| 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, the fair value estimate of the Earn-Out Payments due from Mentor related to the sale of the CADRA business and the valuation of long term assets including goodwill, capitalized patent costs, capitalized software development costs, the note receivable and deferred tax assets. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains cash at certain financial institutions in amounts that at times, exceed Federal Deposit Insurance Corporation limits. Cash held in foreign bank accounts at August 31, 2016 totaled approximately $41,000. The Company does not believe it is exposed to significant credit risk related to cash and cash equivalents. ACCOUNTS RECEIVABLE Accounts receivable are stated at the amount management expects to collect from outstanding balances. An allowance for doubtful accounts is provided for those accounts receivable considered to be uncollectible based upon management's assessment of the collectability of accounts receivable, which considers historical writeoff experience and any specific risks identified in customer collection matters. Bad debts are written off against the allowance when identified. The Companys allowance for uncollectible accounts was approximately $18,000 at August 31 and May 31, 2016. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and equivalents and accounts receivable. The Company maintains its cash and equivalents with high credit quality financial institutions. The Company believes it is not exposed to any significant losses due to credit risk on cash and cash equivalents. Accounts receivable are stated at the amount management expects to collect from outstanding balances. Consequently, the Company believes that its exposure to losses due to credit risk on net accounts receivable are limited. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. The Company provides for depreciation on a straight-line basis over the following estimated useful lives: Data Processing Equipment 2-5 years Office furniture 5-10 years Automobiles 4-6 years Leasehold improvements Lesser of the life of the lease or the estimated lease term Property and equipment was composed of the following (000s): August 31, 2016 May 31, 2016 Computer Software $ 506 $ 506 Equipment 502 502 Office Furniture 116 116 Leasehold Improvements 31 31 1,155 1,155 Less Accumulated Depreciation (1,092) (1,084) $ 63 $ 71 Depreciation expense, including amortization of assets under capital lease, was approximately $8,000 and $10,000 for the three month periods ended August 31, 2016 and 2015, respectively. Maintenance and repairs are charged to expense as incurred; betterments are capitalized. At the time property and equipment are retired, sold, or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts. Any resulting gain or loss on disposal is credited or charged to income. SOFTWARE DEVELOPMENT COSTS The Company accounts for its software development costs in accordance with Accounting Standards Codification (ASC) 985-20, Software-Costs of Computer Software to Be Sold, Leased or Marketed ASC 350-40, Intangibles-Goodwill and Other- Internal Use-Software. Under ASC 985-20, costs that are incurred in researching and developing a computer software product are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, software development costs are capitalized until the product is available for general release to customers. Under ASC 350-40 there are three distinct stages associated with development software which include 1) preliminary project; 2) application development; and 3) post implementation-operation. Costs should be capitalized after each of the following has occurred: · The preliminary project stage has been completed; · Management with the relevant authority authorizes the project; · Management with the relevant authority commits to fund the project; · It is probable that the project will be completed; and · It is probable that the software will be used for the intended purpose. Capitalization stops after the software is substantially complete. Capitalized costs are amortized using the straight-line method over the estimated economic life of the product, generally three years. The Company evaluates the realizability of the assets and the related periods of amortization on a regular basis. Judgment is required in determining when costs should begin to be capitalized under both standards as well as the technologys economic life. During the three months ended August 31, 2016 and 2015, the Company capitalized approximately $84,000 and $118,000, respectively, of software development costs. Amortization expense related to capitalized software development costs for the three months ended August 31, 2016 and 2015 was approximately $2,000 and $16,000, respectively. 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 Companys 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. REVENUE RECOGNITION The Company follows the provisions of ASC 985-605, Software Revenue Recognition, CAPITALIZED PATENT COSTS Costs related to patent applications are capitalized as incurred and are amortized once the patent application is accepted or are expensed if the application is finally rejected. Patent costs are amortized over their estimated economic lives under the straight-line method, and are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable through the estimated undiscounted future cash flows from the use of the associated patent. Capitalized patent costs totaled approximately $2,000 for the three month period ended August 31, 2015. No patent costs were capitalized in the three month period ended August 31, 2016. ACCOUNTING FOR GOODWILL The Company accounts for goodwill pursuant to ASC 350, Intangibles Goodwill and Other As of May 31, 2016, the Company conducted its annual impairment test of goodwill by comparing the fair value of the reporting unit to the carrying amount of the underlying assets and liabilities of its single reporting unit. The Company determined that the fair value of the reporting unit exceeded the carrying amount of the assets and liabilities, therefore no impairment existed as of the testing date. The Company concluded that no facts or circumstances arose during the three month period ended August 31, 2016 to warrant an interim impairment test. 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 August 31, 2016, the Company does not have any long-lived assets it considers to be impaired. FINANCIAL INSTRUMENTS The Companys financial instruments consist of cash and cash equivalents, accounts receivable, Earn-Out Payments, related party notes receivable, accounts payable, accrued expenses, deferred maintenance and subscription revenue, long-term debt and capital lease obligations. The Companys estimate of the fair value of these financial instruments approximates their carrying amounts at August 31, 2016. FAIR VALUE OF FINANCIAL INSTRUMENTS Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the Company is required to classify certain assets based on the fair value hierarchy, which groups fair value-measured assets based upon the following levels of inputs: · Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; · Level 2 Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; · Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity). The assets maintained by the Company that are required to be measured at fair value on a recurring basis are the Earn-Out Payments associated with the Companys sale of the CADRA product line. As of August 31, 2016, the maximum amount that could be received by the Company under the Asset Purchase Agreement totaled $223,000. The final Earn-Out Payment will be based on the CADRA revenue generated for the nine month period ended October 31, 2016. The average quarterly CADRA revenue for Mentors most recent fiscal year was approximately $500,000. The following table summarizes the valuation of the Company's assets and liabilities measured at fair value on a recurring basis as of August 31, 2016: (in thousands) Total Quoted prices in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Assets: Earn-Out Payments $ 130 $ - $ - $ 130 Total assets at fair value $ 130 $ - $ - $ 130 The following table summarizes the valuation of the Company's assets and liabilities measured at fair value on a recurring basis as of May 31, 2016: (in thousands) Total Quoted prices in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Assets: Earn-Out Payments $ 130 $ - $ - $ 130 Total assets at fair value $ 130 $ - $ - $ 130 The table below provides a summary of the changes in fair value of the Level 3 classified Holdback Payment and Earn-Out Payments asset for the period from May 31, 2014 through August 31, 2016: (in thousands) Fair value at May 31, 2014 $ 895 Payments received (604) Change in fair value 85 Fair value at May 31, 2015 376 Change in fair value (46) Payments received (200) Fair value at May 31, 2016 130 Change in fair value - Payments received - Fair value at August 31, 2016 $ 130 The Company has estimated the fair value of the Earn-Out Payments using a discounted cash flow approach. This valuation is based upon several factors including; i) managements estimate of the amount and timing of future CADRA revenues, ii) the timing of receipt of payments from Mentor, and iii) a discount rate of 7%. A change in any of these unobservable inputs can significantly change the fair value of the asset. The change in fair value of the Earn-Out Payments recognized in the Consolidated Statements of Operations for the three months ended August 31, 2016 and 2015 was approximately $0 and $(10,000), respectively. FOREIGN CURRENCY TRANSLATION The functional currency of the Companys 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). The foreign currency gain (loss) arising from transactions were included in operations (Other expense, net in the Consolidated Statement of Operations) in three months ended August 31, 2016 and 2015 and totaled approximately $0 and $(7,000), respectively. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) is a more inclusive reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income (loss). To date, the Companys comprehensive income and expense items include only foreign translation adjustments. Comprehensive income (loss) has been included in the Consolidated Statements of Comprehensive Loss for all periods. RESEARCH AND DEVELOPMENT COSTS The Company expenses all research and development costs as incurred. NET INCOME (LOSS) PER COMMON SHARE In each of the three month periods ended August 31, 2016 and 2015, 3,448 options to purchase shares of common stock were anti-dilutive and were excluded from the basic and diluted earnings per share calculation. STOCK-BASED COMPENSATION Stock-based compensation expense for all stock-based payment awards made to employees and directors is measured based on the grant-date fair value of the award. The Company estimated the fair value of each share-based award using the Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates assumptions as to stock price volatility, the expected life of options, a risk-free interest rate and dividend yield. The Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period of the award. In May 2011, the 2011 Equity Incentive Plan (the 2011 Plan) was approved by the Companys shareholders, pursuant to which 150,000 shares of our common shares are reserved for issuance. Any shares subject to any award under the 2011 Plan that expires, is terminated unexercised or is forfeited will be available for awards under the 2011 Plan. The Company may grant stock options, restricted stock, restricted stock units, stock equivalents and awards of shares of common stock that are not subject to restrictions or forfeiture under the 2011 Plan. As of August 31, 2016, 149,500 options were outstanding. The following table summarizes option activity under the 2011 Stock Option Plan: Number of Options Weighted Average Exercise Price Per Share Weighted-Average Remaining Life (in years) Aggregate Intrinsic Value Outstanding options at May 31, 2015 147,000 1.77 8.54 2,625 Granted 2,500 1.00 10.00 - Exercised - - - - Forfeited or expired - - - - Outstanding options at May 31, 2016 149,500 1.75 7.56 4,325 Granted - - - - Exercised - - - - Forfeited or expired - - - - Outstanding options at August 31, 2016 149,500 $ 1.75 7.56 $ 4,325 Exercisable at August 31, 2016 149,500 $ 1.75 7.56 $ 4,325 The Company determined the volatility for options granted during the fiscal year ended May 31, 2016 using the historical volatility of the Companys common stock. The expected life of options has been determined utilizing the simplified method as prescribed in ASC 718 Compensation, Stock Compensation The weighted-average fair value of each option granted in the fiscal year ended May 31, 2016 was estimated to be $1.10 on the date of grant using the Black-Scholes model with the following weighted average assumptions: Expected life 5.00 years Assumed annual dividend growth rate 0% Expected volatility 133% Risk free interest rate 1.63% For the three month period ended August 31, 2016 and 2015, the Company expensed approximately $2,000 and $31,000, respectively, of stock-based compensation. Unamortized stock based compensation as of August 31, 2016 was approximately $5,000. REDEEMABLE COMMON STOCK During the year ended May 31, 2013, the Company issued 50,000 shares of common stock, $0.10 par value (the Common Stock), at a purchase price of $5.00 per share to accredited investors (collectively, the Investors) in separate private placement transactions for total proceeds of $250,000. These transactions were completed pursuant to a Securities Purchase Agreement (the Agreement) which the Company entered into with each of the respective Investors. In lieu of registration rights, each $25,000 investment entitled the Investors to a fee of $6,000 (the Fee) to be paid in six equal quarterly installments during the eighteen month period following the investment. The Agreement also provided the Investors with the right to require the Company to redeem the Common Stock held by such Investors (the Put Option) for $5.50 per share in cash for a 30 day period ending between June 1, 2014 and June 30, 2014. Each of the Investors exercised their Put Option and the Common Stock was repurchased by the Company at the agreed upon Put Option price of $5.50 per share for a total of $275,000 during the first quarter of fiscal 2015. During the fiscal quarter ended August 31, 2014, in a transaction structured in a similar fashion to the above described Agreement, the Company issued 110,000 shares of the Common Stock at a purchase price of $5.00 per share to Joseph P. Daly, an accredited investor and existing Company shareholder, in a private placement transaction for total proceeds of $550,000. This transaction was completed pursuant to a securities purchase agreement whereby Mr. Daly shall have the right to require the Company to repurchase some or all of the shares at $7.00 per share during the ninety (90) day period immediately following the three-year anniversary of the transaction. Upon completion of the transaction, the 110,000 shares of Common Stock issued pursuant to the security purchase agreement were recorded as redeemable common stock at its redemption value of $770,000 and accretion of $220,000 was recorded to additional paid in capital. In the event whereby the Company is unable to honor the agreement to repurchase the shares, in whole or in-part, the unpaid portion would revert into a loan obligation secured by all of the Companys assets and bearing an annual interest rate of 20%. During the fiscal quarter ended November 30, 2014, the Company issued an additional 60,000 shares of the Common Stock at a purchase price of $5.00 per share to four accredited investors (collectively, the New Investors) in private placement transactions for total proceeds of $300,000. These transactions were completed pursuant to Securities Purchase Agreements (the New Agreements) entered into with each of the respective New Investors. In lieu of registration rights, each $50,000 investment entitles the New Investors to a fee (the New Investors Fees) of $5,000 to be paid in eight equal quarterly installments during the twenty-four month period (the Payment Period) following the investment. The New Agreements also provide the New Investors with the right to require the Company to redeem the Common Stock held by such New Investors for $7.00 per share in cash for a 30 day period following the Payment Period. Upon completion of these transactions, the 60,000 shares of Common Stock issued pursuant to the New Agreements were recorded as redeemable common stock at its redemption value of $420,000 and accretion of $120,000 was recorded to additional paid in capital. During the fiscal quarter ended November 30, 2015, the Company issued an additional 10,000 shares of the Common Stock at a purchase price of $5.00 per share to an accredited investor in private placement transactions for total proceeds of $50,000. This transaction was completed pursuant to a Securities Purchase Agreement entered into with the investor. In lieu of registration rights, the investor is entitled to a fee of $5,000 to be paid in eight equal quarterly installments during the twenty-four month period (the Payment Period) following the investment. The Securities Purchase Agreement also provides the investor with the right to require the Company to redeem the Common Stock held by such investor for $7.00 per share in cash for a 30 day period following the Payment Period. Upon completion of this transaction, the 10,000 shares of Common Stock issued pursuant to the Securities Purchase Agreement was recorded as redeemable common stock at its redemption value of $70,000 and accretion of $20,000 was recorded to additional paid in capital. As of August 31, 2016, the redeemable common stockholders of the Company have the right to redeem shares with an aggregate redemption value of $420,000 within twelve months of the balance sheet date. The Company first assessed the redeemable Common Stock to determine whether each of these instruments should be accounted for as a liability in accordance with ASC 480, Distinguishing Liabilities from Equity Derivatives and Hedging, Classification and Measurement of Redeemable Securities RECENT ACCOUNTING PRONOUNCEMENTS In February 2016, the FASB issued ASU No. 2016-02, Leases. This ASU requires entities to recognize right-to-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. We are currently evaluating the potential In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, This ASU simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. In May 2015, the FASB issued ASU No. 2015-08, "Business Combinations (Topic 805): Pushdown Accounting Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115." The amendments in this ASU amend various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115, Topic 5: Miscellaneous Accounting, regarding various pushdown accounting issues, and did not have a material impact on the Company's consolidated financial statements. Accounting Standards Update (ASU) 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40) Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern was issued by the FASB in August 2014. The primary purpose of the ASU is to provide guidance in GAAP about managements responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern and to provide related footnote disclosures. The amendments should reduce diversity in the timing and content of footnote disclosure. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for the annual periods and interim periods thereafter. Early adoption is permitted. The Company is in the process of evaluating if this guidance will have a material impact on its consolidated results of operations or financial position or disclosures. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers In March 2016, the FASB issued ASU 2016-08, amending the new revenue recognition standard that it issued jointly with the IASB in 2014 - Revenue from Contracts with Customers In April 2016, the FASB issued ASU 2016-10, amending the new revenue recognition standard that it issued jointly with the IASB in 2014 - Revenue from Contracts with Customers |
