Form 10-QSB
Page 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------
For the Quarter Ended Commission File Number
February 28, 2007 0-10665
SOFTECH, INC.
State of Incorporation IRS Employer Identification
Massachusetts 04-2453033
2 Highwood Drive, Tewksbury, MA 01876
Telephone (978) 640-6222
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 / /
The number of shares outstanding of registrant's common stock at March 30, 2007
was 12,213,236 shares.
Form 10-QSB
Page 2
SOFTECH, INC.
INDEX
PART I. Financial Information PAGE NUMBER
-----------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
February 28, 2007 and May 31, 2006 3
Consolidated Condensed Statements of Operations -
Three Months Ended February 28, 2007 and 2006 4
Consolidated Condensed Statements of Operations -
Nine Months Ended February 28, 2007 and 2006 5
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended February 28, 2007 and 2006 6
Notes to Consolidated Condensed Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Operations 13-17
Item 3. Controls and Procedures 18
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Form 10-QSB
Page 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
(dollars in thousands)
February 28, May 31,
2007 2006
-------- --------
ASSETS
Cash and cash equivalents $ 626 $ 680
Accounts receivable, net 2,480 1,657
Prepaid and other assets 361 317
-------- --------
Total current assets 3,467 2,654
-------- --------
Property and equipment, net 234 143
Capitalized software costs, net 2,217 3,279
Goodwill, net 4,600 4,600
Notes receivable 134 134
Other assets 2 3
-------- --------
TOTAL ASSETS $ 10,654 $ 10,813
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable $ 349 $ 339
Accrued expenses 905 913
Deferred maintenance revenue 3,637 3,423
Current portion of long term debt 608 608
-------- --------
Total current liabilities 5,499 5,283
-------- --------
Long-term debt, net of current portion 13,681 12,947
-------- --------
Stockholders' deficit (8,526) (7,417)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 10,654 $ 10,813
======== ========
See accompanying notes to consolidated condensed financial statements.
Form 10-QSB
Page 4
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
-----------------------------------------------
(in thousands, except for per share data)
Three Months Ended
-------------------------------
February 28, February 28,
2007 2006
-------- --------
Revenue
Products $ 788 $ 887
Services 2,063 2,037
-------- --------
Total revenue 2,851 2,924
Cost of products sold: materials 28 29
Cost of product sold: amortization of capitalized software costs 354 354
Cost of services provided 433 403
-------- --------
Gross margin 2,036 2,138
Research and development expenses 489 742
Selling, general and administrative 1,291 1,656
-------- --------
Income (Loss) from operations before interest expense 256 (260)
Interest expense 372 321
-------- --------
Net loss $ (116) $ (581)
======== ========
Basic and diluted net loss per common share $ (0.01) $ (0.05)
Weighted average common shares outstanding 12,213 12,205
See accompanying notes to consolidated condensed financial statements.
Form 10-QSB
Page 5
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
-----------------------------------------------
(in thousands, except for per share data)
Nine Months Ended
----------------------------------
February 28, February 28,
2007 2006
-------- --------
Revenue
Products $ 1,935 $ 2,604
Services 6,418 6,779
-------- --------
Total revenue 8,353 9,383
Cost of products sold: materials 67 155
Cost of product sold: amortization of capitalized software costs
and other intangible assets 1,062 1,518
Cost of services provided 1,211 1,184
-------- --------
Gross margin 6,013 6,526
Research and development expenses 1,714 2,112
Selling, general and administrative 4,297 4,581
-------- --------
Income (Loss) from operations before interest expense 2 (167)
Interest expense 1,079 850
-------- --------
Net loss $ (1,077) $ (1,017)
======== ========
Basic and diluted net loss per common share $ (0.09) $ (0.08)
Weighted average common shares outstanding 12,213 12,205
See accompanying notes to consolidated condensed financial statements.
Form 10-QSB
Page 6
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(dollars in thousands)
Nine Months Ended
-------------------------------
February 28, February 28,
2007 2006
------- -------
Cash flows from operating activities:
Net loss $(1,077) $(1,017)
------- -------
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 1,097 1,566
Change in current assets and liabilities:
Accounts receivable (823) (1,016)
Prepaid expenses and other assets (43) 108
Accounts payable and accrued expenses 2 158
Deferred maintenance revenue 214 (261)
------- -------
Total adjustments 447 555
------- -------
Net cash used by operating activities (630) (462)
------- -------
Cash flows used by investing activities:
Capital expenditures (135) (27)
------- -------
Net cash used by investing activities (135) (27)
------- -------
Cash flows from financing activities:
Borrowings under line of credit agreements, net 734 357
------- -------
Net cash provided by financing activities 734 357
------- -------
Effect of exchange rates on cash (23) 9
------- -------
Decrease in cash and cash equivalents (54) (123)
Cash and cash equivalents, beginning of period 680 399
------- -------
Cash and cash equivalents, end of period $ 626 $ 276
======= =======
See accompanying notes to consolidated condensed financial statements.
Form 10-QSB
Page 7
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(A) The consolidated condensed financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission from the accounts of SofTech, Inc. and its wholly owned
subsidiaries (the "Company") 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 fiscal year 2006 Annual Report on Form
10-KSB.
(B) SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company follows the provisions of Statement of Position No. 97-2,
"Software Revenue Recognition" (SOP 97-2) as amended by SOP No. 98-9,
"Modification of SOP 97-2, Software Revenue Recognition with Respect to
Certain Transactions" (SOP 98-9) in recognizing revenue from software
transactions. 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 collectibility 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 elements
using the residual method set forth in SOP 98-9. 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, primarily performed on a
time and material basis, is recognized as those services are rendered.
CAPITALIZED SOFTWARE COSTS AND RESEARCH AND DEVELOPMENT:
The Company capitalizes certain costs incurred to internally develop
and/or purchase software that is licensed to customers. Capitalization
of internally developed software begins upon the establishment of
technological feasibility. Costs incurred prior to the establishment of
technological feasibility are expensed as incurred. Purchased software
is recorded at cost. The Company evaluates the realizability and the
related periods of amortization on a regular basis. Such costs are
amortized over estimated useful lives ranging from three to ten years.
The Company did not capitalize any internally developed software during
the three and nine month periods ended February 28, 2007 or 2006.
Substantially all of the recorded balance represents software acquired
from third parties. Amortization expenses related to capitalized
software costs for the three and nine month periods ended February 28,
2007 were $354,000 and $1,062,000, respectively, as compared to
$354,000 and $1,518,000 for the same periods in the prior fiscal year.
ACCOUNTING FOR GOODWILL
Effective June 1, 2002, the Company adopted the provisions of SFAS No.
142, Goodwill and Other Intangible Assets. This statement requires that
goodwill existing at the date of adoption be reviewed for possible
impairment and that impairment tests be periodically repeated, with
impaired assets written down to fair value. Additionally, existing
goodwill and intangible assets must be assessed and classified within
the statement's criteria. Intangible assets with finite useful lives
will continue to be amortized over those periods. Amortization of
goodwill ceased as of May 31, 2002.
As of May 31, 2006, the Company conducted its annual impairment test of
goodwill by comparing fair value to the carrying amount of its
underlying assets and liabilities. The Company determined that the fair
value exceeded the carrying amount of the assets and liabilities,
therefore no impairment existed as of the testing date.
Form 10-QSB
Page 8
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
LONG-LIVED ASSETS:
The Company periodically reviews the carrying value of all intangible
assets with a finite life (primarily capitalized software costs) 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. The Company does not
have any long-lived assets it considers to be impaired.
STOCK BASED COMPENSATION
Effective June 1, 2006, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 123 (Revised 2004),
Share-Based Payment, ("SFAS 123R") which requires all share-base
payments to employees, including grants of employee stock options, to
be recorded as expense in the statement of operations based on their
fair value.
To adopt SFAS 123(R), we selected the modified prospective transition
method. This method requires recording compensation expense
prospectively over the remaining vesting period of the stock options on
a straight-line basis using the fair value of the options on the date
of the grant. It does not require restatement of financial results for
the prior period expense related to stock option awards that were
outstanding prior to adoption. The expense recorded from adoption of
this Statement in the current quarter was nominal.
We calculated the fair value of the options using the Black-Scholes
model. The assumptions used to value the previous grants were as
follows:
Expected Life 5 Years
Assumed annual dividend growth rate 0%
Expected volatility 1.12%
Risk free interest rate 2.68% - 3.35%
Prior to adoption, the Company followed SFAS 123, Accounting for Stock
Based Compensation, as amended by SFAS No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure, an amendment to
SFAS Statement No. 123, which required entities to recognize as expense
over the vesting period the fair value of stock-based awards on the
date of grant or measurement date. For employee stock-based awards,
however, SFAS Nos. 123 and 148 allowed entities to continue to apply
the intrinsic value method under the provisions of Accounting
Principles Board ("APB") Opinion No. 25 and provide pro forma net
earnings disclosures as if the fair-value based method defined in SFAS
No. 123 had been applied. The Company elected to apply the provisions
of APB No. 25 and provide the pro forma disclosures of SFAS Nos. 123
and 148 for periods as required prior to June 1, 2006. Had compensation
cost for the Company's stock option plans been determined based on the
fair value at the grant date for awards under these plans, consistent
with the methodology prescribed under SFAS 123, for the comparable
periods in fiscal 2006, the Company's net loss and loss per share would
have approximated the pro forma amounts indicated below:
Three Month Period
(in thousands, except per share data) Ended February 28, 2006
---------------------------------------------------------------------
Net loss - as reported $ (116)
Stock-based compensation expense determined
under fair value based method -
-------
Net loss - pro forma (116)
========
Loss per share - diluted - as reported (.01)
Loss per share - diluted - pro forma (.01)
Form 10-QSB
Page 9
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
Nine Month Period
(in thousands, except per share data) Ended February 28, 2006
--------------------------------------------------------------------
Net loss - as reported $ (1,077)
Stock-based compensation expense determined
under fair value based method (2)
-------
Net loss - pro forma (1,079)
========
Loss per share - diluted - as reported (.09)
Loss per share - diluted - pro forma (.09)
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 2004 but options granted prior to that time continue
to vest.
The following table summarizes information for stock options
outstanding and exercisable at February 28, 2007:
WEIGHTED
AVERAGE
WEIGHTED AVERAGE REMAINING
NUMBER OF EXERCISE PRICE CONTRACTUAL AGGREGATE
OPTIONS PER SHARE LIFE IN YEARS INTRINSIC VALUE
------------------ ------------------ ----------------- ------------------
Outstanding at May
31, 2006 323,000 $ .58 4.65 $ 152,070
Granted - -
Exercised - -
Forfeited or
expired (31,000) $.98
Outstanding at
February 28, 2007 292,000 $.60 4.15 $ 140,541
================== ================== ================= ==================
Exercisable at
February 28, 2007 258,200 $.66 3.95 $ 139,368
================== ================== ================= ==================
The following table summarizes the information related to non-vested
stock option awards outstanding as of February 28, 2007:
WEIGHTED AVERAGE GRANT DATE
NUMBER OF OPTIONS FAIR VALUE PER SHARE
------------------------------ ------------------------------
Non-vested at May 31, 2006 59,800 $ .03
Granted -
Vested (23,000) $.04
Forfeited (3,000) $.21
------------------------------ ------------------------------
Non-vested at February 28, 2007 33,800 $.03
============================== ==============================
As of February 28, 2007, the remaining prospective pre-tax cost of
non-vested stock option employee compensation was nominal and will be
expensed on a pro rata basis going forward.
Form 10-QSB
Page 10
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
FOREIGN CURRENCY TRANSLATION:
The functional currency of the Company's foreign operations (France,
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 are included in the statement of operations.
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 are
the valuation of long term assets including intangibles (goodwill,
capitalized software and other intangible assets), deferred tax assets
and the allowance for doubtful accounts. Actual results could differ
from those estimates.
(C) LIQUIDITY
As of February 28, 2007, the Company had cash of $626,000, a decrease
of $54,000 from May 31, 2006. Operating activities used $630,000 of
cash during the first nine months of the fiscal year and the Company
borrowed $734,000 in excess of its debt repayments from its line of
credit. At February 28, 2007, the Company had available borrowings on
its debt facilities of approximately $2.4 million.
The Company believes its cost structure subsequent to the cost
reduction actions during Q207 together with reasonable revenue run
rates based on historical performance will generate positive cash flow
during the remainder of fiscal 2007. The Company believes that the cash
on hand together with cash flow from operations and its available
borrowings under its credit facility will be sufficient for meeting its
liquidity and capital resource needs for the next year.
(D) BALANCE SHEET COMPONENTS
Details of certain balance sheet captions are as follows (000's):
February 28, May 31,
2007 2006
-------- --------
Property and equipment $ 4,120 $ 3,985
Accumulated depreciation
and amortization
(3,886) (3,842)
-------- --------
Property and equipment, net $ 234 $ 143
-------- --------
Common stock, $.10 par value $ 1,221 $ 1,221
Capital in excess of par value 18,037 18,037
Accumulated deficit (27,458) (26,381)
Accumulated other comprehensive income (326) (294)
-------- --------
Stockholders' deficit $ (8,526) $ (7,417)
======== ========
Form 10-QSB
Page 11
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(E) LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss by the
weighted-average number of common shares outstanding. Diluted net loss
per share is computed by dividing net loss by the weighted-average
number of common and equivalent dilutive common shares outstanding.
After the application of assumed proceeds, options to purchase shares
of common stock for the nine months ending February 28, 2007 were
19,179 as compared to 133,460 for the same period in the prior year,
have been excluded from the denominator for the computation of diluted
earnings per share for all periods presented in fiscal 2007 and 2006
because their inclusion would be antidilutive. The weighted average
shares outstanding are as follows (000's):
Three and Nine Month Periods
Ended February 28,
2007 2006
------ ------
Basic weighted average shares outstanding 12,213 12,205
Effect of employee stock options outstanding -- --
------ ------
12,213 12,205
====== ======
(F) COMPREHENSIVE LOSS
The Company's comprehensive loss includes accumulated foreign currency
translation adjustments and unrealized gain (loss) on marketable
securities the comprehensive loss was as follows (000's):
Three Month Periods
Ended February 28,
2007 2006
----- -----
Net loss $(116) $(581)
Changes in:
Foreign currency translation adjustment 9 4
----- -----
Comprehensive loss $(107) $(577)
===== =====
Nine Month Periods
Ended February 28,
2007 2006
------- -------
Net loss $(1,077) $(1,017)
Changes in:
Foreign currency translation adjustment (32) 9
------- -------
Comprehensive loss $(1,109) $(1,008)
======= =======
Form 10-QSB
Page 12
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(G) SEGMENT INFORMATION
The Company operates in one reportable segment and is engaged in the
development, marketing, distribution and support of CAD/CAM and Product
Data Management and Collaboration computer solutions. The Company's
operations are organized geographically with foreign offices in France,
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
(000's):
Three Months Ended Three Months Ended
February 28, February 28,
Revenue: 2007 2006
------- -------
North America $ 2,058 $ 2,269
Asia 333 236
Europe 528 436
Eliminations (68) (17)
------- -------
Consolidated Total $ 2,851 $ 2,924
------- -------
Nine Months Ended Nine Months Ended
February 28, February 28,
Revenue: 2007 2006
------- -------
North America $ 6,214 $ 7,106
Asia 836 813
Europe 1,597 1,733
Eliminations (294) (269)
------- -------
Consolidated Total $ 8,353 $ 9,383
------- -------
February 28, May 31,
2007 2006
------ ------
Long Lived Assets:
North America $7,038 $8,004
Europe 149 155
------ ------
Consolidated Total $7,187 $8,159
------ ------
Form 10-QSB
Page 13
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
--------------------------------------------------
The statements made below with respect to SofTech's outlook for fiscal 2007 and
beyond represent "forward looking statements" within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act
of 1934 and are subject to a number of risks and uncertainties. These include,
among other risks and uncertainties, general business and economic conditions,
generating sufficient cash flow from operations to fund working capital needs,
continued integration of acquired entities, potential obsolescence of the
Company's technologies, maintaining existing relationships with the Company's
lenders, successful introduction and market acceptance of planned new products
and the ability of the Company to attract and retain qualified personnel both in
our existing markets and in new territories in an extremely competitive
environment.
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.
The Company's significant accounting policies are described in Note B to these
financial statements. The Company believes that the following accounting
policies require the application of management's most difficult, subjective or
complex judgments:
REVENUE RECOGNITION
-------------------
The Company follows the provisions of Statement of Position No. 97-2, "Software
Revenue Recognition" (SOP 97-2) as amended by SOP No. 98-9, "Modification of SOP
97-2 Software Revenue Recognition with Respect to Certain Transactions" (SOP
98-9) in recognizing revenue from software transactions. 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 collectibility 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 elements
using the residual method. Revenue from customer maintenance support agreements
is deferred and recognized ratably over the term of the agreements. Revenue from
engineering, consulting and training services, primarily performed on a time and
material basis, is recognized as those services are rendered.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS
---------------------------------------------
The Company periodically reviews the carrying value of all intangible assets
(primarily capitalized software costs and other intangible assets) 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.
The Company does not have any long-lived assets it considers to be impaired.
VALUATION OF GOODWILL
---------------------
Effective June 1, 2002, the Company adopted the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets. This statement affects the Company's
treatment of goodwill and other intangible assets. This statement requires that
goodwill existing at the date of adoption be reviewed for possible impairment
and that impairment tests be periodically repeated, with impaired assets written
down to fair value. Additionally, existing goodwill and intangible assets must
be assessed and classified within the statement's criteria. Intangible assets
with finite useful lives will continue to be amortized over those periods.
Amortization of goodwill and intangible assets with indeterminable lives ceased
as of June 1, 2002.
Form 10-QSB
Page 14
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
----------------------------------------------------------
As of May 31, 2006, the Company conducted its annual impairment test of goodwill
by comparing fair value to the carrying amount of its underlying assets and
liabilities. The Company determined that the fair value exceeded the carrying
amount of the assets and liabilities, therefore no impairment existed as of the
testing date.
ESTIMATING ALLOWANCES FOR DOUBTFUL ACCOUNTS RECEIVABLE
------------------------------------------------------
We perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current credit worthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past. A significant change in the liquidity or
financial position of any of our significant customers could have a material
adverse effect on the collectibility of our accounts receivable and our future
operating results.
VALUATION OF DEFERRED TAX ASSETS
--------------------------------
We regularly evaluate our ability to recover the reported amount of our deferred
income taxes considering several factors, including our estimate of the
likelihood of the Company generating sufficient taxable income in future years
during the period over which temporary differences reverse. The Company's
deferred tax assets are currently fully reserved.
RESULTS OF OPERATIONS
---------------------
Revenue for the three and nine month periods ended February 28, 2007 was
approximately $2.9 million and $8.4 million, respectively, as compared to
approximately $2.9 million and $9.4 million for the same periods in the prior
fiscal year. This represents a decrease of 2.5% for the third quarter of fiscal
2007 and 11.0% for the first nine months of fiscal 2007 as compared to the same
periods in fiscal 2006.
Product revenue for the three and nine month periods ended February 28, 2007 was
approximately $788,000 and $1.9 million, respectively, as compared to $887,000
and $2.6 million for the same periods in the prior fiscal year. This represents
a decrease of 11.2% for Q3 2007 and 25.7 % for the first nine months of fiscal
2007 as compared to the same periods in fiscal 2006. The majority of the product
revenue decrease for the quarter and the nine month period ended February 28,
2007 as compared to the same period in fiscal 2006 was related to the reduced
order flow for the ProductCenter product line. Product revenue from
ProductCenter in 2007 has been uneven and not as robust as fiscal 2006,
especially regarding orders from new customers.
Service revenue for the three and nine month periods ended February 28, 2007 was
approximately $2.1 million and $6.4 million, respectively, as compared to
approximately $2.0 million and $6.8 million for the same period in fiscal 2006.
This represents an increase of 1.3% for Q3 2007 as compared to the same period
in fiscal 2006 and a decrease of 5.3% for the first nine months of fiscal 2007
compared to the same period in fiscal 2006. The increase in Q307 from Q306 was
related to a 24% increase in our ProductCenter consulting revenue. Our European
customers contributed significantly to this increased activity as a result of
new ProductCenter implementation projects. The decrease in service revenue for
the nine month periods ended February 28, 2007 as compared to the same period in
fiscal 2006 was due primarily to declines in both maintenance and other services
related to our Cadra product line which declined by 15% for the first nine
months of fiscal 2007 as compared to the same period in the prior fiscal year.
As drafting technologies like Cadra are replaced by solid modeling technology,
we expect that our Cadra customers will continue to reduce their investment in
maintenance and other services such as consulting and training.
Form 10-QSB
Page 15
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
--------------------------------------------------
Revenue generated in the U.S. accounted for 70% and 71% of total revenue for the
three and nine month periods ended February 28, 2007, respectively, as compared
to 78% and 76% of total revenue for the same periods in the previous year.
Revenue generated in Europe for each of the three and nine month periods ended
February 28, 2007 was 19% of total revenue as compared to 15% and 18% of total
revenue for the same periods in fiscal 2006, respectively. Revenue generated in
Asia for the three and nine month periods ended February 28, 2007 was 12% and
10% of total revenue, respectively, as compared to 8% and 9% of total revenue
for the same period in fiscal 2006. Revenue generated in the U.S. decreased by
about 10% and 13% for the three and nine month periods ended February 28, 2007,
respectively, as compared to the same periods in the prior fiscal year. Revenue
generated in Europe increased by about 21% for the three months ending February
28, 2007 and decreased by about 8% for the nine month periods ended February 28,
2007 and revenue generated in Asia increased about 41% and 3% for the three and
nine month periods ended February 28, 2007, respectively, when compared to the
same periods in fiscal 2006. The increased revenue in Asia and Europe were
primarily a result of customers embracing our latest release of Cadra. There can
be no assurances that Asia and Europe will experience the same results in the
upcoming quarters. The decrease in US revenue was due primarily to the
ProductCenter product revenue being uneven and the reduced service revenue from
our Cadra and AMT product lines. We are optimistic we will have improved success
in the upcoming quarters.
Gross margin as a percentage of revenue was 71.4% and 72.0 % for the three and
nine month periods ended February 28, 2007, respectively, as compared to 73.1%
and 69.6% for the same periods in fiscal 2006. The gross margin decline in Q307
compared to Q306 was due to nominal increases in material and labor despite a
2.5% revenue decline. The improvement in gross margin for the nine months ended
February 28, 2007 as compared to the same period in the prior fiscal year was
due primarily to reduced amortization expense as the costs of acquiring the
ProductCenter technology were fully amortized.
Research and development expenses ("R&D") were $489,000 and $1.71 million for
the three and nine month periods ended February 28, 2007, respectively, as
compared to $742,000 and $2.1 million for the same periods in the prior fiscal
year. This represents a decrease of 34.1% and 18.8% for the three and nine month
periods ended February 28, 2007, respectively, as compared to the same period in
the prior fiscal year. The reduced spending was the result of reduced
investment, mostly in the form of reduced headcount, related to our legacy
technologies that have experienced continued revenue decline. While the Company
remains committed to improving those technologies and ensuring their
compatibility with current operating systems, our spending must reflect the
reality of the revenue trend for these product lines.
Selling, general and administrative ("SG&A") expenses were $1.3 million and $4.3
million, respectively, for the three and nine month periods ended February 28,
2007 as compared to $1.7 million and $4.6 million for the same period in fiscal
2006. This represents a decrease of approximately 22.0% and 6.2% for the three
and nine month periods ended February 28, 2007, respectively, as compared to the
same periods in the prior fiscal year. The decrease for both periods is due
primarily to the reduction of certain Cadra sales and support personnel in the
U.S. and Europe in Q207.
The non-cash expenses related to the amortization of capitalized software and
other intangible assets were $354,000 and $1.1 million for the three and nine
month periods ended February 28, 2007 as compared to $354,000 and $1.5 million
for the same periods in fiscal 2006. The decrease is related to the completion
of the amortization related to the intangible assets acquired in the acquisition
of the ProductCenter technology in December 2002.
Interest expense for the three and nine month periods ended February 28, 2007
was approximately $372,000 and $1,079,000, respectively, as compared to $321,000
and $850,000 for the same periods in fiscal 2006. This represents an increase of
15.9% for the third quarter of fiscal 2007 compared to the same period in the
previous fiscal year and an increase of 26.9% for the nine month period ended
February 28, 2007 compared to the same period in the prior fiscal year. For the
quarter, the average borrowings increased to approximately $14.2 million during
the current quarter as compared to $13.5 million for the same period in fiscal
2006 and the interest rate on those borrowings increased to about 10.5% in the
current quarter from 9.75% for the same period in fiscal 2006. Year to date, the
average borrowings increased to approximately $14.0 million during the first
nine months of fiscal 2007 as compared to $13.4 million for the same period in
fiscal 2006 and the interest rate on those borrowings increased to about 10.5%
during the first nine months of fiscal 2007 as compared to 8.5% for the same
period in fiscal 2006. The changes in the interest rate on our borrowings in
fiscal 2007 as compared to 2006 is due to the increase in the prime rate.
Form 10-QSB
Page 16
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
--------------------------------------------------
The net loss for the three and nine month periods ended February 28, 2007 was
$(116,000) and $(1,077,000), respectively, as compared to a net loss of
$(581,000) and $(1,017,000) for the same period in the prior fiscal year. The
loss per share for the three and nine month periods ended February 28, 2007 was
$(.01) and $(.09), respectively. The loss per share for the three and nine month
periods ended February 28, 2006 was $(.05) and $(.08), respectively.
CAPITAL RESOURCES AND LIQUIDITY
-------------------------------
As of February 28, 2007, the Company had cash of $626,000, a decrease of $54,000
from May 31, 2006. Operating activities used $630,000 of cash during the first
nine months of the fiscal year and the Company borrowed $734,000 in excess of
its debt repayments from its line of credit. At February 28, 2007, the Company
had available borrowings on its debt facilities of approximately $2.4 million.
The Company believes its cost structure subsequent to the cost reduction actions
during Q207 together with reasonable revenue run rates based on historical
performance will generate positive cash flow during the remainder of fiscal
2007. The Company believes that the cash on hand together with cash flow from
operations and its available borrowings under its credit facility will be
sufficient for meeting its liquidity and capital resource needs for the next
year.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business is subject to many uncertainties and risks. This Form
10-QSB also contains certain forward-looking statements within the meaning of
the Private Securities Reform Act of 1995. The Company's future results may
differ materially from its current results and actual results could differ
materially from those projected in the forward looking statements as a result of
certain risk factors, including but not limited to those set forth below, other
one-time events and other important factors disclosed previously and from time
to time in the Company's other filings with the SEC.
OUR QUARTERLY RESULTS MAY FLUCTUATE. The Company's quarterly revenue and
operating results are difficult to predict and may fluctuate significantly from
quarter to quarter. Our quarterly revenue may fluctuate significantly for
several reasons, including: the timing and success of introductions of our new
products or product enhancements or those of our competitors; uncertainty
created by changes in the market; difficulty in predicting the size and timing
of individual orders; competition and pricing; and customer order deferrals as a
result of general economic decline. Furthermore, the Company has often
recognized a substantial portion of its product revenues in the last month of a
quarter, with these revenues frequently concentrated in the last weeks or days
of a quarter. As a result, product revenues in any quarter are substantially
dependent on orders booked and shipped in the latter part of that quarter and
revenues from any future quarter are not predictable with any significant degree
of accuracy. We typically do not experience order backlog. For these reasons, we
believe that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance.
WE MAY NOT GENERATE POSITIVE CASH FLOW IN THE FUTURE. During fiscal years 1998
through 2001 we generated significant cash losses from operations. The Company
took aggressive cost cutting steps and reorganized its operations at the
beginning of fiscal 2002. These actions greatly reduced our fixed costs and
resulted in positive cash flow from operations in each of fiscal years 2002
through 2005. In fiscal 2006 we were breakeven but for the first nine months of
2007 we have generated a cash loss from operations of about $630,000 as our
maintenance renewal rates on our legacy product lines have declined. It is our
expectation that we can correct the most recent problems of cash losses from
operations and return to generating positive cash flows similar to the
performance during fiscal years 2002 to 2005, however, there can be no
assurances that the Company will continue to generate positive cash in the
future.
DECLINE IN BUSINESS CONDITIONS AND INFORMATION TECHNOLOGY (IT) SPENDING COULD
CAUSE A DECLINE IN REVENUE. Business conditions and the level of IT spending
have improved in the recent past as evidenced by our revenue growth. However,
there can be no assurance that this recent improvement will continue given the
difficult to forecast economic environment. If IT spending declines the
Company's revenues and profitability could be adversely impacted.
Form 10-QSB
Page 17
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
--------------------------------------------------
DECLINE IN BUSINESS CONDITIONS AND INFORMATION TECHNOLOGY (IT) SPENDING COULD
CAUSE FURTHER DECLINE IN REVENUE. The level of future IT spending remains
uncertain as does the prognosis for the continued economic recovery in the
manufacturing sector. If IT spending declines and/or the manufacturing sector
experiences economic difficulty, the Company's revenues could be adversely
impacted.
THE COMPANY IS DEPENDENT ON ITS LENDER FOR CONTINUED SUPPORT. We have a strong
relationship with our sole lender, Greenleaf Capital. They currently represent
our sole source of financing.
REVENUE DECLINE FOR CERTAIN PRODUCT LINES. We experienced revenue declines from
2005 to 2006 of 11% for our Cadra product line and 4% for our AMT product line.
The declines for the same period for software maintenance revenue was about 11%
for each of those product lines. While we understand that as these technologies
age the revenue will decline as a normal part of the technology life cycle,
double digit declines from year to year were not expected. Should this
unexpected fiscal 2007 revenue decline for these product lines continue it will
materially negatively impact the Company's overall financial performance.
Form 10-QSB
Page 18
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
ITEM 3. CONTROLS AND PROCEDURES
-------------------------------
The Company's Chief Financial Officer is responsible for establishing and
maintaining disclosure controls and procedures for the Company. Such officer has
concluded (based upon his evaluation of these controls and procedures as of a
date within 90 days of the filing of this report) that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in this report is accumulated and communicated to the
Company's management, including its principal executive officers as appropriate,
to allow timely decisions regarding required disclosure.
The Certifying Officer also has indicated that there were no significant changes
in the Company's internal controls or other factors that could significantly
affect such controls subsequent to the date of their evaluation, and there were
no corrective actions with regard to significant deficiencies and material
weaknesses.
PART II. OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOFTECH, INC.
Date: April 16, 2007 /s/ Amy E. Mcguire
-------------- ------------------
Amy E. McGuire
Chief Financial Officer