest in or Lien against other items of Collateral or any of the Lender's options, powers or rights under this Loan Agreement, the Loan Documents or applicable law.

3.3

Post Default Communications.  Following and during a continuing Event of Default, the Lender may at any time and from time to time, with or without notice to the Borrower (i) transfer into the name of the Lender, or the name of the Lender's nominee, any of the Collateral, (ii) notify any holder of any Collateral to transfer Collateral in such party’s possession directly to the Lender,  (iii) notify any and all obligors under one or more accounts receivable to pay and turnover any amount due to the Lender, and (iv) receive and direct the disposition of any proceeds of any Collateral. Once any such notice has been given to any Person, the Borrower shall not give any contrary instruction to such Person without the Lender’s written consent, until such time as the Event of Default is no longer continuing.

3.4

Waiver of Marshaling.  The Borrower waives any right it may have to require marshaling of its assets, among and between each Original Lender and the Lender.

3.5

Continuing Duty of the Borrower.  It is expressly agreed by the Borrower that, notwithstanding anything herein to the contrary, it remains liable under each of its respective contracts, Leases and each of its licenses to which it is a party (if any), to observe and perform all of the conditions and obligations to be observed and performed thereunder.  The Lender shall not have any obligation or liability under any contract, Lease or license by reason of or arising out of this Loan Agreement, or the granting of the Liens herein, or the receipt by Lender of any payment relating to any contract or license pursuant hereto.  The Lender shall not be required or obligated in any manner to perform or fulfill any of the obligations of the Borrower, under or pursuant to any contract or license, or to make any payment, or to make any inquiry as to the nature or the sufficiency of any payment received by it or the sufficiency of any performance by any party under contract or license, or to present or file any claims, or to take any action to collect or enforce any performance or the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times.

3.6

Permitted Communications.  Prior to and during a continuing Event of Default the Lender may, in the name of the Borrower, or a third party, communicate (by mail, email, telephone, facsimile or otherwise) with Persons, parties to contracts or obligors in respect of Instruments, Accounts, Chattel Paper and/or payment intangibles to inquire about the amounts outstanding and status of such Instruments, Accounts, Chattel Paper and/or payment intangibles.  During a continuing Event of Default the Lender may at any time, in the Lender’s own name, the name of the Borrower, or in the name of the Lender’s nominee, communicate by mail, email, telephone, facsimile, email or otherwise with Persons, parties to or obligors under Instruments, Accounts, Chattel Paper and/or payment intangibles.

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3.7

Deposit Accounts.  As of the date hereof the Borrower maintains its Deposit Accounts at First Republic Bank.  The Borrower, Lender and First Republic Bank shall enter into a reasonably acceptable deposit account control agreement (a “DACA”).  Borrower may, in its sole discretion, move the Deposit Accounts to another FDIC insured depository institution, upon fifteen (15) days written notice to the Lender.  Before Borrower moves its Deposit Accounts to another institution the Borrower, Lender and the new bank shall enter into a new DACA.  If any depository institution, including without limitation First Republic Bank, refuses to enter into a DACA or terminates an existing DACA, the Borrower is prohibited from maintaining any of the Deposit Accounts at such institution.   

SECTION 4

PLEDGE OF SECURITIES and

GRANT OF SECURITY INTEREST

4.1

As security for the payment and performance of any and all of the Indebtedness, including without limitation all amounts due under the Term Note, this Loan Agreement, and all other Loan Documents, and the performance of all obligations and covenants of the Borrower hereunder and under the Loan Documents, certain or contingent, now existing or hereafter arising, which are now, or may at any time or times hereafter be owing by the Borrower to the Lender pursuant to the Loan Documents, the Borrower hereby pledges to the Lender and grants the Lender a continuing security interest in and general Lien upon and right of set-off against, all right, title and interests of the Borrower in the Pledged Subsidiary Equity.

4.2

The certificates representing the Pledged Subsidiary Equity this Section 4 shall be delivered to and held by the Lender until all Indebtedness is paid in full.

4.3

Stock powers, substantially similar to the form stock power attached hereto as Exhibit 4.3, shall be executed in blank by the Borrower and together with this Loan Agreement delivered to PCC, for itself and as agent for PCCA.

4.4

Each Domestic Subsidiary and each Foreign Subsidiary shall cause their respective books and corporate records to reflect the Borrower’s pledge of such Subsidiary’s Equity Interests.

4.5

Upon the occurrence and during a continuing Event of Default, the Lender may affect the transfer of any Pledged Subsidiary Equity into the name of the Lender, or the Lender’s designee, and cause new certificates representing such securities to be issued in the name of the Lender, or the Lender's designee.

4.6

The Borrower will execute and deliver such documents, and take or cause to be taken such actions, as the Lender may reasonably request to perfect or continue the perfection of the Lender’s security interest in the Pledged Subsidiary Equity.

SECTION 5

CONDITIONS PRECEDENT TO ENTERING INTO THIS LOAN AGREEMENT

5.1

Conditions Precedent to Entering Into this Loan Agreement.  In addition to all other requirements set forth in this Loan Agreement and the other Loan Documents, the Lender will not execute this Loan Agreement and continue to advance credit under the Term Note, unless and until the following conditions shall have been satisfied:

(a)

Loan Documents.  The Borrower has executed and delivered to the Lender all of the Loan Documents, all in a form and substance acceptable to the Lender;

(b)

The Borrower’s Supporting Documents.  The Borrower has delivered to the Lender the following documents:

(i)

Certified resolutions of the boards of directors for the Borrower, signed by Borrower’s corporate secretary, or another authorized officer, or such other Person, authorizing the execution, delivery and performance of the Loan Documents; and

(ii)

A good standing certificate for the Borrower, certified by the appropriate government officials in the Borrower’s jurisdiction of organization.

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(c)

Pay Down of Term Notes.  All payments set forth in Section 2.2 herein have been paid in full;

.

(d)

Fees and Expenses.  Payment of all reasonable fees due and reimbursement of all costs incurred by the Lender, and evidence of payment to other parties of all fees or costs which the Borrower is required to pay under this Loan Agreement;

(e)

Insurance. The Lender receipt of a written insurance binder which amends all of Borrower's current property and casualty insurance policies to (1) list the Lender as first loss payee and additional insured.  Within thirty (30) days after the date hereof the Borrower will deliver to the Lender a lender’s loss payment endorsement;

(f)

Security Interests.  UCC-3/Amendment shall have been duly recorded or filed in the manner and places required by law to assign, establish, preserve, protect and perfect the interests and rights created or intended to be created by the security interest granted by the Borrower to the Lender to secure the Borrower’s obligations under the Loan Documents; and all taxes, fees and other charges in connection with the execution, delivery and filing of such financing statements shall duly have been paid;

(g)

Material Adverse Effect.  There shall have been no change that could have a Material Adverse Effect on the condition, financial or otherwise, of the Borrower, individually, or the Borrower, the Domestic Subsidiaries and the Foreign Subsidiaries taken as a whole, or the Collateral;

(h)

Source Code Escrow. Borrower, the Lender and Iron Mountain have executed and delivered an amendment to the Source Code Escrow Agreement, reasonably acceptable to the Lender, pursuant to which the Lender replaces the Original Lenders as a party to such Source Code Escrow Agreement;

(i)

Deposit Accounts.  The Borrower shall deliver to the Lender a list of all bank and deposit accounts that it maintains with any Person, including without limitation all Deposit Accounts at First Republic Bank; and

(j)

Additional Documents.   The Borrower shall have delivered to Lender all such other opinions, documents, certificates and other assurances that Lender or its counsel may reasonably require.

SECTION 6

REPRESENTATIONS AND WARRANTIES

6.1

In order to induce Lender to enter into this Loan Agreement, the Borrower makes the following representations and warranties, all of which shall survive the execution and delivery of this Loan Agreement and the Loan Documents.  Unless otherwise specified, the following representations and warranties shall be deemed made as of the date hereof:

(a)

Valid Existence.   Borrower and each Subsidiary are corporations duly organized, validly existing and in good corporate standing under the laws of the jurisdictions of their respective organization, and are duly qualified or licensed to transact business in all places where the failure to be so qualified would have a Material Adverse Effect on them.

(b)

Power to Act.

 Borrower and each Domestic Subsidiary has the requisite power to make, execute and perform the Loan Documents executed by them, and all such instruments will constitute the legal, valid and binding obligations of the Borrower and Domestic Subsidiaries, enforceable in accordance with their respective terms, subject only to the Borrower’s, or Domestic Subsidiaries' bankruptcy, insolvency, reorganization, or other similar laws relating to or staying the enforcement of remedies of creditors generally, and the effect of rules of law governing, or practices of courts with respect to, specific enforcement, injunctive relief and other equitable remedies generally.

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(c)

Authority.  The execution and delivery of the Loan Documents by the Borrower and Domestic Subsidiaries, and performance thereof by the Borrower and Domestic Subsidiaries, has been duly authorized by all necessary corporate action, and do not violate any provision of law or regulation, or any writ, order or decree of any court or governmental or regulatory authority or agency or any provision of the governing instruments of such Person, and do not, with the passage of time or the giving of notice, result in a breach of, or constitute a default or require any consent under, or result in the creation of any Lien upon any property or assets of such Person pursuant to, any law, regulation, instrument or agreement to which any such Person is a party or by which any such Person or its respective properties may be subject, bound or affected.

(d)

Financial Condition.  Other than as disclosed in financial statements delivered to the Lender on or prior to the date hereof, the Borrower has no material direct or contingent obligations or liabilities (including any guarantees or leases) or any material unrealized or anticipated losses from any commitments of such Person except as described on Exhibit 6.1(d).  All financial statements of the Borrower have been prepared in accordance with GAAP and fairly present the financial condition of the Borrower, as of the date thereof.  

(e)

Knowledge of Material Adverse Facts.  The Borrower is not aware of any material adverse fact (other than facts which are generally available to the public and not particular to the Borrower, such as general economic or industry trends) concerning the condition of the Borrower or any Subsidiary, which has not been fully disclosed to Lender, including any material adverse change in the operations or financial condition of the Borrower or any Subsidiary, since the date of the most recent financial statements delivered to Lender.

(f)

Solvency.  The Borrower and each Subsidiary are Solvent, and after consummation of the transactions set forth in this Loan Agreement and the other Loan Documents the Borrower and each Domestic Subsidiary will be and remain Solvent.

(g)

Litigation.  Except as disclosed in Exhibit 6.1(g), there are no suits or proceedings pending, or to the knowledge of the Borrower threatened, before any court or by or before any governmental or regulatory authority, commission, bureau or agency or public regulatory body against or affecting the Borrower or any Subsidiary, or their respective assets or properties, which if adversely determined would have a Material Adverse Effect.

(h)

Adverse Effect of Agreements.  Neither the Borrower nor any of its Subsidiaries are in default in the performance, observance or fulfillment of any of the material obligations, covenants or conditions contained in any agreement or instrument to which any of them are a party, or any law, regulation, decree, order or the like applicable to them.

(i)

Authorizations.   All material authorizations, consents, approvals, certificates and licenses required under applicable law or regulation for the ownership or operation of the property owned or operated by the Borrower, and each Subsidiary, or for the conduct of any business in which they are engaged have been duly issued and are in full force and effect, and they are not in default, nor to their respective knowledge has any event occurred which with the passage of time or the giving of notice, or both, would constitute a default, under any of the terms or provisions of any part thereof, or under any order, decree, ruling, regulation, or other decision or instrument of any governmental commission, bureau or other administrative agency or public regulatory body having jurisdiction over the Borrower, or any Subsidiary, which default would have a Material Adverse Effect on the Borrower or any Subsidiary.  No approval, consent or authorization of, or filing or registration with, any governmental commission, bureau or other regulatory authority or agency is required with respect to the execution, delivery or performance of any Loan Document.

(j)

Title.  The Borrower has good title to all of its assets and properties shown in its financial statements, free and clear of all Liens, except Permitted Liens.  The Borrower has full ownership rights in the Collateral, subject to the Permitted Liens.  

(k)

Collateral.  The security interests granted to Lender herein and pursuant to any other Loan Document with the Lender (a) constitute and, as to subsequently acquired property included in the Collateral, will constitute, security interests under the Code and (b) are, and as to such subsequently acquired Collateral will be superior and prior to the rights of all third persons, now existing or hereafter arising, subject to the Permitted Liens.  All of the Collateral is intended for use solely in the Borrower’s businesses.

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(l)

Taxes.  The Borrower and all Domestic Subsidiaries have filed all federal, state and local income and other tax returns which are required to be filed, and have paid all taxes as shown on said returns and all taxes, including withholding, FICA and ad valorem taxes, shown on all assessments received by it to the extent that such taxes have become due, or has set aside reserves to timely pay such taxes and/or assessments.  Neither Borrower nor any of the Domestic Subsidiaries are subject to any federal, state or local tax Liens, other than Permitted Liens, nor has such Person received any notice of deficiency or other official notice of delinquent taxes. The Borrower and each Subsidiary, have paid all sales and excise taxes payable by them, to the extent such taxes have become due.

(m)

Labor Law Matters.  To the Borrower’s knowledge no goods or services have been or will be produced, provided or performed by the Borrower or any Subsidiary in violation of any applicable labor laws or regulations or any collective bargaining agreement or other labor agreements or in violation of any minimum wage, wage-and-hour or other similar laws or regulations applicable to the Borrower or Subsidiary, which will have a Material Adverse Effect on the Borrower or a Subsidiary.

(n)

Judgment Liens.   Except as set forth in Exhibit 6.1(n), neither the Borrower, any Subsidiary, nor any of their respective assets, are subject to any unpaid judgments (whether or not stayed) or any judgment liens in excess of twenty-five thousand dollars ($25,000), in any jurisdiction.  Following the Closing Date and until all amounts due under the Loan Documents are paid in full, the Borrower shall amend and deliver to Lender Exhibit 6.1(n) as soon as (i) judgments and judgment liens listed therein are dismissed, satisfied and/or released and (ii) additional judgments and/or judgment liens in excess of twenty-five thousand dollars ($25,000) are entered against the Borrower or filed against its assets.

(o)

Subsidiaries.  A complete list of the Borrower’s Subsidiaries is set forth in Exhibit 6.1(o).

(p)

ERISA.  The Borrower has furnished to Lender true and complete copies of the latest annual report required to be filed pursuant to Section 104 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), with respect to each employee benefit plan or other plan maintained for employees of the Borrower, and covered by Title IV of ERISA (a "Plan"), and no Termination Event (as hereinafter defined) with respect to any Plan has occurred and is continuing.  For the purposes of this Loan Agreement, a "Termination Event" shall mean a "reportable event" as defined in Section 4043(b) of ERISA, or the filing of a notice of intent to terminate under Section 4041 of ERISA.  Neither the Borrower nor any of its Subsidiaries have any unfunded liability with respect to any such Plan.

(q)

Investment Company Act.   The Borrower is not an "investment company" as defined in the Investment Company Act of 1940, as amended.

(r)

Compliance with Covenants; No Default.   The Borrower is, and upon funding of the Term Note will be in compliance with all of the covenants hereof. No Event of Default has occurred and is continuing, and the execution, delivery and performance of the Loan Documents and the funding of the Term Note will not cause an Event of Default.  

(s)

Full Disclosure.   There is no material fact, which is known by the Borrower that the Borrower has not disclosed to Lender that would have a Material Adverse Effect.  No Loan Document, nor any agreement, document, certificate or statement delivered by the Borrower to Lender, knowingly contains any untrue statement of a material fact or omits to state any material fact that is known or which should be known by the Borrower that is necessary to keep the other statements from being misleading.

(t)

Warehousemen, Consignees and Bailees.  None of the Collateral is (i) stored or located in a warehouse or other location, which would give the owner, tenant, sub-landlord, sub-tenant, operator, manager or warehouseman a claim to or lien on the Collateral, (ii) in the possession or control of a third party on consignment and (iii) in the possession or control of a third party bailee.

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6.2

Updates.  Following the Closing Date the Borrower shall, from time to time, deliver to Lender updated schedules to this Section 6 with respect to facts and circumstances arising after the Closing Date.  Provided that such updated schedules do not have a Material Adverse Effect, the same shall be incorporated herein.  

SECTION 7

AFFIRMATIVE COVENANTS

7.1

Payment and Performance.  The Borrower will duly and punctually pay all interest and principal as and when it becomes due to the Lender under the Loan Documents, including without limitation the Term Note and this Loan Agreement, and will duly and punctually pay and perform all obligations to be paid or performed under this Loan Agreement, or pursuant to any instrument, document or agreement executed pursuant hereto.

7.2

Use of Loan Proceeds. The Borrower shall use the proceeds of the Term Note to (i) pay fees, costs and expenses due under the Term Note and this Loan Agreement, and all other Loan Documents, (ii) fund growth and working capital needs and (iii) fund operating expenses.

7.3

Maintenance of Business and Collateral.   The Borrower shall maintain all of its property and assets used or useful in the conduct of its business, and keep the same in working order and condition, ordinary wear and tear, fire and casualty excepted, and from time to time make, or cause to be made, all material needful and proper repairs, renewals, replacements, betterments and improvements thereto so that the business carried on in connection therewith may be conducted properly and in accordance with standards generally accepted in businesses of a similar type and size at all times, and maintain and keep in full force and effect all licenses and permits reasonably necessary for the proper conduct of their respective businesses and operation of their respective properties.  Notwithstanding the foregoing, the Borrower may transfer, sell or dispose of Collateral which is obsolete, damaged, or no longer in use, so long as the gross proceeds generated by the transfer, sale, damage or disposal of such Collateral is used to either (i) replace or repair such transferred, sold, damaged or disposed of Collateral, or (ii) re-pay amounts due under the Term Note, this Loan Agreement and all other Loan Documents.

7.4

Insurance.  

(a)

On or before the date of this Loan Agreement, and so long as any amount is due under any of the Loan Documents, the Borrower shall obtain and maintain property and casualty insurance on all of the Collateral, liability insurance, workers’ compensation insurance, and business interruption insurance, from good and responsible insurance companies reasonably satisfactory to Lender.  All insurance policies shall be in amounts and shall contain co-insurance and deductible provisions reasonably approved in advance by the Lender.  The Lender shall be named as the creditor/loss payee in all policies, under the name “PRIDES CROSSING CAPITAL FUNDING, L.P., its successors and assigns, as its interests may appear.” All such insurance may not be cancelled by the Borrower without first obtaining the Lender’s written consent, which consent must be obtained no less than thirty (30) days before the insurance will be cancelled.  If the insurance is cancelled, for any reason, the Lender may maintain the existing policy or policies or obtain new insurance.  All such premiums paid for by the Lender shall be added to, included and become the Indebtedness under this Loan Agreement, the Term Note, and all other Loan Documents.  The Lender reserves the right to require the Borrower, in the Lender’s reasonable discretion, to obtain accounts receivable insurance.

(b)

On or before the date of this Loan Agreement, and so long as any amount is due under any of the Loan Documents, the Borrower shall obtain and maintain One Million Dollars ($1,000,000) of key man life insurance on the Guarantor, from insurance companies reasonably satisfactory to Lender.

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7.5

Notice of Default.   The Borrower shall provide to the Lender prompt notice of (a) the occurrence and continuance of an Event of Default and what action (if any) the Borrower is taking to correct the same, (b) any litigation or changes in existing litigation, which includes a claim or claims against the Borrower in excess of fifty thousand dollars ($50,000), or any judgment in excess of fifty thousand dollars ($50,000), against it or any of its assets, (c) any damage or loss to property in excess of one hundred thousand dollars ($100,000), (d) any notice from taxing authorities as to claimed deficiencies in excess of twenty-five thousand dollars ($25,000) or any tax lien or any notice relating to alleged ERISA violations, (e) any ERISA Event, (f) any Termination Event, (g) any rejection, return, offset, dispute, loss or other circumstance having a Material Adverse Effect on any Collateral, (h) the cancellation or termination of, or any default under, any agreement to which the Borrower is a party, the termination of which, or default, will have a Material Adverse Effect on the Borrower, (i) any acceleration of the maturity of any Debt of the Borrower in excess of twenty-five thousand dollars ($25,000), and (j) any loss or threatened loss of licenses or permits, the loss of which will have a Material Adverse Effect on the Borrower, or its business.

7.6

Inspections.  The Borrower shall permit the Lender to inspect the Collateral, the Borrower’s business premises, business records and the Borrower’s other records and property (collectively a “Field Examination”) twice per year, so long as there is no Event of Default.  Upon an Event of Default that is continuing or if in the Lender’s commercially reasonable opinion the Borrower’s financial results have materially deteriorated; the Lender may conduct additional Field Examinations.  The Borrower shall permit Field Examinations at such times and in such manner as may be reasonably required by the Lender.  The reasonable cost of all such Field Examinations shall be paid by the Borrower, become part of the Indebtedness and shall not exceed $10,000 for any one Field Examination.

7.7

Permitted Loans.  Simultaneous with a Permitted Loan the Borrower shall (i) deliver to the Lender any and all documents related to such Permitted Loan, including without limitation any and all notes evidencing such Permitted Loan (collectively “Permitted Loan Documents”), (ii) notify, in writing, each borrower under such Permitted Loan that the Lender holds a security interest in the Permitted Loan, and the Lender has possession of the Permitted Loan Documents.

7.8

Affiliate Contracts.  For avoidance of doubt, the Borrower may enter into contracts with its affiliates so long as such contracts are (i) in writing, (ii) promptly disclosed to the Lender and (iii) comply with applicable Internal Revenue Service standards and regulations.

SECTION 8

FINANCIAL INFORMATION AND DISCLOSURES

8.1

Financial Information.  The Borrower shall maintain its books and records in accordance with GAAP.

8.2

Financial Information Furnished by the Borrower.  The Borrower shall furnish to the Lender the following periodic financial information:

(a)

Monthly.

(i)

Within ten (10) days after the end of each month an Account Receivable aging report, Accounts Payable aging report, and an updated rolling three (3) month cash flow forecast.

(ii)

Within thirty (30) days after the end of each month a Covenant Compliance Certificate that certifies and evidences Borrower’s compliance with the financial covenants set forth in Section 12 herein.  A draft Covenant Compliance Certificate is attached hereto as Exhibit 8.2(a).

(b)

Quarterly.

(i)

Within thirty (30) days after the end of each fiscal quarter a management prepared consolidated balance sheet, income statement and statement of cash flows, which reflect the Borrower’s and Subsidiaries'  financial condition and operating results, together with all supporting schedules, and certified by the Borrower as true and correct and fairly representing the financial condition of the Borrower, and that such statements are prepared in accordance with GAAP, except without footnotes and subject to normal year-end adjustments; and

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(c)

Annual Statements.

(i)

Within one hundred and twenty days (120) days after the end of each fiscal year, unqualified financial statements, including a balance sheet, income statement and statement of cash flows, audited by an accounting firm reasonably acceptable to the Lender, together with all supporting schedules, prepared in accordance with GAAP, and any management letter or letter of recommendation to and from Borrower's accounting firm; and

(ii)

Within thirty (30) days after the end of the fiscal year, a management prepared financial budget, including planned Capital Expenditures, for the upcoming fiscal year.

8.3

Other Information.   The Borrower shall furnish to the Lender such other information reasonably requested by Lender from time to time concerning the business, properties or financial condition of the Borrower.

SECTION 9

COVENANTS OF COMPLIANCE AND COLLATERAL

9.1

Maintenance of Existence and Rights.   The Borrower shall preserve and maintain their corporate existence, authority to transact business, rights and franchises, trade names, patents, copyrights, trademarks and permits material and necessary to the conduct of its business.

9.2

Payment of Taxes.  The Borrower shall pay before delinquent all of its debts and taxes, except for nonpayment of taxes being actively contested in accordance with law and with proper reserves maintained on its books and records.

9.3

Compliance; Hazardous Materials.   The Borrower shall comply in all material respects with all laws, regulations, ordinances and other legal requirements applicable to it, specifically including, without limitation, ERISA, all securities laws and all laws relating to hazardous materials and the environment, except to the extent that failure to comply will not have a Material Adverse Effect.  Unless approved in writing by Lender, the Borrower shall not engage in the storage, manufacture, disposition, processing, handling, use or transportation of any hazardous or toxic materials, except for ordinary and customary amounts of solvents, cleaners and similar materials used in the Borrower’s ordinary course of business in accordance with applicable laws.

9.4

Compliance with Assignment Laws.  The Borrower shall, if required by the Lender, comply with the Federal Assignment of Claims Act and any other applicable law relating to assignment of government contracts.

9.5

Compliance with Intellectual Property.  The Borrower shall maintain all of its Intellectual Property and License(s) and all of its Subsidiaries Intellectual Property and License(s), and shall actively pursue any infringement of any such Intellectual Property or License(s), in each case to the extent material to Borrower’s business.  The Borrower shall operate its business and the Subsidiaries business so as to not knowingly infringe any patent, trademark or copyright.

9.6

Further Assurances.  The Borrower shall take such further action and provide to Lender such further assurances as may be reasonably requested to ensure compliance with the intent of this Loan Agreement and the other Loan Documents.

9.7

Covenants Regarding the Collateral and Leased Premises.  The Borrower makes the following covenants with the Lender regarding the Collateral:

(a)

The Borrower will use the Collateral only in the ordinary course of its businesses, and will not permit the Collateral to be knowingly used in violation of any applicable law or policy of insurance;

(b)

The Borrower will defend the Collateral against all claims and demands of all Persons, except for Permitted Liens;

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(c)

The Borrower will, at Lender’s request, use reasonable efforts to obtain and deliver to Lender such waivers as Lender may require waiving a landlord's or subsequent lien holder’s enforcement rights against the Collateral;

(d)

The Borrower will not sell, assign, lease, transfer, pledge, hypothecate or otherwise dispose of or encumber the Collateral or any interest therein, except in the ordinary course of the Borrower’s business, except as provided for herein; and

(e)

The Borrower shall use commercially reasonable efforts to cause the Borrower’s landlord to execute and deliver, within thirty (30) days after the date hereof, a subordination and non-disturbance agreement, which is reasonably acceptable to the Lender.

9.8

Lease Agreements.  A list of all Leases is set forth in Exhibit 9.8.

SECTION 10

NEGATIVE COVENANTS

10.1

Debt.  With the exception of Permitted Debt, the Borrower shall not incur, assume, create, and permit to exist or guarantee any non-trade Debt.  This Section 10.1 does not amend or modify the terms, conditions and agreements in Section 2.14 above.

10.2

Liens.  With the exception of Permitted Liens, the Borrower shall not create or permit any Liens on its property, assets, including without limitation the Collateral.  This Section 10.2 does not amend or modify the terms, conditions and agreements in Section 2.14 above.

10.3

Dividends and Redemptions.  With the exception of Permitted Distributions and Permitted Redemptions, the Borrower shall not (i) pay or declare any dividends, including without limitation stock dividends, or other distributions, (ii) purchase, repurchase, redeem or otherwise acquire any stock or other equity interests in itself or any third party, or (iii) pay or acquire any debt subordinate to the Indebtedness, unless specifically permitted by the Lender in writing.

10.4

Loans and Other Investments.  With the exception of Permitted Distributions, the Borrower shall not make or permit to exist any advances or loans to, or guarantee or become contingently liable, directly or indirectly, in connection with the obligations, leases, stock or dividends of, or own, purchase or make any commitment to purchase any stock, bonds, notes, debentures or other securities of, or any interest in, or make any capital contributions to (all of which are sometimes collectively referred to herein as “Investments”) any Person except for (i) deposits in the Lender, (ii) endorsement of negotiable instruments for collection in the ordinary course of business, (iii) advances to employees for business travel and other expenses incurred in the ordinary course of business, (iv) so long as no Event of Default shall have occurred and be continuing, cash advances to wholly owned Foreign Subsidiaries in an amount not to exceed the lesser of (A) cash received from such Foreign Subsidiaries during the previous twelve (12) months or (B) One Hundred Thousand Dollars ($100,000) during any twelve (12) month period.

10.5

Change in Business.  The Borrower shall not enter into any business that is substantially different from the business in which it is presently engaged.

10.6

Change in Ownership and Control of the Borrower.  The Borrower shall not issue or authorize any additional or new equity interests, stock, securities, rights or phantom stock, yet excluding issuance of warrants and options that will result in a Change in Control of the Borrower.  Equity interests in the Borrower, including without limitation all stock, equity interests, securities, rights, options, warrants and phantom stock, may be transferred or sold, so long as such transfer and/or sale does not or will not result in a Change in Control.  

10.7

No Change in Name, Offices; Removal of Collateral. Borrower shall not, unless it shall have given thirty (30) days’ advance written notice thereof to Lender, (i) change its name, (ii) change the location of its chief executive offices or other office where books or records are kept, or (iii) change its state of organization.  Other than in the ordinary course of business or as expressly provided for herein, the Borrower shall not move, remove, relocate or transfer the Collateral to any location not approved by the Lender, in writing.

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10.8

No Sale, Leaseback.  The Borrower shall not enter into any sale-and-leaseback or similar transaction, unless approved by the Lender in writing.

10.9

Margin Stock.  The Borrower shall not use any proceeds of the Term Note or Revolving Note to purchase or carry any margin stock (within the meaning of Regulation U of the Board of Governors of Federal Reserve System) or extend credit to others for the purpose of purchasing or carrying any margin stock.

10.10

Subsidiaries.  The Borrower shall not create, acquire, form, merge with or dispose of any Subsidiary, other than inactive Subsidiaries listed on Exhibit 10.10, or permit any Subsidiary to issue capital stock, unless the Borrower (i) obtains the Lender’s written consent, and (ii) simultaneously upon the creation, acquisition, formation or merger of a new Domestic Subsidiary the Borrower shall pledge to the Lender one hundred percent (100%) of the Equity Interests owned by the Borrower in each new Subsidiary, or upon the creation, acquisition, formation or merger of a new Foreign Subsidiary the Borrower shall pledge to the Lender sixty-five percent (65%) of all Equity Interests in each new Foreign Subsidiary that is a direct Foreign Subsidiary of the Borrower, in each case by delivering original stock certificates (if any) representing such Equity Interests to PCC, for itself and as agent for PCCA, together with written stock powers related to such Equity Interests, which are reasonably acceptable to the Lender.

10.11

Trade or Fictitious Name.  The Borrower shall give the Lender sixty (60) days prior written notice of use of or any change of any new trade or fictitious name.  The use of any trade or fictitious name shall be in compliance in all material respects with all laws regarding the use of such names.

10.12

Liquidation, Mergers, Consolidations and Dispositions of Assets.  Except with the prior written approval of the Lender, the Borrower shall not dissolve, liquidate, or become a party to any merger or consolidation, or acquire by purchase, lease, sale or otherwise, all or a substantial part of the assets of any Person, or purchase, sell, transfer, lease or otherwise dispose of all or a substantial part of its property or assets, other than a purchase, sale, transfer, lease or other disposition made in the ordinary course of the Borrower’s business.  If any of the Borrower’s property or assets are sold, transferred, leased or otherwise disposed of outside the ordinary course of Borrower’s business, except as otherwise permitted herein, the proceeds of such disposition shall be transferred directly to the Lender, and shall be applied to the outstanding amounts due under the Loan Documents in accordance with this Loan Agreement.  If the Borrower receives proceeds from a sale, transfer, lease or other disposition, except as otherwise expressly provided herein, it shall hold them in trust for the Lender, and immediately turn such proceeds over to the Lender up to the amount of the Indebtedness.  Amounts received by the Lender in excess of the Indebtedness shall be promptly returned to the Borrower.  

10.13

Change of Fiscal Year or Accounting Methods.   The Borrower shall not change its year or accounting methods if it will have a Material Adverse Effect.

10.14

Subordination of Debt and Subordination Agreements.  All debts now or hereafter owed to any Person, other than capital leases, trade debt, Permitted Redemptions, and unsecured operating costs that are incurred in the ordinary course of business, shall be governed by a Subordination Agreement or subordination agreement reasonably approved by the Lender.

SECTION 11

FINANCIAL COVENANTS

Borrower covenants and agrees that from the date hereof and until payment in full of the Indebtedness and termination of all Loan Documents, including without limitation this Loan Agreement, the following financial covenants shall not be breached or violated.

11.1

Cash Collateral.  As of the last day of each month the Borrower shall own and possess no less than One Million Dollars ($1,000,000), of which no less than Seven Hundred and Fifty Thousand Dollars ($750,000) shall be held in the Deposit Account at First Republic Bank and subject to a DACA. At all other times the Borrower shall own and possess no less than Seven Hundred and Fifty Thousand Dollars ($750,000)   

11.2

Quick Ratio.  On the last day of Borrower’s third fiscal quarter in 2014, and on the last day of each fiscal quarter thereafter Borrower’s Quick Ratio shall be no less than 2.7:1.

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11.3

EBITDA.  In the Borrower’s third and fourth fiscal quarters in 2014 EBITDA losses shall be no greater than Two Hundred Thousand Dollars ($200,000) for each fiscal quarter.  In the Borrower’s first quarter in 2015, and for each fiscal quarter thereafter EBITDA must exceed One Hundred Thousand Dollars ($100,000).

11.4

Maximum Capital Expenditures.  At all times the total of Capital Expenditures plus Capitalized Software Development Costs shall not exceed One Hundred Thousand Dollars ($100,000) during each fiscal year, commencing with the 2014 fiscal year.

11.5

Quarterly Compliance Certificates. Within forty-five (45) days after the last day of each fiscal quarter the Borrower shall deliver to the Lender a Covenant Compliance Certificate, and certify satisfaction of all covenants in this Section 11.  A form copy of the Covenant Compliance Certificate is attached hereto as Exhibit 11.6.

SECTION 12

EVENTS OF DEFAULT

Each of the following shall constitute an Event of Default under this Loan Agreement and the other Loan Documents:

12.1

Borrower's failure to pay any principal or interest, when due, under either Term Note, this Loan Agreement or any of the other Loan Documents; or

12.2

Borrower's breach of or failure to comply with any financial term, condition, agreement, obligation, representation, warranty and/or covenant under either Term Note, this Loan Agreement or any of the other Loan Documents, including without limitation the financial information and disclosures in Section 8 herein and the financial covenants in Section 11 herein; or

12.3

Borrower's breach of or failure to comply with any non-financial term, condition, agreement, obligation, representation, warranty and/or covenant under either Term Note, this Loan Agreement or any of the other Loan Documents, if such breach or failure is not cured within fifteen (15) days following such breach; or

12.4

Any representation, warranty or certification made by Borrower in any Loan Document, herein or therein or in any letter, certificate, communication or report furnished in connection herewith or therewith, shall prove to have been untrue or incorrect in any material respect when made; or

12.5

Any other obligation now or hereafter owed by Borrower to the Lender shall be in default; or

12.6

The Personal Guarantor breaches or fails to comply with any term, condition, agreement, obligation, representation, warranty and/or covenant under the Personal Guaranty, beyond any applicable cure period; or

12.7

Borrower, any Subsidiary or Personal Guarantor shall be in default under any obligation for borrowed money in excess of fifty thousand dollars ($50,000) owed to any other party, beyond any applicable cure period, which default entitles the other party to accelerate any such obligations; or

12.8

Borrower, any Subsidiary or Personal Guarantor shall (a) voluntarily dissolve, liquidate or terminate operations or apply for or consent to the appointment of, or the taking of possession by a receiver, custodian, trustee or liquidator of such Person or of all or of a substantial part of its assets, (b) admit in writing its/his inability, or be generally unable, to pay its debts as they become due, (c) make a general assignment for the benefit of its/his creditors, (d) commence a voluntary case under the federal bankruptcy code (as now or hereafter in effect), (e) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, (f) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the bankruptcy code, or (g) take any corporate action for the purpose of effecting any of the actions referred to in this Section 12.8; or

12.9

An involuntary petition or complaint shall be filed against Borrower, any Subsidiary or Personal Guarantor seeking bankruptcy relief or reorganization or the appointment of a receiver, custodian, trustee, intervenor or liquidator, of all or substantially all of its/his respective assets, and such petition or complaint shall not have been dismissed within sixty (60) days of the filing thereof; or an order, order for relief, judgment or decree shall be entered by any court of competent jurisdiction or other competent authority approving or ordering any of the foregoing actions; or

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12.10

Any loss, theft, damage or destruction of any of the Collateral, having an aggregate value of one hundred thousand dollars ($100,000) or more, which loss is not fully insured, less applicable deductibles; or

12.11

A final judgment in excess of fifty thousand dollars ($50,000) shall be rendered against the Borrower, any Subsidiary or the Personal Guarantor and such judgment shall remain undischarged, undismissed, not timely appealed and/or unstayed for more than forty-five (45) days (except judgments validly covered by insurance or surety bond with a deductible of not more than ten thousand dollars ($10,000)), or there shall occur any levy upon, or attachment, garnishment, replevin or other seizure of, any material portion of the Collateral, which is not bonded over, dismissed or released within thirty (30) days of such levy, attachment, garnishment, replevin or other seizure; or

12.12

Borrower or any Subsidiary shall cease to be managed by its present management or other senior management personnel which are reasonably satisfactory to the Lender; or

12.13

Failure to pay all Indebtedness on or before the Maturity Date, unless extended in writing by the Lender; or

12.14

A default or event of default under any Subordination Agreement; or

12.15

Borrower takes or participates in any action that is prohibited under an Subordination Agreement, or Borrower makes any payment not permitted under this Loan Agreement, or any Subordination Agreement; or

12.16

Any event or circumstance that causes or will cause a Material Adverse Effect, or any event or circumstance that the Lender reasonably believes in good faith will cause a Material Adverse Effect during the proceeding six (6) months; or

12.17

Any of Borrower’s officers or directors, or the Personal Guarantor are convicted of or plead guilty to a felony under federal, state, municipal or foreign law; or

12.18

Entry of a court or administrative order that enjoins, restrains or in any way prevents Borrower or any Subsidiary from conducting their business, or materially interferes with the ownership, use, occupation or management of any of their assets; or

12.19

The Borrower shall fail to transfer to the Lender all Permitted Loan Documents, simultaneously with the making, grant or extension of a Permitted Loan.

SECTION 13

REMEDIES

13.1

Remedies.   If any Event of Default shall occur and be continuing, under either Term Note, this Loan Agreement or any other Loan Document, the Lender may without notice to the Borrower, at its option, take any or all of the following actions:

(a)

Accelerate any or all of Indebtedness and declare such Indebtedness to be immediately due and payable;

(b)

Bring suit against the Borrower, or the Personal Guarantor to collect the Indebtedness;

(c)

Exercise any remedy available to Lender hereunder or at law and take any action or exercise any remedy provided herein or in any other Loan Document or under applicable law; and

(d)

Enforce and foreclose the security interest on the Collateral, without first enforcing or foreclosing any other security interest, or enforcing any Loan Document.

13.2

Rights Under the Code. Without waiving any of its other rights hereunder or under any other Loan Document or applicable law, the Lender shall have all rights and remedies of a secured party under the Code (and the Uniform Commercial Code of any other applicable jurisdiction) and such other rights and remedies as may be available hereunder, under other applicable law or pursuant to contract.

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13.3

Preparation of Collateral. Following and during an Event of Default, if requested by the Lender, the Borrower will promptly (i) assemble any Collateral and make it available to the Lender at a place to be designated by the Lender, located within three hundred (300) miles of Boston, Massachusetts, and (ii) notify all obligors under all Permitted Loans to make all future payments directly to the Lender, in lieu of making payments to the Borrower.

13.4

Notice.  The Borrower agrees that any notice by Lender of the sale or disposition of any of the Collateral, or any other intended action hereunder, whether required by applicable law, the Code or otherwise, shall constitute reasonable notice to the Borrower if the notice is mailed to the Borrower by regular or certified mail, postage prepaid, at least ten (10) days before the action to be taken.

13.5  

Receiver.  In addition to any other remedy available to it, the Lender have the absolute right, upon the occurrence and during the continuance of an Event of Default, to seek and obtain the appointment of a receiver to take possession of and operate and/or dispose of the assets of Borrower, including without limitation the Collateral, and any reasonable costs and expenses incurred by Lender in connection with such receivership shall bear interest at the Default Rate, and shall be secured by the Collateral.

13.6

Application of Proceeds.  After the occurrence and during a continuing Event of Default, the Borrower authorizes the Lender to collect and apply against the Indebtedness when due (i) any cash or deposit accounts in Lender’s possession, (ii) any tax refunds, and (iii) any insurance premiums or any insurance proceeds payable on account of the loss or damage to the Collateral, and irrevocably appoints Lender as its attorney-in-fact to endorse any check or draft or take other action necessary to obtain such funds.

13.7

Non-Exclusive Remedies.  No remedy shall be exclusive of other remedies or impair the right of the Lender to exercise any other remedies.

13.8  

Marshaling. The Borrower waives any and all rights they may have to require marshaling of its assets and/or the Lender’s claims against it.

SECTION 14

MISCELLANEOUS PROVISIONS

14.1

Continuing Obligation to Cooperate.  The Borrower agrees to execute and deliver to the Lender all such other and further instruments and documents and take or cause to be taken all such other and further action as the Lender may reasonably request in order to effect and confirm or vest more securely in the Lender all rights contemplated in this Loan Agreement, including without limitation the Lender’s rights under Section 2.14 herein.

14.2

Amendments.  This Loan Agreement may be amended only by an instrument in writing and duly signed by the Lender and the Borrower.  

14.3

Enforceability.  If any provisions of this Loan Agreement shall be held to be illegal or unenforceable, such illegality or unenforceability shall relate solely to such provision and shall not affect the remainder of this Loan Agreement.

14.4

Venue.  The Borrower and Lender agree that any action or proceeding to enforce or arising out of this Loan Agreement may be commenced in any federal or state court of the Commonwealth of Massachusetts sitting in the county of Suffolk.

14.5

Service of Process.  The Borrower waives personal service of process and agrees that a summons and complaint commencing an action or proceeding in any such court shall be properly served and confers personal jurisdiction if served by registered or certified mail, or as otherwise provided by the laws of the Commonwealth of Massachusetts or the United States of America.

14.6

No Waiver, Remedies Cumulative.   No failure on the part of either Lender to exercise, and no delay in exercising, any right hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right.  All rights and remedies herein provided are cumulative and are in addition to any other remedies provided by law, any Loan Document or otherwise.

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14.7

Survival of Representations.   All representations, warranties and covenants made herein shall survive the making of the Loans hereunder and the delivery of the Loan Documents, and shall continue in full force and effect so long as any Indebtedness is outstanding, there exists any commitment by Lender to the Borrower, and until this Loan Agreement is formally terminated in writing.

14.8

Indemnity.   In addition to all other Indebtedness, the Borrower agrees to defend, protect, indemnify and hold harmless the Lender, and all of its respective Affiliates, Subsidiaries, officers, directors, employees, attorneys, accountants, consultants, agents and any controlling Persons (collectively the “Indemnified Parties”) from and against any and all losses, claims, damages, liabilities, obligations, penalties, fees, costs, expenses and settlement agreements, joint and several (including, without limitation, reasonable attorneys’ and paralegals’ fees, costs and expenses) incurred by any of the Indemnified Parties, whether prior to or from and after the date hereof, as a result of or arising from or relating to (i) the Commitment Letter, (ii) any due diligence effort (including, without limitation, public record search, recording fees, examinations and investigations of the properties of the Borrower, each Domestic Subsidiary, each Foreign Subsidiary, the Borrower’s operations, each Domestic Subsidiary’s operations, each Foreign Subsidiary’s operations and the Collateral), negotiation, preparation, execution and/or performance of any of the Loan Documents or of any document executed in connection with the transactions contemplated thereby and the perfection of the Lender’s Liens in the Collateral, maintenance of the Loan by the Lender, and any and all amendments, modifications, and supplements of any of the Loan Documents or restructuring of the Indebtedness, (iii) any suit, investigation, action or proceeding by any Person, whether threatened or initiated, asserting a claim for any legal or equitable remedy against any Person under any statute, regulation or common law principle, arising from or in connection with any of the Loan Documents and/or Lender’s furnishing of funds to the Borrower under this Loan Agreement, (iv) the Lender’s preservation, administration and enforcement of its rights under the Loan Documents and applicable law, including the reasonable fees of the outstanding Indebtedness as attorneys fees if collected by or through an attorney at law and disbursements of counsel for the Lender in connection therewith, whether suit be brought or not and whether incurred at trial or on appeal, and all costs of repossession, storage, disposition, protection and collection of Collateral, (v) periodic field exams, audits and appraisals performed by the Lender, as permitted herein; and/or (vi) any matter relating to the financing transactions contemplated by the Loan Documents or by any document executed in connection with the transactions contemplated thereby, other than for such loss, damage, liability, obligation, penalty, fee, cost or expense, any of which arise from an Indemnified Parties’ gross negligence or willful misconduct.  No Indemnified Party shall be liable for any direct or consequential damages that arise from or are related to the Commitment Letter, this Loan Agreement or any of the Loan Documents.  All obligations for indemnification hereunder for all of the foregoing losses, damages, liabilities, obligations, penalties, fees, costs and expenses shall be part of the Indebtedness, secured by the Collateral, and chargeable against the loan accounts of the Borrower.  The indemnity herein shall survive the termination of this Loan Agreement.

14.9

Tax Obligations.  If the Borrower should fail to pay any tax or other amount required by this Loan Agreement to be paid or which may be reasonably necessary to protect or preserve any Collateral, the Lender may make such payment and the amount thereof shall be payable on demand, shall bear interest at the Default Rate from the date of payment by the Lender until paid and shall be deemed to be Indebtedness entitled to the benefit and security of the Loan Documents.  The Borrower agrees to pay and save the Lender harmless against any liability for payment of any state documentary stamp taxes, intangible taxes or similar taxes (including interest or penalties, if any) which may now or hereafter be determined to be payable in respect to the execution, delivery or recording of any Loan Document or the making of any Loan, whether originally thought to be due or not.  The agreement herein shall survive the termination of this Loan Agreement.

14.10

Reinstatement.  Notwithstanding anything herein to the contrary, this Loan Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any amount received by the Lender in respect of the Indebtedness is rescinded or must otherwise be restored or returned by the Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower, or upon the appointment of any receiver, assignee, intervener or conservator of, or trustee or similar official for, the Borrower or any substantial part of its properties, or otherwise, all as though such payments had not been made.

14.11

Notices.   Any notice or other communication hereunder, or under any Loan Document, to any party hereto or thereto shall be by hand delivery, overnight delivery, facsimile, telegram, telex or registered or certified mail and unless otherwise provided herein shall be deemed to have been given or made when delivered, telegraphed, telexed, faxed or three (3) Business Days after having been deposited in the mails, postage prepaid, addressed to the party at its address specified in Exhibit 14.11 (or at any other address that the party may hereafter specify to the other parties in writing).

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14.12

Governing Law.   This Loan Agreement and all Loan Documents shall be deemed contracts made under the laws of the Commonwealth of Massachusetts, and shall be governed by and construed in accordance with the laws of said state (excluding its conflict of laws provisions if such provisions would require application of the laws of another jurisdiction).

14.13

Successors.   This Loan Agreement shall be binding upon and shall inure to the benefit of the Borrower and the Lender, and their respective successors and assigns.

14.14

Assignment.  The Borrower may not assign any of their rights, obligations, covenants, representations, warranties, duties or responsibilities hereunder and under the Loan Documents.  Any such assignment shall be void.  The Lender may assign all or part of its rights hereunder and under the Loan Documents, at any time.

14.15

Counterparts.   This Loan Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original and all of which when taken together shall constitute but one and the same instrument.

14.16

Exhibits.  The exhibits annexed hereto are the only exhibits to be annexed to this Loan Agreement, and the material contained therein shall be incorporated herein.

14.17

Captions.  The captions herein contained are inserted as a matter of convenience only and such captions do not form a part of this Loan Agreement and shall not be utilized in the construction hereof.

14.18

Powers.   All powers of attorney granted to the Lender are coupled with an interest and are irrevocable.

14.19

Approvals.   If this Loan Agreement calls for the approval or consent of the Lender, such approval or consent may be given or withheld in the discretion of the Lender unless otherwise specified herein.

14.20

No Punitive Damages.   Each party agrees that it shall not have a remedy of punitive or exemplary damages against the other and hereby waives any right or claim to punitive or exemplary damages it may have now or which may arise in the future in connection with any Dispute.

14.21

Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS LOAN AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY).  EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS LOAN AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 14.21.

14.22

Participations.   Nothing in this Loan Agreement or any other Loan Document shall prohibit the Lender from pledging or assigning this Loan Agreement and the Lender’s rights under any of the other Loan Documents, including collateral therefore, to any Federal Reserve lender in accordance with applicable law.

14.23

The Borrower’s Officers and Agents.  Lender shall have the right to deal with any officer or other representative designated in writing by the Borrower with regard to all matters concerning the rights and obligations of Lender hereunder and pursuant to applicable law with regard to the transactions contemplated under the Loan Documents.  All actions or inactions of the officers, directors and/or agents of the Borrower with regard to the transactions contemplated under the Loan Documents shall be deemed with full authority and binding upon the Borrower hereunder.  The foregoing is a material inducement to the agreement of Lender to enter into the terms hereof and to consummate the transactions contemplated hereby.

14.24

Fiduciary and Representative Capacities.  If a party hereto executes this Loan Agreement in a fiduciary or representative capacity, only the estate or entity represented shall be bound by this Loan Agreement, and the party executing this Loan Agreement, and the shareholders, officers, directors, employees and beneficiaries of such party shall not be personally liable for any obligation, express or implied, hereunder.

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14.25

Waiver of Certain Defenses. All rights of the Lender and all obligations of the Borrower hereunder and under the Loan Documents shall be absolute and unconditional irrespective of (i) any change in the time, manner or place of payment of, or any other term of, all or any of the Indebtedness, or any other amendment or waiver of or any consent to any departure from any provision of the Loan Documents, (ii) any exchange, release or non-perfection of any other collateral given as security for the Indebtedness, or any release or amendment or waiver of or consent to departure from any guaranty for all or any of the Indebtedness, or (iii) any other circumstance which might otherwise constitute a defense available to, or a discharge of the Borrower, or any third party, other than payment and performance in full of the Indebtedness.

14.26

Terms Generally.  The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined.  Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms.  The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”.  The word “will” shall be construed to have the same meaning and effect as the word “shall”.  Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person’s successors and assigns, (c) the words “herein”, “hereof” and “hereunder”, and words of similar import, shall be construed to refer to this Loan Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Loan Agreement and (e) the word “asset” shall be construed to the have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.

[Remainder of the page is blank.  Signatures are on the following page.]

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IN WITNESS WHEREOF, the parties hereto have caused this Loan, Pledge and Security Agreement to be duly executed as of the day and year first above written.

THE BORROWER

SOFTECH, INC.

/s/ Joseph P. Mullaney

Joseph P. Mullaney

Its Chief Executive Officer

THE LENDER

PRIDES CROSSING CAPITAL FUNDING, L.P., as successor to PRIDES CROSSING CAPITAL, L.P. and PRIDES CROSSING CAPITAL-A, L.P.

          By PRIDES CROSSING CAPITAL GP, LLC

   Its General Partner

/s/ Peter M. Sherwood

Peter M. Sherwood

Its Manager

[SofTech: Signature page to A/R Loan, Pledge and Security Agreement – December 2013]

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SCHEDULE OF EXHIBITS

Exhibit

Title

1.1

Definitions

4.3

Stock Power

6.1(d)

Previously Undisclosed Liability

6.1(g)

List of Litigation

6.1(n)

List of Judgment Liens

6.1(o)

List of Subsidiaries

8.2(a)

Covenant Compliance Certificate - Form

9.8

List of Leases

10.10

List of Inactive Subsidiaries

14.11

Notice Addresses

Definitions 1

List of Commercial Tort Claims

Definitions 2

List of Intellectual Property

Definitions 3

List of Permitted Debt

Definitions 4

List of Permitted Liens

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EXHIBIT 1.1

Definitions

“Accounts” means accounts as defined in the Code.

"Accounts Payable" means all accounts payable as defined under GAAP.

"Accounts Receivable" means accounts receivable as defined under GAAP.

"Accrued Expense" means an expense which has been incurred but for which no payment has been made.

“Advance” means a payment and transfer of Principal from the Lender to the Borrower under a Term Note, in accordance with the terms, conditions and agreements of such Term Note and the Loan Agreement.

“Affiliate” of a Person means (a) any Person directly or indirectly owning ten percent (10%) or more of the voting stock or rights of such named Person or of which the named Person owns ten percent (10%) or more of such voting stock or rights; (b) any Person controlling, controlled by or under common control with such named Person; (c) any officer, director or employee of such named Person or any Affiliate of the named Person; and (d) any family member of the named Person or any Affiliate of such named Person.

“Borrower” means SofTech, Inc., a Massachusetts corporation with a place of business at 650 Suffolk Street, Suite 415, Lowell, Massachusetts 01854.

“Business Day” means any day that is not a Saturday, Sunday or other day on which the Lender are authorized or required by law to remain closed.

“Capital Expenditures” means capital expenditures as defined under GAAP, including without limitation capital leases.

“Capitalized Software Development Costs” means all capitalized costs and expenses incurred to write, develop, code, debug and commercialize software code and software, which are not expensed in the period they were incurred, but recognized over a period of time via depreciation or amortization.

"Cash" means cash as defined under GAAP.

“Change in Control” means either (a) any transaction or series of transactions that results in, or will lead to a change in the Borrower’s ownership such that owners of fifty and one tenth percent (50.10%) of the voting interests in the Borrower on a fully diluted basis before giving effect to such transaction or series of transactions will not own at least fifty and one tenth percent (50.10%) of the voting interests in the Borrower, on a fully diluted basis after giving effect to such transaction or series of transactions, (b) all or substantially all of  Borrower’s assets are sold or transferred, (c) any decrease after the Closing Date in the number of shares of Borrower’s Equity Interests owned by Guarantor on the Closing Date, (d) Guarantor becomes disabled or dies, (e) Guarantor ceases to be Borrower’s Chief Executive Officer, unless Guarantor is replaced by a Chief Executive Officer reasonably acceptable to the Lender within thirty (30) days, or (f) Borrower’s current senior management no longer manages, controls or operates Borrower’s business.

“Change in Law” means (a) the adoption of any law, rule or regulation after the Closing Date or (b) any change in any law, rule or regulation or in the interpretation or application thereof by any governmental authority after the Closing Date.

“Closing Date” means the date all Loan Documents are executed and delivered by the Borrower, The Lender, and Personal Guarantor, respectively.

“Code” means the Uniform Commercial Code, including all amendments, in effect in the Commonwealth of Massachusetts from time to time.

22

“Collateral” means all assets of the Borrower, including without limitation the following property of the Borrower, wherever located and whether now owned by the Borrower or hereafter acquired (all terms shall have the meaning provided in the Code), (a) all accounts (which for avoidance of doubt shall exclude accounts of Borrower’s Subsidiaries), (b) all inventory, (c) all general intangibles, provided, however, the security interest in the Equity Interests owned by the Borrower in the Foreign Subsidiaries shall be limited as provided in Section 4.1 herein, (c) all chattel paper, (d) all instruments, (e) all payment intangibles, (f) all equipment, (g) all insurance and insurance proceeds, (h) all machinery, (i) all contracts, including all retainage under such contracts, (j) all contract rights, (k) all Intellectual Property, including without limitation all Source Code, (l) all chattel paper, (m) all electronic chattel paper, (n) all causes of action and Commercial Tort Claims, (o) all deposit accounts, including without limitation all Deposit Accounts, (p) all supporting obligations, (q) all funds on deposit with or under the control of Lender or its agents or correspondents, (r) all notes, documents, agreements and other writings that evidence a loan or other financial obligation owed to the Borrower, including without limitation each Permitted Loan, (s) all Pledged Subsidiary Equity, including without limitation all stock and stock certificates in each Domestic Subsidiary and sixty-five percent (65%) of all Equity Interests in each Foreign Subsidiary, (t) all parts, replacements, substitutions, profits, products and cash and non-cash proceeds of any of the foregoing (including insurance proceeds, of any kind, including those payable by reason of loss or damage thereto) in any form and wherever located, (u) all fixtures, (v) all vehicles, and (w) all written or electronically recorded books and records relating to any such Collateral and other rights relating thereto, wherever located and whether now owned by the Borrower or hereafter acquired.

“Commercial Tort Claim” means commercial tort claim as defined in Section 9-102 of the Code.  A complete list of the Borrower’s Commercial Tort Claims are set forth in Exhibit Definitions 1 to the Loan Agreement.

“DACA” means a Deposit Account Control Agreement.

“Debt” means all liabilities of a Person as determined under GAAP and all obligations which such Person has guaranteed or endorsed or is otherwise severally, secondarily or jointly liable for, and shall include, without limitation () all obligations for borrowed money or purchased assets, () obligations secured by assets whether or not any personal liability exists, () the capitalized amount of any capital or finance lease obligations, () the unfunded portion of pension or benefit plans or other similar liabilities, () obligations as a general partner, () contingent obligations pursuant to guaranties, endorsements, letters of credit and other secondary liabilities, and () obligations for deposits.

“Default” means any event or condition, or which upon notice, lapse of time or both would, unless cured or waived, is an Event of Default.

“Default Rate” means the per annum rate of five (5.00%) percent plus the rate of interest rate payable under the Term Note.

“Deposit Account” means any and all of the bank accounts and deposit accounts maintained by the Borrower, including without limitation all checking accounts, savings accounts, and money market accounts maintained at First Republic Bank.  The term Deposit Account does not include any bank or deposit account which is used exclusively for (i) accepting and converting payments in foreign currencies, (ii) payroll, (iii) employee benefits or (iv) escrowed deposits.  

“Deposit Account Control Agreement” means one or more deposit account control agreements, entered into by and among the Borrower, the Lender, and a Person, pursuant to which the Lender perfects it’s security interest in a Deposit Account and all assets held, maintained and/or deposited into such Deposit Account.

"Domestic Subsidiary" means any existing and future corporation, limited liability corporation, limited liability partnership, partnership, trust or other entity in which the Borrower, directly or indirectly, owns more than fifty percent (50%) of the stock, capital, income interests, or other beneficial interests, or which is effectively controlled by the Borrower, and such entity is organized under the laws of one of the fifty United States, including without limitation Information Decisions, Inc. and Workgroup Technology Corp.

"EBITDA" means earnings before interest, taxes, depreciation and amortization, as defined under GAAP.

23

“Environmental Laws” means, collectively the following acts and laws, as amended:  the Comprehensive Environmental Response, Compensation and Liability Act of 1980; the Superfund Amendments and Reauthorization Act of 1986; the Resource Conservation and Recovery Act; the Toxic Substances Act; the Clean Water Act; the Clean Air Act; the Oil Pollution and Hazardous Substances Control Act of 1978; and any other “Superfund” or “Superlien” law, and any other present or future federal, state or local law statute, ordinance, code, rule, regulation, order or decree relating to, or imposing liability or standards of conduct concerning, any pollutants, hazardous materials or waste, hazardous substances, toxic or dangerous waste, substance or material that may have a negative impact on human health, including without limitation, asbestos and asbestos containing materials, lead, radon, toxic mold, petroleum, petroleum products and radioactive materials, as now or at any time hereafter in effect.

“Equipment” means equipment as defined in the Code.

“Equity Interest” means any securities, interests, ownership rights, general partnership interests and/or rights, limited partnership interests and/or rights, limited liability company interests and/or rights, limited liability partnership interests and/or rights, rights to control and/or manage, instruments or distributions of any kind owned, issuable, issued by any Person, including, but not limited to, any such securities, interests and/or rights arising from a stock dividend, stock split, reclassification, reorganization, merger, consolidation, sale of assets or other exchange of securities or any dividends or other distributions of any kind upon or with respect to such securities, interests and/or rights.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.

“ERISA Affiliate” means any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer within the meaning of Section 414(b), (c), (m) or (o) of the Code.

“ERISA Event” means (a) any “reportable event”, as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to any Pension Plan, (b) the existence with respect to any Pension Plan of an “accumulated funding deficiency” (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived, (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Pension Plan, (d) the incurrence by the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Pension Plan, (e) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Pension Plan or Pension Plans or to appoint a trustee to administer any Pension Plan or (f) the receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by any Multi-employer Plan from the Borrower or any ERISA Affiliate of any notice of Withdrawal Liability or a determination that a Multi-employer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA.

“Event of Default” means any event specified as such in Section 12 hereof (“Events of Default”), provided that there shall have been satisfied any requirement in connection with such event for the giving of notice or the lapse of time, or both.

“First Republic Bank” means First Republic Bank, with a place of business at One Post Office Square, Boston, Massachusetts.

“Fixed Assets” means all tangible property owned and used in the production of Borrower’s revenue, that is not expected to be consumed or converted into Cash within the next twelve (12) months.

“Foreign Subsidiary” means any existing and future corporation, limited liability corporation, limited liability partnership, partnership, trust or other entity in which the Borrower, directly or indirectly, owns more than fifty percent (50%) of the stock, capital, income interests, or other beneficial interests, or which is effectively controlled by the Borrower, and such entity is organized and incorporated in a country other than the United States, including without limitation SofTech GmbH, and SofTech Srl.

“GAAP” means generally accepted accounting principles as in effect in the Unites States from time to time.

"Greenleaf " means Greenleaf Capital, LLC, with a place of business at 100 W. Michigan Avenue, Suite 300, Kalamazoo, Michigan.

24

“Greenleaf Stock” means Two Hundred and Seventy-One Thousand Four Hundred and Eleven (271,411) shares of Borrower’s common stock, which as of May 31, 2013 were owned by Greenleaf or Persons affiliated with Greenleaf.

"Guarantor" means Joseph P. Mullaney, who resides at 9 Delaware Road, Medfield, Massachusetts.

“Indebtedness” means all obligations now or hereafter owed to the Lender by the Borrower, in connection with the Loan Agreement, Original Loan Agreement, Term Note I, Term Note II, Original Term Notes, Term Note, Personal Guaranty, any Subordination Agreement and all other Loan Documents, or arising out of the transactions described therein, including, without limitation sums advanced to pay overdrafts on any account maintained by the Borrower with the Lender, together with all interest accruing thereon, all obligations under any swap agreements as defined in 11 U.S.C. §101 between the Lender and the Borrower whenever executed, all interest, taxes, fees, all costs of collection, reasonable attorneys’ fees and expenses of or advances by either Lender which such Lender pays or incurs in discharge of obligations of the Borrower or to appraise, inspect, repossess, protect, preserve, store or dispose of any Collateral or the Leased Premises, whether such amounts are now due or hereafter become due, direct or indirect and whether such amounts due are from time to time reduced or entirely extinguished and thereafter re-incurred and any and all amounts covered by the indemnification provisions of Section 14.8, which are paid by an Indemnified Party.

“Insolvency Proceeding” means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.

“Insolvent” means not Solvent.

“Instruments” means an instrument as defined in the Code.

“Intellectual Property” means all right, title, and interest in any of the following, whether now existing or hereafter acquired or created, (a) copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held (collectively, the "Copyrights"), including the Copyrights set forth in Exhibit Definitions 2 to the Loan Agreement, (b) trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks (collectively, the "Trademarks"), including the Trademarks described in Exhibit Definitions 2 to the Loan Agreement, (c) patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same (collectively, the "Patents"), including the Patents described in Exhibit Definitions 2 to the Loan Agreement, (d) mask work or similar rights available for the protection of semiconductor chips or other products (collectively, the "Mask Works"), (e) trade secrets, and any and all intellectual property rights in computer software and computer software products, (f) design rights, (g) claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above, (h) licenses or other rights to use any of the Copyrights, Patents, Trademarks, or Mask Works, and all license fees and royalties arising from such use to the extent permitted by such license or rights, (i) amendments, renewals and extensions of any of the Copyrights, Trademarks, Patents, or Mask Works, and (j) proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing.

"Interest" means Interest Expense.

“Interest Expense” means, for any period, all interest in respect of Debt accrued or capitalized during such period (whether or not actually paid during such period).

“Inventory” means inventory as defined in the Code.

“Investment Property” means the definition provided in Section 9-102 of the Code.

“IP Security Agreement” means that certain Intellectual Property Security Agreement, dated as of the date of the Loan Agreement, by and between the Borrower and the Lender.

25

“Iron Mountain” means Iron Mountain, Inc., and its subsidiaries and affiliates, with a place of business at 745 Atlantic Avenue, Boston, Massachusetts.

"Leases" means, for Borrower, all lease agreements with a third party for the lease and occupancy of real estate, buildings, common areas, office space, residential living space, fixtures and/or parking spaces, used by Borrower in the operation of its business.

“Lender” Prides Crossing Capital Funding, L.P., and it’s successors and assigns.

“Lien” means any consensual lien, non-consensual lien, mortgage, pledge, statutory lien or other lien arising by operation of law, grant, security interest, trust arrangement, security deed, financing lease, collateral assignment or other encumbrance, conditional sale or title retention agreement, or any other interest in property designed to secure the repayment of Indebtedness, whether arising by agreement or under any statute or law or otherwise.

“Loan Agreement” means that certain Amended and Restated Loan, Security and Pledge Agreement, dated December 5, 2013, by and between the Lender and Borrower.

“Loan Documents” means the Loan Agreement, Original Loan Agreement, Term Note I, Term Note II, Term Note, IP Security Agreement, Personal Guaranty, October Consent Letter, November Escrow Letter, all DACAs, all Subordination Agreements, Stock Powers, all UCC-1/Financing Statements, all UCC-3/Amendments, the Escrow Agreement, Source Code Escrow Agreement, Master Assignment Agreement, and all other documents, agreements, instruments and inter-creditor agreements now or hereafter evidencing, describing, relating to, guaranteeing or securing the Indebtedness, contemplated hereby or delivered in connection herewith, and all prior amendments and restates of any or all or the foregoing, as they may be modified from time to time.

“Machinery” means machinery as defined in the Code.

“Master Assignment Agreement” means that certain Master Assignment Agreement, dated December 5, 2013, by and between the Original Lenders and the Lender.

“Material Adverse Effect” means any (i) material adverse effect upon the validity, performance or enforceability of any of the Loan Documents or any of the transactions contemplated hereby or thereby, including without limitation the existence, priority or perfection of liens securing the Indebtedness, (ii) material adverse effect upon the properties, business, or condition (financial or otherwise) of the Borrower and/or any other Person obligated under any of the Loan Documents, which will or may reasonably likely cause the Borrower or other Person to Default under any of the Loan Documents, or (iii) material effect upon the ability of the Borrower, any Domestic Subsidiary or Personal Guarantor to fulfill any of their respective obligations under any of the Loan Documents.

"Maturity Date" means January 1, 2015.

“Mentor Contract” means that certain Asset Purchase Agreement, dated as of August 30, 2013, by and between the Borrower and Mentor Graphics Corporation.

“Mullaney Loan” means the loan made by the Borrower to Joseph P. Mullaney in May, 1998, in the original principal amount of $134,000, which loan does not accrue interest and does not mature until stock issued by the Borrower which was purchased with the proceeds of such loan are sold.

"Net Income" means total revenue less all expenses during the same period, calculated in accordance with GAAP.

“November Escrow Letter” means that certain letter agreement, dated November 18, 2013, by and between the Original Lenders and the Borrower.

“October Consent Letter” means that certain letter agreement, dated October 17, 2013, by and between the Original Lenders and the Borrower.

“Original Lenders” means PCC and PCCA.

26

“Original Loan Agreement” means that certain Loan, Security and Pledge Agreement, dated May 10, 2013, by and between PCC and PCCA and Borrower.

“PCC” means Prides Crossing Capital, L.P., a Delaware limited partnership, with a place of business at 800 Boylston Street, Suite 2220, Boston, Massachusetts.

“PCCA” means Prides Crossing Capital-A, L.P., a Delaware limited partnership, with a place of business at 800 Boylston Street, Suite 2220, Boston, Massachusetts.

“Permitted Debt” means (a) the Indebtedness; (b) any other Debt listed on Exhibit Definitions 3; provided, however, that the principal amount of such Debt may not be increased from the amount shown as outstanding on such Exhibit Definitions 3, (c) Debt under any Permitted Revolving Facility, (d) Debt incurred for Capital Expenditures, including capital leases, secured only by the capital asset purchased with such Debt, not to exceed the amounts set forth in Section 11.5 of the Loan Agreement, (e) Debt incurred for Capitalized Software Development Costs, not to exceed the amounts set forth in Section 11.5 of the Loan Agreement, (f) trade payables incurred in the ordinary course of business that are not past due for more than ninety (90)  days other than as may be disputed in good faith or for which adequate reserves have been provided under GAAP, (g) Permitted Loans made to the Borrower, and (h) Debt owing under the Escrow Agreement.

“Permitted Distributions” means all Permitted Loans and all Permitted Equity Contributions.

“Permitted Equity Contribution” means a  transfer of value by the Borrower to a Domestic Subsidiary in any form, which constitutes a contribution of equity to such Domestic Subsidiary, and is not a loan to such Domestic Subsidiary.  The total of all Permitted Equity Contributions shall not exceed Fifty Thousand Dollars ($50,000).

“Permitted Liens” means:

(a)

Liens created under the Loan Documents;

(b)

Liens granted on specific assets purchased with Permitted Debt;

(c)

Liens imposed by any governmental authority for taxes, assessments or charges not yet due or which are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of the Borrower in accordance with GAAP;

(d)

purchase money security interests and liens evidencing capital leases, subject to the limitations set forth in “Permitted Debt”;

(e)

pledges or deposits under worker’s compensation, unemployment insurance and other social security legislation;

(f)

deposits to secure the performance of bids, tenders, trade contracts (other than for borrowed money), leases (other than capital leases), statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business;

(g)

Liens securing any Permitted Revolving Facility;

(h)

Liens created under the Escrow Agreement; and

(h)

liens, if any, listed in Exhibit Definitions 4 to the Loan Agreement.

“Permitted Loans” means (i) intercompany loans among the Borrower and its Domestic Subsidiaries, that are (a) evidenced  by a written, authorized, executed, delivered and enforceable promissory note, (b) owned by the Borrower, and (c) not subject to any claim, counterclaim, defense, set-off right, recoupment or other right, (ii) all notes or other written form of payment or promise to pay is immediately turned over to and held by the Lender, (iii) the Mullaney Loan and (iv) all loans listed in Exhibit Definitions 5 to the Loan Agreement.  The total of all Permitted Loans shall not exceed Fifty Thousand Dollars ($50,000) and the Mullaney Loan.  If some or all of the Mullaney Loan is paid, the amount paid shall not be added to the $50,000 limit herein to calculate the total of all Permitted Loans.

27

“Permitted Redemptions” means (i) Borrower’s purchase of One Hundred and One Thousand Four Hundred and Eleven (101,411) shares of Greenleaf Stock on a future date chosen by Borrower, provided that (A) the Borrower shall have provided written notice to the Lender no less than five (5) Business Days prior to the proposed purchase of Borrower’s intent to purchase such Greenleaf Stock, (B) the Lender consents, in its sole discretion, in writing, and (C) on the date of such purchase (1) no Event of Default exists, (2) payment of the purchase price for such Greenleaf Stock will not result in an Event of Default and (3) payment of the purchase price of such Greenleaf Stock will not have a Material Adverse Effect, and (ii) an aggregate of Two Hundred and Ninety-Five Thousand Dollars ($295,000) in redemptions, fees and payments by the Borrower to Investors under the Securities Purchase Agreement, provided that (A) the Borrower shall have provided written notice to the Lender no less than ten (10) Business Days prior to the proposed payments, (B) the Lender consents, in writing, which written consent shall not be unreasonably withheld, conditioned or delayed if on the date of such purchase (1) no Event of Default exists, (2) such payment will not result in an Event of Default and (3) such payment will not have a Material Adverse Effect.

“Person” means any natural person, corporation, unincorporated organization, trust, joint-stock company, joint venture, association, company, limited or general partnership, any government or any agency or political subdivision of any government, or any other entity or organization, including without limitation the Borrower.

"Personal Guaranty" means that certain Personal Guaranty Agreement, dated as of the date of the Loan Agreement, by and between the Personal Guarantor and the Lender, and pursuant to which the Personal Guarantor unconditionally guarantees payment and performance of up to Five Hundred Thousand Dollars ($500,000) of the Indebtedness.  

“Pledged Subsidiary Equity” means, collectively, (i) one hundred percent (100%) of the Equity Interests owned by the Borrower in each Domestic Subsidiary, whether now owned or hereafter created or acquired by the Borrower, together will all proceeds and substitutions thereof, all cash, stock and other moneys and property paid thereon, all rights to subscribe for securities declared or granted in connection therewith, and all other cash and noncash proceeds of the foregoing, and (ii) sixty-five percent (65%) of the Equity Interests owned by the Borrower in each Foreign Subsidiary, whether now owned or hereafter created or acquired by the Borrower, together with all proceeds and substitutions thereof, all cash, stock and other moneys and property paid thereon, all rights to subscribe for securities declared or granted in connection therewith, and all other cash and noncash proceeds of the foregoing.

“Principal” means funds paid and transferred by the Lender to the Borrower under either Term Note I and Term Note II.

“Quick Ratio” means (a) Cash, plus Borrower’s Accounts Receivable, divided by (b) Borrower’s Accounts Payable, plus Borrower’s accrued expenses.  

“Regulated Materials” means any hazardous, toxic or dangerous waste, substance or material, the generation, handling, storage, disposal, treatment or emission of which is subject to an Environmental Law.

“Securities” means the definition provided in Section 8-102 of the Code.

“Securities Purchase Agreement” means that certain Securities Purchase Agreement, entered into by the Borrower and certain investors (collectively the “Investors”) between November 2012 and February 2013, pursuant to which Borrower issued and sold 50,000 shares of new common stock to the Investors for Five Dollars ($5.00) per share.

“Security Entitlement” shall have the meaning provided in Sec 8-102 of the Code.

“SofTech Stock” means any and all Equity Interests, Securities, options, warrants, rights to purchase an equity interest in the Borrower, which is owned by the Guarantor, owned by any Person controlled by the Guarantor or the disposition, transfer, sale or redemption of which is controlled by the Guarantor.

“Solvent” means, as to any Person including without limitation the Borrower, that such Person has capital sufficient to carry on its business and transactions in which it is currently engaged and all business and transactions in which it is about to engage, is able to pay its debts as they mature, and has assets having a fair valuation greater than its liabilities, at fair valuation.

28

“Source Code” means all source code, programming code, programing instructions, programing statements, programming text containing declarations, instructions, functions, loops, declarations, notes, scripts, files and other statements that tell a computer program how to function, which is created by Borrower, Borrower’s agents or employees, or owned by Borrower.

“Source Code Escrow Agreement” means any and all agreements by and between the Borrower, the Lender and Person, pursuant to which the Source Code is held in escrow as security collateral for all Indebtedness under the Loan Documents.

"Subordination Agreement" means a subordination agreement, which is reasonably  acceptable to the Lender, by and between the Lender and a Person that loans funds to the Borrower under a Permitted Revolving Facility, as acknowledged by the Borrower, pursuant to which the Lender and such Person set forth (i) the allowance, priority and suspension of payments due Lender and such Person from the Borrower, and (ii) their respective collateral and enforcement rights in the Event of a Default under the Loan Documents or any of such Person’s loan documents.

“Subsidiaries” all of the Domestic Subsidiaries and Foreign Subsidiaries.

“Term Note” means that certain $1,000,000 Term Note, dated as of the date of the Loan Agreement, from the Borrower in favor of the Lender.

"Term Note I" means that certain $1,426,410 Term Note, dated as of the date of the Original Loan Agreement, from the Borrower in favor of PCC.

"Term Note II" means that certain $1,273,590 Term Note, dated as of the date of the Original Loan Agreement, from the Borrower in favor of PCCA.

“Termination Event” means a “reportable event” as defined in Section 4043(b) of ERISA, or the filing of a notice of intent to terminate under Section 4041 of ERISA.

Footnote 1.    All financial terms used herein shall have the meanings assigned to them under GAAP unless another meaning shall be specified.

Footnote 2.  The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined.  Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms.  The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”.  The word “will” shall be construed to have the same meaning and effect as the word “shall”.  Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person’s successors and assigns, (c) the words “herein”, “hereof” and “hereunder”, and words of similar import, shall be construed to refer to this Loan Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Loan Agreement and (e) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.

29

EXHIBIT 4.3

Stock Powers

[The remainder of the page is blank.  The Exhibit appears on the following page.]

30

 EXHIBIT 6.1(d)

Previously Undisclosed Liabilities

None.

[The remainder of the page is blank.]

31

EXHIBIT 6.1(g)

List of Litigation

On July 19, 2013, Dassault Systemes Solidworks Corporation (“Solidworks”) filed a complaint (the “Complaint”) against the Borrower in the United States District Court for the Eastern District of Texas, Tyler Division, alleging fraud and false assurances.  The Complaint is connected to a patent infringement suit brought by Auto-Dimensions LLC, a wholly-owned subsidiary of Acacia Research Group, against Solidworks in December 2012.  The Borrower owned those patents in question and sold them to Auto-Dimensions LLC in June 2012.  Solidworks is seeking reimbursement from the Borrower of attorneys’ fees and any judgments or settlement monies it may incur under the infringement suit, as well as punitive and multiple damages.  Trial is set for November 2015.

The Borrower has engaged Davis Malm & D’Agostine, P.C. in this matter, who has evaluated the case and believe that the Solidworks suit against the Borrower is without merit and was filed as a strategic move to put SofTech in conflict with Acacia. The addition of the Borrower to the case (i) affords Solidworks access to the Borrower’s documents and personnel for purposes of discovery and (ii) improved Solidworks’ argument to have the case moved from Texas to Massachusetts.

[The remainder of the page is blank.]

32

 EXHIBIT 6.1(n)

List of Judgment Liens

None.

[The remainder of the page is blank.]

33

EXHIBIT 6.1(o)

List of Subsidiaries

Entity	State of Incorporation	Corporate Relationship
SofTech, Inc.	Massachusetts	Parent Company
Workgroup Technology Corporation	Delaware	Wholly-owned subsidiary of SofTech
Information Decisions, Inc.	Michigan	Wholly-owned subsidiary of SofTech
SofTech, Srl	Italy	Wholly-owned subsidiary of SofTech
SofTech GmbH	Germany	Wholly-owned subsidiary of SofTech

[The remainder of the page is blank.]

34

 EXHIBIT 8.2(a)

Covenant Compliance Certificate

[The remainder of the page is blank.  The Exhibit starts on the following page.]

35

EXHIBIT 9.8

List of Leases

Lease Agreement between Borrower as tenant and Fortune Wakefield LLC as landlord for 9,141  square feet of office space located at 650 Suffolk Street, Lowell, Massachusetts 01854. The Lease terminates on December 31, 2018, if not extended at Borrower election.

[The schedule appears on the following page. The remainder of the page is blank.]

36

EXHIBIT 10.10

List of Inactive Subsidiaries

[The schedule appears on the following page. The remainder of the page is blank.]

37

EXHIBIT 14.11

Notice Addresses

If to the Lender:

Peter M. Sherwood

Manager

Prides Crossing Capital Funding, L. P.

800 Boylston Street, Suite 2220

Boston, Massachusetts 02199

With a Copy to:

Sean W. Gilligan, Esq.

Gesmer Updegrove LLP

40 Broad Street

Boston, Massachusetts 02110

If to the Borrower:

Joseph P. Mullaney

Chief Executive Officer

SofTech, Inc.

650 Suffolk Street, Suite 415

Lowell, Massachusetts 01854

with a copy to

Matthew V.P. McTygue, Esq.

Christine Dreyer McCay, Esq.

Edwards, Wildman & Palmer LLP

111 Huntington Avenue

Boston, Massachusetts 02199

38

EXHIBIT Definitions 1

List of Commercial Tort Claims

None.

[The remainder of the page is blank.]

39

EXHIBIT Definitions 2

List of Intellectual Property

US Trademarks Registrations

PRODUCTCENTER

Trademark No.

3,657,646

SOFTECH

Trademark No.

4,170,380

Canadian Trademark Registrations

SOFTECH

Trademark No. TMA 348907

[The schedule appears on the following page. The remainder of the page is blank.]

40

EXHIBIT Definitions 3

List of Permitted Debt

None.

[The remainder of the page is blank.]

41

EXHIBIT Definitions 4

List of Permitted Liens

None.

[The remainder of the page is blank.]

42

EXHIBIT Definitions 5

List of Permitted Loans

None.

[Remainder of the page is blank.]

43

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULE 13A-14(A) / 15D-14(A)

I, Amy E. McGuire, Chief Financial Officer of SofTech, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of SofTech, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;  

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: January 14, 2014

/s/ Amy E. McGuire

Amy E. McGuire

Chief Financial Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULE 13A-14(A) / 15D-14(A)

I, Joseph P. Mullaney, President and Chief Executive Officer of SofTech, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of SofTech, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;  

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: January 14, 2014

/s/ Joseph P. Mullaney

Joseph P. Mullaney

President and Chief Executive Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of SofTech, Inc. (the “Company”) on Form 10-Q for the quarter ended November 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Joseph P. Mullaney, Chief Executive Officer of the Company and Amy E. McGuire, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:    January 14, 2014

/s/ Amy E. McGuire

Amy E. McGuire

Chief Financial Officer

/s/ Joseph P. Mullaney

Joseph P. Mullaney

President and Chief Executive Officer

XML

Stock Purchase Agreement (DETAILS) (USD $)	Nov. 30, 2013
Stock Purchase Agreement:
Company purchased common stock from Greenleaf Capital Inc,	170,000
Purchase price (total)	$ 62,900
Purchase price per share	$ 0.37
Option to purchase remainig shares as per stock purchase agreement	101,411
Price per share within one year of the date of agreement	$ 0.37

XML

Activity for liabilities classified as level 3 (Details) (Subordinated Convertible Note, USD $)	Subordinated Convertible Note USD ($)
Balance. at May. 31, 2013	0
Issuance of warrant liability	$ 51
Fair value adjustment	(6)
Fair value: at Nov. 30, 2013	$ 45

XML

Patents Sales Transactions (DETAILS) (USD $)	Nov. 30, 2013	Sep. 30, 2012
Patents Sales Transactions
Non-refundable initial royalty payment made	$ 200,000
Patents purchased	290,000
Support services payment	10,000
Share of royalties payable	30.00%
Increase in the limit of initial payment		$ 100,000

XML

SEGMENT INFORMATION

6 Months Ended

Nov. 30, 2013

SEGMENT INFORMATION

SEGMENT INFORMATION

C. Segment 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 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):

		Three Month Periods Ended
Revenue:		November 30, 2013		November 30, 2012
North America	$	1,255	$	1,215
Europe		290		604
Asia		330		120
Eliminations		(461)		(167)
Consolidated Total	$	1,414	$	1,772
		Six Month Periods Ended
Revenue:		November 30, 2013		November 30, 2012
North America	$	2,259	$	2,413
Europe		604		937
Asia		493		286
Eliminations		(566)		(294)
Consolidated Total	$	2,790	$	3,342

Long Lived Assets:		As of November 30, 2013		As of May 31, 2013
North America	$	1,922	$	5,119
Europe		43		113
Consolidated Total	$	1,965	$	5,232

XML

FOREIGN CURRENCY TRANSLATION TRANSACTIONS (Details) (USD $)	3 Months Ended		6 Months Ended
	Nov. 30, 2013	Nov. 30, 2012	Nov. 30, 2013	Nov. 30, 2012
FOREIGN CURRENCY TRANSLATION TRANSACTIONS:
Net gain from foreign currency related transactions	$ 14,000	$ 8,000	$ 22,000	$ 11,000

XML

REEDEMABLE COMMON STOCK (Details) (USD $)	Nov. 30, 2013
Reedemable common stock
Company issued common stock shares	50,000
Par value of the share	$ 0.10
Purchase price of the share	$ 5.00
Private placement transactions for total proceeds	$ 250,000
company investment	25,000
Investors fee	6,000
Redemption price of the Common Stock per share (Put option)	$ 5.50
Redeemable common Stock initial carrying value	163,000
Amount equal to gross proceeds	250,000
Issuance cost related legal fee	27,000
Fee included in other liabilities	60,000
Common Stock recorded at its redemption value	275,000
Recorded accretion to additional paid in capital	$ 112,000

XML

Certain balance sheet captions are as follows (Details) (USD $)	Nov. 30, 2013	May 31, 2013
Certain balance sheet captions are as follows:
Property and equipment	$ 1,905	$ 1,869
Accumulated depreciation and amortization	(1,025)	(1,816)
Property and equipment, net.	$ 70	$ 53

XML

NET INCOME PER COMMON SHARE (Details) (USD $)	3 Months Ended		6 Months Ended
	Nov. 30, 2013	Nov. 30, 2012	Nov. 30, 2013	Nov. 30, 2012
Calculation of basic and diluted net income:
Net income (loss) available to common shareholders	$ (44)	$ 252	$ (310)	$ 425
Weighted average number of common shares outstanding used in calculating basic earnings per share	875,135	995,468	888,140	995,295
Incremental shares from the assumed exercise of dilutive stock options		$ 995,468		$ 1,277
Weighted average number of common shares outstanding used in calculating diluted earnings per share	875,135	995,468	888,140	996,572

XML

Significant Accounting Policies

6 Months Ended

Nov. 30, 2013

Significant Accounting Policies

Significant Accounting Policies

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, and the valuation of long term assets including goodwill, intangibles, capitalized software development costs and deferred tax assets. Actual results could differ from those estimates.

REVENUE RECOGNITION

The Company follows the provisions of the Accounting Standards Codification (“ASC”) 985, Software 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, and a fixed fee and collectability has been determined. 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. 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.

The Company follows the provisions of ASC 605, Revenue Recognition for transactions that do not involve the licensing of software or software support services as in the case of the recent sale of our patents. Revenue from the sale of patents is recorded when persuasive evidence of an arrangement exists, delivery has taken place and a fixed fee and collectability has been determined. These conditions are no different from those when we license software. For multiple element arrangements, however, under ASC 605, total fees are allocated to each of the elements based upon the relative selling price method. Under that method the allocation of fees to the undelivered elements is based on VSOE, or if it doesn’t exist, then based on third party evidence of selling price. If neither exists, then the allocation is based on management’s best estimate of the selling price.

SOFTWARE DEVELOPMENT COSTS

The Company accounts for its software development costs in accordance with 985-20, Costs of Computer Software to Be Sold, Leased or Marketed.  Costs that are incurred internally 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.  Such 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 technological feasibility of a product is established as well as its economic life.

During the three and six months ended November 30, 2013, the Company capitalized approximately $18,000 and $57,000, respectively, of software development costs related to new products, as compared to approximately $48,000 and $159,000 for the comparable periods in the prior fiscal year. Amortization expense related to capitalized software development for the three and six months ending November 30, 2013 was approximately $24,000 and $49,000, respectively, as compared to approximately $16,000 and $28,000 for the comparable periods in the prior fiscal year.  

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.  Total direct costs incurred in establishing this debt agreement were approximately $291,000. These costs have been capitalized and are being amortized over the three year life of the loan. Unamortized debt issuance costs related to the Company’s previous debt agreement as of May 10, 2013 totaled approximately $108,000 and were expensed in Q4 of fiscal 2013. Amortization expense related to debt issuance costs for the three and six months ending November 30, 2013 were approximately $22,000 and $43,000, respectively, as compared to approximately $29,000 and $59,000 for the comparable periods in the prior fiscal year.

ACCOUNTING FOR GOODWILL

The Company accounts for goodwill pursuant to the provisions of the 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 statement’s criteria.

The Company operates in a single reporting unit.  Goodwill has been allocated to the CADRA product line based upon the estimated fair value of the CADRA product line based on the transaction with Mentor as compared to the estimated fair value of the Company as a whole. Goodwill allocated to the CADRA product line included in the derivation of the gain on sale was approximately $3.2 million.

As of May 31, 2013, 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. The Company concluded that no facts or circumstances arose during the six months ended November 30, 2013 to warrant an interim impairment test.

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 for the three and six month periods ending November 30, 2013 were approximately $ – and $2,000, respectively,  as compared to $ - and $6,000, respectively, for the three and six month periods ending November 30, 2012.

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 November 30, 2013, the Company does not have any long-lived assets it considers to be impaired.

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.

The Company’s 1994 Stock Option Plan provided for the granting of stock options at an exercise price not less than fair market value of the stock on the date of the grant and with vesting schedules as determined by the Board of Directors. No new options could be granted under the Plan after fiscal year 2004 and all stock options had vested prior to May 31, 2009. During fiscal 2012, all options awarded under the 1994 Stock Option Plan had expired. 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. Additionally, any future 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, 2013, 10,000 options were awarded and outstanding under the 2011 Plan.

The following table summarizes option activity under the 1994 Stock Option Plan and 2011 Plan:

			Weighted	Weighted-
			Average	Average
	Number of		Exercise Price	Remaining		Aggregate
	Options		Per Share	Life (in years)		Intrinsic Value
Outstanding options at May 31, 2012	10,000	$	2.40	9.02	$	-
Granted	-		-	-		-
Exercised	-		-	-		-
Forfeited or expired	-		-	-		-
Outstanding options at May 31, 2013	10,000		2.40	8.02		-
Granted	-		-	-		-
Exercised	-		-	-		-
Forfeited or expired	-		-	-		-
Outstanding options at November 30, 2013	10,000	$	2.40	7.52	$	-
Exercisable at November 30, 2013	8,056	$	2.40	7.52	$	-

The Company determined the volatility for options granted 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.

For each of the three and six month periods ended November 30, 2013 and 2012, the Company expensed approximately $2,000 and $4,000, respectively, of stock-based compensation.  

REDEEMABLE COMMON STOCK

During the year ending May 31, 2013, the Company issued 50,000 shares of common stock, $.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 entitles the Investors to a fee of $6,000 (the “Fee”) to be paid in six equal quarterly installments during the eighteen month period (the “Payment Period”) following the investment.  The Agreement also provides 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 following the Payment Period.

The Company first assessed the redeemable Common Stock to determine if the instrument should be accounted for as a liability in accordance with ASC 480. 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 the 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 Common Stock issued pursuant to the Agreement in accordance with ASC 480-10-S99-3A, 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. The 50,000 shares of Common Stock issued pursuant to the Agreement were recorded as redeemable common stock at an initial carrying value of $163,000. This amount is equal to the gross proceeds of $250,000, less $27,000 in issuance costs related to legal fees and the $60,000 Fee, which has been included in other liabilities. The Company elected to record the Common Stock at its redemption value of $275,000 immediately and accordingly recorded accretion of $112,000 to additional paid in capital during fiscal year 2013.

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 the statements of operations. For the three and six month periods ended November 30, 2013, the Company recorded a net gain from foreign currency related transactions of approximately $14,000, and $22,000, respectively, as compared to approximately $8,000 and $11,000 for the comparable periods in the prior fiscal year, to Other (income) expense in the Consolidated Condensed Statements of Operations.

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.

BALANCE SHEET COMPONENTS

Details of certain balance sheet captions are as follows:

		November 30, 2013		May 31, 2013
		(Amounts in thousands)
Property and equipment	$	1,095	$	1,869
Accumulated depreciation and amortization		(1,025)		(1,816)
Property and equipment, net	$	70	$	53

NET INCOME (LOSS) PER COMMON SHARE

Basic and diluted net income (loss) per share are computed by dividing the net income (loss) by the weighted-average number of common shares outstanding. Diluted net income per share is computed by dividing net income (loss) by the weighted-average number of common and equivalent dilutive common shares outstanding.  For periods in which losses are reported potentially dilutive common stock equivalents are excluded from the calculation of diluted loss per share because the effect is antidilutive.

The following table details the derivation of weighted average shares outstanding used in the calculation of basic and diluted net income (loss) for each period:

		For the Three Months Ended
		November 30, 2013		November 30, 2012
		(amounts in thousands)
Net income (loss) available to common shareholders	$	(44)	$	252
Weighted average number of common shares outstanding
used in calculation of basic earnings per share		875,135		995,468
Incremental shares from the assumed exercise of
dilutive stock options		-		2,283
Weighted average number of common shares
outstanding used in calculating diluted earnings
per share		875,135		997,751

		For the Six Months Ended
		November 30, 2013		November 30, 2012
		(amounts in thousands)
Net income (loss) available to common shareholders	$	(310)	$	425
Weighted average number of common shares outstanding
used in calculation of basic earnings per share		888,140		995,295
Incremental shares from the assumed exercise of
dilutive stock options		-		1,277
Weighted average number of common shares
outstanding used in calculating diluted earnings
per share		888,140		996,572

For the three and six month periods ended November 30, 2013, 10,000 options to purchase common shares were anti-dilutive and were excluded from the above calculation. For the three and six month periods ended November 30, 2012, all options were included in the above calculation.  

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments consist of cash equivalents, accounts receivable, warrants to purchase shares of common stock, accounts payable and notes payable. The estimated fair values have been determined through information obtained from market sources and management estimates.  The estimated fair value of certain financial instruments including cash equivalents, accounts receivable and account payable, approximate the carrying value due to their short-term maturity.  The Company’s warrant liability is recorded at fair value. 

Fair Value Measurements

The fair value of the Company’s financial assets and liabilities are measured using inputs from the three levels of fair value hierarchy which are as follows:

Level 1	—	Quoted prices in active markets for identical assets or liabilities.
Level 2	—	Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3	—	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following summarizes the Company’s assets and liabilities measured at fair value as of November 30, 2013:

			Fair Value Measurements at Reporting Date Using:
			Quoted
			Prices
			in Active		Significant
			Markets for		Other		Significant
	Balance as of		Identical		Observable		Unobservable
	November 30,		Assets		Inputs		Inputs
Description (amounts in thousands)	2013		(Level 1)		(Level 2)		(Level 3)
Liabilities
Warrant liability	$	45	$	—	$	—	$	45
Total Liabilities	$	45	$	—	$	—	$	45

Activity for liabilities classified as Level 3:

	SubordinatedConvertibleNote
Balance at May 31, 2013	$	-
Issuance of warrant liability	51
Change in fair value	(6)
Fair value at November 30, 2013	$	45

Fair values for the Company’s warrant liability are determined by utilizing widely accepted valuation techniques including the Black-Scholes Pricing Model. The methods and significant inputs and assumptions utilized in estimating the fair value of the warrant liabilities as of the November 30, 2013 balance sheet date are discussed below. The warrants are categorized as Level 3 within the fair value hierarchy. In December 2013, the Company agreed to repurchase the outstanding warrant to purchase 25,000 shares of common stock at an exercise price of $1.00 per share in exchange for $19,000 (see Note I).

The Company estimated the fair value of each share-based award using the Black-Scholes option valuation model. The Black-Scholes Pricing Model incorporates assumptions as to stock price volatility, the expected life of options, a risk-free interest rate and dividend yield.

Input		July 9, 2013	November 30, 2013
Stock Price	$	2.11	$	1.90
Exercise Price		1.00		1.00
Expected Life (in years)		7.00	6.61
Stock Volatility		138%	138%
Risk-Free Interest Rate		2.28%	2.10%
Dividend Rate		0%	0%

The following are significant assumptions utilized in developing the inputs:

o

Shares of the Company’s common stock are traded on the OTC Bulletin Board. The stock price input is based upon bid prices as of the valuation dates due to the extremely thin trading volume, broker-driven market (vs. exchange market) and the wide bid/ask spread as of the valuation date;

o

Stock volatility was estimated by considering (i) the annualized monthly volatility of the Company’s stock price during the historical period preceding the respective valuation dates and measured over a period corresponding to the remaining life of the instruments (monthly data set is more relevant given the extremely thin trading volume of the Company’s common stock). Historical prices of the Company’s common stock were used to estimate volatility as the Company did not have traded options as of the valuation dates;

o

Based upon the Company’s historical operations and management’s expectations for the foreseeable future, the Company’s stock was assumed to be a non-dividend-paying; and

o

The risk-free interest rate is based on the U.S. Treasury yield curve in effect as of the valuation date for the expected term.

XML

Summarizes assets and liabilities measured at fair value (Details) (USD $)	Nov. 30, 2013
Summarizes assets and liabilities measured at fair value:
Warrant liability:	$ 45
Total Liabilities:	45
Warrant liability (Quoted Prices)	0
Total Liabilities (Quoted Prices)	0
Warrant liability (Other Observable Inputs)	0
Total Liabilities (Other Observable Inputs)	0
Warrant liability (Unobservable Inputs)	45
Total Liabilities (Unobservable Inputs)	$ 45

XML

Transaction generated a gain during as Follows (DETAILS) (USD $)	3 Months Ended
	Nov. 30, 2013
Transaction generated a gain during as Follows:
Proceeds from the sale of the CADRA technology	$ 3,200
Liabilities assumed by Mentor related to deferred maintenance obligations	607
Professional fees and other expenses related to the transaction	(448)
Goodwill allocated to the CADRA product line	(3,261)
Net book value of equipment transferred in the sale	(7)
Gain on sale of CADRA product line	$ 91

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CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands) (USD $)	Nov. 30, 2013	May 31, 2013
Current Assets
Cash and cash equivalents	$ 1,612	$ 1,188
Restricted cash	1,406	100
Accounts receivable (less allowance for uncollectible accounts of $29 as of November 30, 2013 and May 31, 2013)	1,091	895
Receivable from product line sale	320	0
Prepaid and other assets	157	299
Total current assets	4,586	2,482
Property and equipment, net	70	61
Goodwill	992	4,249
Capitalized software development costs, net	384	376
Capitalized patent costs	103	101
Debt issuance costs, net	238	250
Notes receivable and other assets	178	195
Total Assets	6,551	7,714
Current Liabilities
Accounts payable	237	137
Accrued expenses	947	602
Other current liabilities	46	89
Deferred maintenance revenue	1,002	2,147
Current portion of capital lease	13	13
Current portion of debt	135	0
Total Current Liabilities	2,380	2,988
Capital lease, net of current portion	31	39
Long-term debt	2,520	2,700
Warrant liability	45	0
Total Liabilities	4,976	5,727
Redeemable common stock, $0.10 par value, 50,000 shares issued and outstanding at November 30, 2013 and May 31, 2013	275	275
Shareholders' equity :
Common stock, $0.10 par value 20,000,000 shares authorized, 875,135 and 1,045,135 issued and outstanding at November 30, 2013 and May 31, 2013, respectively.	100	100
Treasury stock, $0.10 par value, 170,000 shares at cost	(63)	0
Capital in excess of par value	27,375	27,369
Accumulated deficit	(25,643)	(25,333)
Accumulated other comprehensive Loss	(469)	(424)
Total Stockholders' Deficiency	1,300	1,712
TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY	$ 6,551	$ 7,714

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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) (USD $)	6 Months Ended
	Nov. 30, 2013	Nov. 30, 2012
Cash flows from operating activities :
Net income (loss)	$ (310)	$ 425
Adjustments to reconcile net loss to net cash used in operating activities :
Depreciation and amortization expense	111	102
Gain on CADRA sale	(91)	0
Stock-based compensation	4	4
Non-cash interest expense	6	0
Change in fair value of warrant liability	(6)	0
Change in Current assets and liabilities:
Accounts receivable.	(196)	(303)
Prepaid expenses and other assets	159	48
Restricted cash	1,306	0
Accounts payable, accrued expenses and other liabilities	402	(2)
Deferred maintenance revenue	(538)	(630)
Net cash used in operating activities	(1,765)	(356)
Cash flows from investing activities:
Proceeds from sale of product line, net of direct cash expenses	2,432	0
Capital expenditures	(37)	(2)
Capitalized software development costs	(57)	(159)
Capitalized patent costs	(2)	(6)
Net cash (used in)provided by investing activities	2,336	(167)
Cash flows from financing activities :
Cost of treasury shares	(63)	0
Capitalized debt issuance costs	(32)	0
Proceeds from issuance of redeemable common stock, net of issuance costs	0	98
Repayment under debt agreements	0	(360)
Borrowing under debt agreements	0	300
Repayments under capital lease	(8)	(4)
Net cash provided by financing activities	(103)	34
Effect of exchange rates on cash	(44)	3
Increase (decrease) in cash and cash equivalents	424	(486)
Cash and cash equivalents at beginning of period	1,188	595
Cash and cash equivalents at end of period	1,612	109
Supplemental Disclosures of Cash Flow Information:
Interest Paid	153	84
Income taxes Paid	14	2
Noncash investing and financing activities:
Issuance of warrants	51	0
Purchase of property and equipment under capital lease	0	53
Accretion of redeemable common stock	$ 0	$ 36

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SEGMENT INFORMATION (Details) (USD $)	3 Months Ended		6 Months Ended
	Nov. 30, 2013	Nov. 30, 2012	Nov. 30, 2013	Nov. 30, 2012	May 31, 2013
SEGMENT INFORMATION AS FOLLOWS:
North America Revenue	$ 1,255	$ 1,215	$ 2,259	$ 2,413
Europe Revenue	290	604	604	937
Asia Revenue	330	120	493	286
Eliminations Revenue	(461)	(167)	(566)	(294)
Consolidated Revenue Total	1,414	1,772	2,790	3,342
North America Assets	1,922		1,922		5,119
Europe Assets	43		43		113
Consolidated Assets Total	$ 1,965		$ 1,965		$ 5,232

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Transaction Generated a Gain During Current Quarter (Tables)

6 Months Ended

Nov. 30, 2013

Transaction Generated a Gain During Current Quarter

Transaction Generated a Gain During Current Quarter

The transaction generated a gain during the current quarter which was composed of the following (000’s):

Proceeds from the sale of the CADRA technology	$	3,200
Liabilities assumed by Mentor related to deferred maintenance obligations		607
Professional fees and other expenses related to the transaction		(448)
Goodwill allocated to the CADRA product line		(3,261)
Net book value of equipment transferred in the sale		(7)
Gain on sale of CADRA product line	$	91

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Notes Receivables (details) (USD $)	May 31, 1998
Notes Receivables details
Non interest bearing note extended by CEO related to a stock transaction	$ 134,000

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DEBT ISSUANCE COSTS (Details) (USD $)	3 Months Ended	6 Months Ended
	Nov. 30, 2013	Nov. 30, 2013	May 10, 2013
DEBT ISSUANCE COSTS DURING THE PERIOD:
Direct costs incurred in establishing debt agreement			$ 291,000
Unamortized debt issuance costs			108,000
Amortization expense related to debt issuance costs	$ 22,000	$ 43,000

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DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

6 Months Ended

Nov. 30, 2013

DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

A.    Description of the Business and Basis of Presentation

SofTech, Inc. (the “Company”) was formed in Massachusetts on June 10, 1969. The Company is 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 European sales and customer support offices in Germany and Italy. The Company also has resellers in Asia and Europe.

Since the Recapitalization Transaction described hereunder, the Company has also 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 our value. It is expected that this kind of activity will become an increasing area of focus and investment over the coming years.

The consolidated financial statements of the Company include the accounts of SofTech, Inc. and its wholly-owned subsidiaries, Information Decisions, Inc., Workgroup Technology Corporation, SofTech, GmbH and SofTech, Srl. All significant intercompany accounts and transactions have been eliminated in consolidation.

The consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission without audit; however, in the opinion of management, the information presented reflects all adjustments which are of a normal recurring nature and elimination of intercompany transactions which are necessary to present fairly the Company’s financial position and results of operations. It is recommended that these consolidated condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2013.

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, 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) of which will be paid 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”).  

The Company will continue to offer the CADRA technology as a reseller throughout Europe (except Germany) and for a one-year period from the closing of the transaction to Sikorsky Aircraft, the largest CADRA user in the United States. Due to the significant continued involvement in the sale and support of CADRA product line subsequent to the sale, the transaction does not qualify for presentation as a discontinued operation.

Recapitalization Transaction

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. As part of that Recapitalization Transaction, Greenleaf accepted a payment of $2.7 million in cash and note for $250,000 in full satisfaction of the $10.6 million of indebtedness. The former CEO resigned after a short transition period, a new four person Board of Directors was appointed and the existing Board members resigned. In addition, Greenleaf gave the Company’s new Board of Directors voting control over its shares for a three year period immediately following the Recapitalization Transaction.

Refinancing of Debt

In May 2013, the Company entered into a new three year, $2.7 million loan agreement (the “Loan Agreement”) as detailed in Note F that replaced the Company’s prior debt facilities that were to expire in February 2014. The Loan Agreement required quarterly principal payments of $135,000 beginning on October 1, 2014 and carried a 14% interest rate due in arrears each calendar quarter beginning July 1, 2013.

The Loan Agreement was amended in July 2013 to allow the Company to repurchase 170,000 shares of common stock from Greenleaf and to increase a specified financial covenant ratio for Q4 of fiscal 2013 and Q1 and Q2 of fiscal 2014. In December 2013 the Loan Agreement was again amended pursuant to an agreement with the Lenders in connection with their consent to the CADRA Sale.

Stock Purchase Agreement with Greenleaf Capital and affiliates

In June 2013, the Company purchased 170,000 shares of common stock from Greenleaf, The Ronda E. Stryker and William D. Johnston Foundation, and The L. Lee Stryker 1974 Irrevocable Trust fbo Ronda E. Stryker, for a purchase price of $62,900 or $0.37 per share as detailed in Note K to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2013. The agreement provides an option for the Company to either make an offer to purchase the remaining 101,411 shares held by Greenleaf at $0.37 per share or to provide Greenleaf with registration rights with respect to the remaining shares as set forth in the Registration Rights Agreement dated March 8, 2011. Greenleaf is under no obligation to accept the Company’s offer to purchase the remaining shares on the terms set forth above, however, if the offer is made by the Company and rejected by Greenleaf, the Company will no longer be obligated to provide Greenleaf with registration rights with respect to the remaining shares. As part of the agreement, Greenleaf agreed not to sell or transfer the shares for a one year period from the purchase date.

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CONSOLIDATED CONDENSED BALANCE SHEETS PARENTHETICALS (USD $)	Nov. 30, 2013	May 31, 2013
Stockholders equity number of shares par value and other disclosures
Redeemable common stock par value	$ 0.10	$ 0.10
Redeemable common stock shares issued	50,000	50,000
Redeemable common stock shares outstanding	50,000	50,000
Common Stock, shares authorized	20,000,000	20,000,000
Common Stock, shares issued	875,135	1,045,135
Common Stock, shares outstanding	875,135	1,045,135
Common stock share par value	$ 0.10	$ 0.10
Treasury stock shares	170,000	0
Treasury stock share par value	$ 0.10	$ 0.10
Accounts receivables allowances uncollectable	$ 29	$ 29

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Summarizes option activity (Tables)

6 Months Ended

Nov. 30, 2013

Summarizes option activity

Summarizes option activity

The following table summarizes option activity under the 1994 Stock Option Plan and 2011 Plan:

			Weighted	Weighted-
			Average	Average
	Number of		Exercise Price	Remaining		Aggregate
	Options		Per Share	Life (in years)		Intrinsic Value
Outstanding options at May 31, 2012	10,000	$	2.40	9.02	$	-
Granted	-		-	-		-
Exercised	-		-	-		-
Forfeited or expired	-		-	-		-
Outstanding options at May 31, 2013	10,000		2.40	8.02		-
Granted	-		-	-		-
Exercised	-		-	-		-
Forfeited or expired	-		-	-		-
Outstanding options at November 30, 2013	10,000	$	2.40	7.52	$	-
Exercisable at November 30, 2013	8,056	$	2.40	7.52	$	-

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Document and Entity Information	6 Months Ended
	Nov. 30, 2013	Jan. 08, 2014
Document and Entity Information
Entity Registrant Name	SOFTECH INC
Document Type	10-Q
Document Period End Date	Nov. 30, 2013
Amendment Flag	false
Entity Central Index Key	0000354260
Current Fiscal Year End Date	--05-31
Entity Common Stock, Shares Outstanding		875,135
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q2

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Details of certain balance sheet captions (Tables)

6 Months Ended

Nov. 30, 2013

Details of certain balance sheet captions

Details of certain balance sheet captions

Details of certain balance sheet captions are as follows:

		November 30, 2013		May 31, 2013
		(Amounts in thousands)
Property and equipment	$	1,095	$	1,869
Accumulated depreciation and amortization		(1,025)		(1,816)
Property and equipment, net	$	70	$	53

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CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except for share and per share data) (USD $)	3 Months Ended		6 Months Ended
	Nov. 30, 2013	Nov. 30, 2012	Nov. 30, 2013	Nov. 30, 2012
Revenues {1}
Products	$ 376	$ 478	$ 618	$ 693
Services	1,038	1,194	2,172	2,359
Royalties from sale of patents	0	100	0	290
Total revenue	1,414	1,772	2,790	3,342
Products.	28	24	62	49
Services.	264	323	572	631
Total cost of revenue	292	347	634	680
Gross margin	1,122	1,425	2,156	2,662
Research and development expenses	304	323	639	567
Selling, general and administrative expenses	866	789	1,747	1,547
Gain on sale of product line	(91)	0	(91)	0
Operating income	43	313	(139)	548
Interest expense	104	69	199	134
Other Income	(17)	(8)	(28)	(11)
Net income (loss)	$ (44)	$ 252	$ (310)	$ 425
Basic and diluted net income (loss) per share:	$ (0.05)	$ 0.25	$ (0.35)	$ 0.43
Weighted average common shares outstanding-basic	875,135	995,468	888,140	995,295
Weighted average number of common stock outstanding - diluted	875,135	997,751	888,140	996,572

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DEBT

6 Months Ended

Nov. 30, 2013

DEBT

DEBT

F. Debt

On May 10, 2013, the Company entered into the Loan Agreement with Prides Crossing Capital, L.P. and Prides Crossing Capital-A, L.P., (“Lenders”).  The Loan Agreement provided for a $2.7 million, three-year term Loan with interest only until October 1, 2014.

The Loan Agreement was amended on July 9, 2013 as described below to, among other things, allow the Company to repurchase 170,000 common shares from its largest shareholder as described in Note G below. On December 5, 2013, the Loan Agreement was again amended as described in Note I below. The December 2013 amendment was necessitated by the CADRA Sale. 

As of November 30, 2013, the Loan Agreement as amended on July 9, 2013 was in full force and effect and, as such, the balance sheet reflects the terms and conditions of that amended agreement which is described hereafter.

Prior to the amended and restated Loan Agreement in December 2013 as described in Note I, the Loan was to mature on May 1, 2016 and carried an interest rate of 14% paid in arrears on a calendar quarter basis commencing on July 1, 2013 and continuing throughout the life of the Loan. Commencing on October 1, 2014, and continuing on the last day of each calendar quarter thereafter through May 1, 2016, the Company was to make quarterly principal payments of $135,000 with the remaining principal balance to be due and payable on May 1, 2016.

The Company agreed to secure all of its obligations under the Loan by granting the Lenders a first priority security interest in all of the Company’s assets, including the Company’s intellectual property and pledges of (i) one hundred percent (100%) of the Company’s equity interests in its domestic subsidiaries and (ii) sixty-five percent (65%) of the Company’s equity interests in its foreign subsidiaries. In connection with the grant of the security interest in favor of the Lenders in the Company’s intellectual property, the Company had entered into an intellectual property security agreement with the Lenders and a source code escrow agreement with the Lenders and an independent third party.  In addition, the Company’s CEO provided the Lenders with a personal guaranty of up to $500,000 secured by his equity interests in the Company. The Company agreed to pay the CEO $80,000 in consideration for extending that personal guaranty. This payment was included as a part of capitalized debt issuance costs.

The Loan Agreement contained customary representations, warranties and covenants, including covenants by the Company limiting additional indebtedness, liens, guaranties, mergers and consolidations, substantial asset sales, investments and loans, sale and leasebacks, transactions with affiliates and fundamental changes in its business.  In addition, the Loan Agreement contained financial covenants by the Company that establish (i) a maximum ratio of indebtedness to recurring revenue; (ii) a maximum ratio of indebtedness to EBITDA; and (iii) a minimum liquidity test (defined as the Company’s cash plus amounts available under a line of credit of up to $250,000).  The Loan Agreement also imposed limits on capital expenditures for each calendar year during the term of the Loan Agreement.

The Loan Agreement provided for events of default customary for credit facilities of this type, including but not limited to non-payment, defaults on other debt, misrepresentation, breach of covenants, representations and warranties, insolvency and bankruptcy.  Upon an event of default relating to insolvency, bankruptcy or receivership, the amounts outstanding under the Loan would become immediately due and payable and the Lenders commitments would be automatically terminated.  Upon the occurrence and continuation of any other event of default, the Lenders could accelerate payment of all obligations and terminate the Lenders’ commitments under the Loan Agreement.

On July 9, 2013, the Loan Agreement was amended (the “Amended Loan Agreement No. 1”) to allow the Company to repurchase 170,000 of its shares from Greenleaf and to increase the maximum ratio of indebtedness to EBITDA from 2.25:1 to 2.60:1 for the quarters ended May 31, 2013, August 31, 2013 and November 30, 2013. In consideration for entering into the Amended Loan Agreement No. 1, the Company issued the Lenders warrants to purchase 25,000 shares of common stock at an exercise price of $1.00 per share. The warrants were to vest monthly over three years, with accelerated vesting under certain circumstances including if the Loan was repaid prior to maturity, and terminate if not exercised on or before July 9, 2020.

Upon issuance, the warrants did not meet the requirements for equity classification, because such warrants provide a cash-out election allowing the holder to a one time right to require the Company to repurchase all or a portion of the warrants.  Therefore these warrants were required to be accounted for as a liability.  Changes in fair value are recognized as either a gain or loss in the consolidated statement of operations under the caption “Other income.”

The Company determined the fair value of the warrants using the Black-Scholes valuation model.  The grant date fair value of the warrant of approximately $51,000 was recorded a liability, with a corresponding discount recorded on the debt.  The debt discount was to be accreted through the remaining term of the Loan Agreement using the effective interest rate method.  Accretion  recorded as interest expense during the three and six months ended November 30, 2013 was approximately $4,000 and $6,000, respectively.  As of November 30, 2013 the warrants were adjusted to fair value of $45,000 resulting in $6,000 of other income recorded during the six months ended November 30, 2013.

In December 2013, the Company paid a pre-payment penalty of $81,000 and agreed to repurchase the outstanding warrant to purchase 25,000 shares of common stock at an exercise price of $1.00 per share in exchange for $19,000. (see Note I).

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SALE OF PATENTS

6 Months Ended

Nov. 30, 2013

SALE OF PATENTS

SALE OF PATENTS

E. Sale of Patents

In June 2012, the Company sold to an unrelated third party (the “Buyer”) its rights, title and interests in three of its U.S. patents (the “Patents”) all entitled Method and System for Design and Drafting in exchange for a non-refundable, initial royalty payment of $200,000 (the “Initial Payment”). These Patents were derived from the Company’s development work related to the Company’s CADRA product line and the inventions are a key, time saving feature within that technology offering. The Company received a limited, non-exclusive, royalty-free license under the Patents to make, use, offer to sell, or sell the Company’s products or services.

In September 2012, the Patent agreement was amended to include two other U.S. patents (“Additional Patents”) both entitled Product Development System and Method Using Integrated Process and Data Management. These Additional Patents were derived from the development work related to the Company’s ProductCenter product line and are a core and essential capability within that product offering. The Company received a limited, non-exclusive, royalty-free license under the Additional Patents to make, use, offer to sell or sell the Company’s products or services. As a result of the amendment, the Initial Payment was increased by $100,000.

The agreement gives the Buyer complete control over what, if any, actions shall be taken in the future to monetize the Patents through licensing, sale, enforcement or other means. In the event whereby monies are derived from the Patents, the Company is due 30% of the net proceeds (the “Net Proceeds”), as defined in the agreement. The Initial Payment shall be reimbursable from Net Proceeds to the extent any are due. There can be no assurance that the Company will derive any additional monies from the Patents, however.

The sale of the Patents is a multiple element arrangement as defined under ASC 605 and, as such, the Company allocated the Initial Payment between the sale of the Patents that were delivered during the fiscal quarter and support services that were undelivered. Support services include being available to the Buyer to assist them should they require such assistance in licensing or pursuing other means of monetizing the Patents to third parties. The allocation of the Initial Payment to the patent and support services elements was based on management’s best estimate of the selling price of each element. The Initial Payment was allocated as follows: Patents - $290,000; and Support Services - $10,000. Additional monies due the Company in the form of royalties from its 30% share of Net Proceeds will be recorded in the quarterly period in which the Buyer notifies the Company such payments are due. Such notification and payment, if any, are due thirty calendar days after the end of each calendar quarter. The revenue allocated to support services has been deferred and will be recognized as revenue when the services are performed.  There can be no assurance that the Company will derive any other monies from the Additional Patents, however.

The Company retained its U.S. patent applications that it acquired or filed since the Recapitalization Transaction in March 2011. These patent applications were not included in the above described agreement. The Company expects to be actively engaged with the U.S. Patent and Trademark Office for the foreseeable future with regard to those filings.

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SOFTWARE DEVELOPMENT COSTS (Details) (USD $)	3 Months Ended	6 Months Ended
	Nov. 30, 2013	Nov. 30, 2013
SOFTWARE DEVELOPMENT COSTS DURING:
Capitalized approximately	$ 18,000	$ 57,000
Software development costs related to new products	48,000	159,000
Amortization expense related to capitalized software development costs	$ 24,000	$ 49,000

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Calculation of basic and diluted net income for each period (Tables)

6 Months Ended

Nov. 30, 2013

Calculation of basic and diluted net income for each period (Tables):

Calculation of basic and diluted net income for each period

The following table details the derivation of weighted average shares outstanding used in the calculation of basic and diluted net income (loss) for each period:

		For the Three Months Ended
		November 30, 2013		November 30, 2012
		(amounts in thousands)
Net income (loss) available to common shareholders	$	(44)	$	252
Weighted average number of common shares outstanding
used in calculation of basic earnings per share		875,135		995,468
Incremental shares from the assumed exercise of
dilutive stock options		-		2,283
Weighted average number of common shares
outstanding used in calculating diluted earnings
per share		875,135		997,751

		For the Six Months Ended
		November 30, 2013		November 30, 2012
		(amounts in thousands)
Net income (loss) available to common shareholders	$	(310)	$	425
Weighted average number of common shares outstanding
used in calculation of basic earnings per share		888,140		995,295
Incremental shares from the assumed exercise of
dilutive stock options		-		1,277
Weighted average number of common shares
outstanding used in calculating diluted earnings
per share		888,140		996,572

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SUBSEQUENT EVENTS

6 Months Ended

Nov. 30, 2013

SUBSEQUENT EVENTS

SUBSEQUENT EVENTS

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 available to be issued.  On December 5, 2013, the Company entered into an amended and restated loan agreement (the “Amended Loan Agreement No. 2”) between the Company, as borrower and Prides Crossing Capital Funding, L.P., (the “Lender”) whereby the parties agreed to amend and restate the Company’s existing $2.7 million Loan Agreement following the CADRA Sale. The Lender was the successor to Prides Crossing Capital, L.P. and Prides Crossing Capital-A, L.P., the Lenders under the Loan Agreement. Under the terms of the Amended Loan Agreement No. 2, the Company agreed to pay down the principal of the Loan Agreement from $2.7 million to $1.0 million (the “Term Note”) using a portion of the proceeds from the CADRA Sale. In addition, the Company paid a pre-payment penalty of $81,000 and agreed to repurchase the outstanding warrant to purchase 25,000 shares of common stock at an exercise price of $1.00 per share in exchange for $19,000.

The amended and restated Term Note matures on January 1, 2015 and bears an interest rate of 14% payable in arrears on a monthly basis throughout the life of the loan commencing on January 1, 2014. The Term Note may be repaid in full at any time but partial voluntary pre-payments are not allowed. If a pre-payment is made on or prior to September 30, 2014, the Company shall pay a yield maintenance fee equal to the interest that would have accrued under the Term Note from the date of pre-payment through September 30, 2014. No yield maintenance fee is due for a pre-payment made subsequent to September 30, 2014.

The Company agreed to secure all of its obligations under the Term Note by granting the Lender a first priority security interest in all of the Company’s assets, including the Company’s intellectual property and pledges of (i) one hundred percent (100%) of the Company’s equity interests in its domestic subsidiaries and (ii) sixty-five percent (65%) of the Company’s equity interests in its foreign subsidiaries.  In connection with the grant of the security interest in favor of the Lender in the Company’s intellectual property, the Company has entered into an intellectual property security agreement with the Lender and will enter into a source code escrow agreement with the Lender and an independent third party on a post-closing basis.  In addition, the Company’s Chief Executive Officer has provided the Lender with a personal guaranty of up to $500,000 secured by his equity interests in the Company.

The Amended Loan Agreement No. 2 contains customary representations, warranties and covenants, including covenants by the Company limiting additional indebtedness, liens, guaranties, mergers and consolidations, substantial asset sales, investments and loans, sale and leasebacks, transactions with affiliates and fundamental changes in its business.  In addition, the Amended Loan Agreement No. 2 contains financial covenants by the Company that establish (i) a month-end minimum consolidated cash balance of $1.0 million of which no less than $750,000 must be held in the Company’s main operating account that is subject to a deposit account control agreement; (ii) a minimum of $750,000 of consolidated cash at all times; (iii) a quick ratio covenant, which provides that on the last day of each fiscal quarter the ratio of the Company’s cash plus accounts receivable divided by accounts playable plus accrued expenses shall not be less than 2.7:1; and (iv) a covenant that provides that the Company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) for Q3 and Q4 of fiscal 2014 shall not exceed  a loss of $200,000 for each of those fiscal quarters and shall be greater than positive EBITDA of $100,000 for each subsequent fiscal quarter. The Amended Loan Agreement No. 2 also imposes limits on capital expenditures for each fiscal year during the term of the Amended Loan Agreement No. 2. As part of the Amended Loan Agreement No. 2 the Company, the Lender and First Republic Bank entered into a deposit account control agreement pursuant to which the Lender will perfect its security interest in the assets held in the Company’s main operating account at First Republic Bank.

The Amended Loan Agreement No. 2 provides for events of default customary for credit facilities of this type, including but not limited to non-payment, defaults on other debt, misrepresentation, breach of covenants, representations and warranties, insolvency and bankruptcy.  Upon an event of default relating to insolvency, bankruptcy or receivership, the amounts outstanding under the Amended Loan Agreement No. 2 will become immediately due and payable and the Lender commitment will be automatically terminated.  Upon the occurrence and continuation of any other event of default, the Lender may accelerate payment of all obligations and terminate the Lender’s commitments under the Amended Loan Agreement No. 2.

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Stock Purchase Agreement

6 Months Ended

Nov. 30, 2013

Stock Purchase Agreement

Stock Purchase Agreement Text Block

G.            Stock Purchase Agreement

In June 2013, the Company purchased 170,000 shares of common stock from Greenleaf, The Ronda E. Stryker and William D. Johnston Foundation, and The L. Lee Stryker 1974 Irrevocable Trust fbo Ronda E. Stryker, for a purchase price of $62,900 or $0.37 per share as detailed in Note G to the consolidated financial statements as of May 31, 2013.  The agreement provides an option for the Company to either make an offer to purchase the remaining 101,411 shares held by Greenleaf at $0.37 per share or to provide Greenleaf with registration rights with respect to the remaining shares as set forth in the Registration Rights Agreement dated March 8, 2011. Greenleaf is under no obligation to accept the Company’s offer to purchase the remaining shares on the terms set forth above, however, if the offer is made by the Company and rejected, the Company will no longer be obligated to provide Greenleaf with registration rights with respect to the remaining shares. As part of the agreement, Greenleaf agreed not to sell or transfer the shares for a one year period from the transaction date.

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CADRA Sale

6 Months Ended

Nov. 30, 2013

CADRA Sale:

CADRA Sale

H.            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, to Mentor, pursuant to an Asset Purchase Agreement dated August 30, 2013.  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) of which will be paid 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 (the “Earn-Out Payments”), subject to the terms of the Earn-Out Agreement dated August 30, 2013.  

The Company will continue to sell and support the CADRA technology throughout Europe (except Germany) and, for a one year period from the closing, will retain the rights to sell and support the technology to the largest U.S. CADRA user, Sikorsky Aircraft.

The transaction generated a gain during the current quarter which was composed of the following (000’s):

Proceeds from the sale of the CADRA technology	$	3,200
Liabilities assumed by Mentor related to deferred maintenance obligations		607
Professional fees and other expenses related to the transaction		(448)
Goodwill allocated to the CADRA product line		(3,261)
Net book value of equipment transferred in the sale		(7)
Gain on sale of CADRA product line	$	91

Any additional Earn-Out Payments received by the Company will be recorded during the periods in which Mentor reports amounts due under the Earn-Out Agreement so long as collectability has been determined.

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ACCOUNTING POLICIES (Policies)

6 Months Ended

Nov. 30, 2013

ACCOUNTING POLICIES

USE OF ESTIMATES

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, and the valuation of long term assets including goodwill, intangibles, capitalized software development costs and deferred tax assets. Actual results could differ from those estimates.

REVENUE RECOGNITION

REVENUE RECOGNITION

The Company follows the provisions of the Accounting Standards Codification (“ASC”) 985, Software 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, and a fixed fee and collectability has been determined. 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. 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.

The Company follows the provisions of ASC 605, Revenue Recognition for transactions that do not involve the licensing of software or software support services as in the case of the recent sale of our patents. Revenue from the sale of patents is recorded when persuasive evidence of an arrangement exists, delivery has taken place and a fixed fee and collectability has been determined. These conditions are no different from those when we license software. For multiple element arrangements, however, under ASC 605, total fees are allocated to each of the elements based upon the relative selling price method. Under that method the allocation of fees to the undelivered elements is based on VSOE, or if it doesn’t exist, then based on third party evidence of selling price. If neither exists, then the allocation is based on management’s best estimate of the selling price.

SOFTWARE DEVELOPMENT COSTS

SOFTWARE DEVELOPMENT COSTS

The Company accounts for its software development costs in accordance with 985-20, Costs of Computer Software to Be Sold, Leased or Marketed.  Costs that are incurred internally 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.  Such 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 technological feasibility of a product is established as well as its economic life.

During the three and six months ended November 30, 2013, the Company capitalized approximately $18,000 and $57,000, respectively, of software development costs related to new products, as compared to approximately $48,000 and $159,000 for the comparable periods in the prior fiscal year. Amortization expense related to capitalized software development for the three and six months ending November 30, 2013 was approximately $24,000 and $49,000, respectively, as compared to approximately $16,000 and $28,000 for the comparable periods in the prior fiscal year.  

DEBT ISSUANCE COSTS POLICY

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.  Total direct costs incurred in establishing this debt agreement were approximately $291,000. These costs have been capitalized and are being amortized over the three year life of the loan. Unamortized debt issuance costs related to the Company’s previous debt agreement as of May 10, 2013 totaled approximately $108,000 and were expensed in Q4 of fiscal 2013. Amortization expense related to debt issuance costs for the three and six months ending November 30, 2013 were approximately $22,000 and $43,000, respectively, as compared to approximately $29,000 and $59,000 for the comparable periods in the prior fiscal year.

ACCOUNTING FOR GOODWILL

ACCOUNTING FOR GOODWILL

The Company accounts for goodwill pursuant to the provisions of the 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 statement’s criteria.

The Company operates in a single reporting unit.  Goodwill has been allocated to the CADRA product line based upon the estimated fair value of the CADRA product line based on the transaction with Mentor as compared to the estimated fair value of the Company as a whole. Goodwill allocated to the CADRA product line included in the derivation of the gain on sale was approximately $3.2 million.

As of May 31, 2013, 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. The Company concluded that no facts or circumstances arose during the six months ended November 30, 2013 to warrant an interim impairment test.

CAPITALIZED PATENT COSTS POLICY

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 for the three and six month periods ending November 30, 2013 were approximately $ – and $2,000, respectively,  as compared to $ - and $6,000, respectively, for the three and six month periods ending November 30, 2012.

LONG-LIVED ASSETS

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 November 30, 2013, the Company does not have any long-lived assets it considers to be impaired.

STOCK-BASED COMPENSATION POLICY

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.

The Company’s 1994 Stock Option Plan provided for the granting of stock options at an exercise price not less than fair market value of the stock on the date of the grant and with vesting schedules as determined by the Board of Directors. No new options could be granted under the Plan after fiscal year 2004 and all stock options had vested prior to May 31, 2009. During fiscal 2012, all options awarded under the 1994 Stock Option Plan had expired. 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. Additionally, any future 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, 2013, 10,000 options were awarded and outstanding under the 2011 Plan.

The following table summarizes option activity under the 1994 Stock Option Plan and 2011 Plan:

			Weighted	Weighted-
			Average	Average
	Number of		Exercise Price	Remaining		Aggregate
	Options		Per Share	Life (in years)		Intrinsic Value
Outstanding options at May 31, 2012	10,000	$	2.40	9.02	$	-
Granted	-		-	-		-
Exercised	-		-	-		-
Forfeited or expired	-		-	-		-
Outstanding options at May 31, 2013	10,000		2.40	8.02		-
Granted	-		-	-		-
Exercised	-		-	-		-
Forfeited or expired	-		-	-		-
Outstanding options at November 30, 2013	10,000	$	2.40	7.52	$	-
Exercisable at November 30, 2013	8,056	$	2.40	7.52	$	-

The Company determined the volatility for options granted 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.

For each of the three and six month periods ended November 30, 2013 and 2012, the Company expensed approximately $2,000 and $4,000, respectively, of stock-based compensation. 

REEDEMABLE COMMON STOCK

REDEEMABLE COMMON STOCK

During the year ending May 31, 2013, the Company issued 50,000 shares of common stock, $.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 entitles the Investors to a fee of $6,000 (the “Fee”) to be paid in six equal quarterly installments during the eighteen month period (the “Payment Period”) following the investment.  The Agreement also provides 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 following the Payment Period.

The Company first assessed the redeemable Common Stock to determine if the instrument should be accounted for as a liability in accordance with ASC 480. 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 the 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 Common Stock issued pursuant to the Agreement in accordance with ASC 480-10-S99-3A, 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. The 50,000 shares of Common Stock issued pursuant to the Agreement were recorded as redeemable common stock at an initial carrying value of $163,000. This amount is equal to the gross proceeds of $250,000, less $27,000 in issuance costs related to legal fees and the $60,000 Fee, which has been included in other liabilities. The Company elected to record the Common Stock at its redemption value of $275,000 immediately and accordingly recorded accretion of $112,000 to additional paid in capital during fiscal year 2013.

FOREIGN CURRENCY TRANSLATION

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 the statements of operations. For the three and six month periods ended November 30, 2013, the Company recorded a net gain from foreign currency related transactions of approximately $14,000, and $22,000, respectively, as compared to approximately $8,000 and $11,000 for the comparable periods in the prior fiscal year, to Other (income) expense in the Consolidated Condensed Statements of Operations.

INCOME TAXES Policy

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.

BALANCE SHEET COMPONENTS

BALANCE SHEET COMPONENTS

Details of certain balance sheet captions are as follows:

		November 30, 2013		May 31, 2013
		(Amounts in thousands)
Property and equipment	$	1,095	$	1,869
Accumulated depreciation and amortization		(1,025)		(1,816)
Property and equipment, net	$	70	$	53

NET INCOME (LOSS) PER COMMON SHARE POLICY

NET INCOME (LOSS) PER COMMON SHARE

Basic and diluted net income (loss) per share are computed by dividing the net income (loss) by the weighted-average number of common shares outstanding. Diluted net income per share is computed by dividing net income (loss) by the weighted-average number of common and equivalent dilutive common shares outstanding.  For periods in which losses are reported potentially dilutive common stock equivalents are excluded from the calculation of diluted loss per share because the effect is antidilutive.

The following table details the derivation of weighted average shares outstanding used in the calculation of basic and diluted net income (loss) for each period:

		For the Three Months Ended
		November 30, 2013		November 30, 2012
		(amounts in thousands)
Net income (loss) available to common shareholders	$	(44)	$	252
Weighted average number of common shares outstanding
used in calculation of basic earnings per share		875,135		995,468
Incremental shares from the assumed exercise of
dilutive stock options		-		2,283
Weighted average number of common shares
outstanding used in calculating diluted earnings
per share		875,135		997,751

		For the Six Months Ended
		November 30, 2013		November 30, 2012
		(amounts in thousands)
Net income (loss) available to common shareholders	$	(310)	$	425
Weighted average number of common shares outstanding
used in calculation of basic earnings per share		888,140		995,295
Incremental shares from the assumed exercise of
dilutive stock options		-		1,277
Weighted average number of common shares
outstanding used in calculating diluted earnings
per share		888,140		996,572

For the three and six month periods ended November 30, 2013, 10,000 options to purchase common shares were anti-dilutive and were excluded from the above calculation. For the three and six month periods ended November 30, 2012, all options were included in the above calculation. 

FAIR VALUE OF FINANCIAL INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments consist of cash equivalents, accounts receivable, warrants to purchase shares of common stock, accounts payable and notes payable. The estimated fair values have been determined through information obtained from market sources and management estimates.  The estimated fair value of certain financial instruments including cash equivalents, accounts receivable and account payable, approximate the carrying value due to their short-term maturity.  The Company’s warrant liability is recorded at fair value. 

Fair Value Measurements

The fair value of the Company’s financial assets and liabilities are measured using inputs from the three levels of fair value hierarchy which are as follows:

Level 1	—	Quoted prices in active markets for identical assets or liabilities.
Level 2	—	Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3	—	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following summarizes the Company’s assets and liabilities measured at fair value as of November 30, 2013:

			Fair Value Measurements at Reporting Date Using:
			Quoted
			Prices
			in Active		Significant
			Markets for		Other		Significant
	Balance as of		Identical		Observable		Unobservable
	November 30,		Assets		Inputs		Inputs
Description (amounts in thousands)	2013		(Level 1)		(Level 2)		(Level 3)
Liabilities
Warrant liability	$	45	$	—	$	—	$	45
Total Liabilities	$	45	$	—	$	—	$	45

Activity for liabilities classified as Level 3:

	SubordinatedConvertibleNote
Balance at May 31, 2013	$	-
Issuance of warrant liability	51
Change in fair value	(6)
Fair value at November 30, 2013	$	45

Fair values for the Company’s warrant liability are determined by utilizing widely accepted valuation techniques including the Black-Scholes Pricing Model. The methods and significant inputs and assumptions utilized in estimating the fair value of the warrant liabilities as of the November 30, 2013 balance sheet date are discussed below. The warrants are categorized as Level 3 within the fair value hierarchy. In December 2013, the Company agreed to repurchase the outstanding warrant to purchase 25,000 shares of common stock at an exercise price of $1.00 per share in exchange for $19,000 (see Note I).

The Company estimated the fair value of each share-based award using the Black-Scholes option valuation model. The Black-Scholes Pricing Model incorporates assumptions as to stock price volatility, the expected life of options, a risk-free interest rate and dividend yield.

Input		July 9, 2013	November 30, 2013
Stock Price	$	2.11	$	1.90
Exercise Price		1.00		1.00
Expected Life (in years)		7.00	6.61
Stock Volatility		138%	138%
Risk-Free Interest Rate		2.28%	2.10%
Dividend Rate		0%	0%

The following are significant assumptions utilized in developing the inputs:

o    Shares of the Company’s common stock are traded on the OTC Bulletin Board. The stock price input is based upon bid prices as of the valuation dates due to the extremely thin trading volume, broker-driven market (vs. exchange market) and the wide bid/ask spread as of the valuation date;

o    Stock volatility was estimated by considering (i) the annualized monthly volatility of the Company’s stock price during the historical period preceding the respective valuation dates and measured over a period corresponding to the remaining life of the instruments (monthly data set is more relevant given the extremely thin trading volume of the Company’s common stock). Historical prices of the Company’s common stock were used to estimate volatility as the Company did not have traded options as of the valuation dates;

o    Based upon the Company’s historical operations and management’s expectations for the foreseeable future, the Company’s stock was assumed to be a non-dividend-paying; and

o    The risk-free interest rate is based on the U.S. Treasury yield curve in effect as of the valuation date for the expected term.

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Black-Scholes option valuation model (Details) (USD $)	Nov. 30, 2013	Jul. 09, 2013
Black-Scholes option valuation model:
Stock Price	$ 1.90	$ 2.11
Exercise Price	$ 1.00	$ 1.00
Expected Life (in years)	6.61	7.00
Stock Volatility	138.00%	138.00%
Risk-Free Interest Rate	2.10%	2.28%
Dividend Rate	0.00%	0.00%

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Segment Reporting Information (Tables)

6 Months Ended

Nov. 30, 2013

Segment Reporting Information

Segment Reporting Information

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):

		Three Month Periods Ended
Revenue:		November 30, 2013		November 30, 2012
North America	$	1,255	$	1,215
Europe		290		604
Asia		330		120
Eliminations		(461)		(167)
Consolidated Total	$	1,414	$	1,772
		Six Month Periods Ended
Revenue:		November 30, 2013		November 30, 2012
North America	$	2,259	$	2,413
Europe		604		937
Asia		493		286
Eliminations		(566)		(294)
Consolidated Total	$	2,790	$	3,342

Long Lived Assets:		As of November 30, 2013		As of May 31, 2013
North America	$	1,922	$	5,119
Europe		43		113
Consolidated Total	$	1,965	$	5,232

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Stock based compensation Issuance (details) (USD $)	3 Months Ended		6 Months Ended
	Nov. 30, 2013	Nov. 30, 2012	Nov. 30, 2013	Nov. 30, 2012	May 31, 2011
Stock based compensation Issuance
As per equity incentive plan company reserved common shares for issuance					150,000
Options were awarded and outstanding under the 2011 Plan.	10,000		10,000
Expensed approximately of stock-based compensation	$ 2,000	$ 2,000	$ 4,000	$ 4,000

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CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME(LOSS) (in thousands) (UNAUDITED) (USD $)	3 Months Ended		6 Months Ended
	Nov. 30, 2013	Nov. 30, 2012	Nov. 30, 2013	Nov. 30, 2012
Comprehensive income (loss):
Net income (loss)	$ (44)	$ 252	$ (310)	$ 425
Other comprehensive income (loss):
Foreign currency translation adjustment	(25)	12	(45)	6
Total other comprehensive income (loss)	(25)	12	(45)	6
Comprehensive income (loss)	$ (69)	$ 264	$ (355)	$ 431

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NOTE RECEIVABLE

6 Months Ended

Nov. 30, 2013

NOTE RECEIVABLE

NOTE RECEIVABLE

D.  Note Receivable

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. The Company has accounted for the note as a fixed arrangement.

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Summarizes option activity under the 1994 and the 2011 Stock Option Plan (Details)	Number of Options	Weighted Average Exercise Price Per Share	Weighted-Average Remaining Life (in years)	Aggregate Intrinsic Value
Outstanding options at May. 31, 2012	10,000	2.40	9.02	0
Granted	0	0.00	0.00	0
Exercised	0	0.00	0.00	0
Forfeited or expired	0	0.00	0.00	0
Outstanding options at May. 31, 2013	10,000	2.40	8.02	0
Granted	0	0.00	0.00	0
Exercised	0	0.00	0.00	0
Forfeited or expired	0	0.00	0.00	0
Exercisable at Nov. 30, 2013	8,056	2.40	7.52	0
Outstanding options at Nov. 30, 2013	10,000	2.40	7.52	0

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PRIDES CROSSING CAPITAL (DETAILS) (USD $)	Dec. 31, 2013	Nov. 30, 2013
PRIDES CROSSING CAPITAL
Loan Agreement with Prides Crossing Capital L.P. and Prides Crossing Capital -A, L.P.		$ 2,700,000
Loan matures on May1, 2016 and bears an interest rate of		14.00%
Quarterly principal payments		135,000
Security offered in company's equity interests in its domestic subsidiaries		100.00%
Security offered in company's equity interests in its foreign subsidiaries		65.00%
Personal guarantee offered by CEO upto		500,000
Consideration for extending personal guaranty		80,000
Repurchase of shares as per the amended agreement		170,000
Warrants issued to the lender		25,000
Exercise price per share		$ 1.00
Warrants vesting period		3
Grant date fair value of the warrant of approximately		51,000
Accretion during recorded as interest expense		4,000
Warrant was adjusted to its fair value		45,000
Other income recorded during the period		6,000
Paid a pre-payment penalty	$ 81,000
Agreed to repurchase the outstanding warrant to purchase shares of common stock	25,000
Shares of common stock at an exercise price	$ 1.00

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Fair Value Of Financial Instruments As Follows (Tables)

6 Months Ended

Nov. 30, 2013

Fair Value Of Financial Instruments As Follows

Fair Value Assets and Liabilities Measured

The following summarizes the Company’s assets and liabilities measured at fair value as of November 30, 2013:

			Fair Value Measurements at Reporting Date Using:
			Quoted
			Prices
			in Active		Significant
			Markets for		Other		Significant
	Balance as of		Identical		Observable		Unobservable
	November 30,		Assets		Inputs		Inputs
Description (amounts in thousands)	2013		(Level 1)		(Level 2)		(Level 3)
Liabilities
Warrant liability	$	45	$	—	$	—	$	45
Total Liabilities	$	45	$	—	$	—	$	45

Activity for liabilities classified as level 3

Activity for liabilities classified as Level 3:

	SubordinatedConvertibleNote
Balance at May 31, 2013	$	-
Issuance of warrant liability	51
Change in fair value	(6)
Fair value at November 30, 2013	$	45

Estimated the fair value of each share-based award using the Black-Scholes option

The Company estimated the fair value of each share-based award using the Black-Scholes option valuation model. The Black-Scholes Pricing Model incorporates assumptions as to stock price volatility, the expected life of options, a risk-free interest rate and dividend yield.

Input		July 9, 2013	November 30, 2013
Stock Price	$	2.11	$	1.90
Exercise Price		1.00		1.00
Expected Life (in years)		7.00	6.61
Stock Volatility		138%	138%
Risk-Free Interest Rate		2.28%	2.10%
Dividend Rate		0%	0%