Form 10-QSB
Page 1
UNITED STATES
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
November 30, 2006 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 December 29,
2006 was 12,213,236 shares.
Form 10-QSB
Page 2
SOFTECH, INC.
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INDEX
-----
PART I. Financial Information Page Number
-----------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
November 30, 2006 and May 31, 2006 3
Consolidated Condensed Statements of Operations -
Three Months Ended November 30, 2006 and 2005 4
Consolidated Condensed Statements of Operations -
Six Months Ended November 30, 2006 and 2005 5
Consolidated Condensed Statements of Cash Flows -
Six Months Ended November 30, 2006 and 2005 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)
November 30, May 31,
2006 2006
-------- --------
ASSETS
------
Cash and cash equivalents $ 452 $ 680
Accounts receivable, net 1,654 1,657
Prepaid and other assets 302 317
-------- --------
Total current assets 2,408 2,654
-------- --------
Property and equipment, net 133 143
Capitalized software costs, net 2,571 3,279
Goodwill, net 4,600 4,600
Notes receivable 134 134
Other assets 2 3
-------- --------
TOTAL ASSETS $ 9,848 $ 10,813
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Accounts payable $ 253 $ 339
Accrued expenses 1,036 913
Deferred maintenance revenue 2,770 3,423
Current portion of long term debt 608 608
-------- --------
Total current liabilities 4,667 5,283
-------- --------
Long-term debt, net of current portion 13,600 12,947
-------- --------
Stockholders' deficit (8,419) (7,417)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 9,848 $ 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
----------------------------------------
November 30, November 30,
2006 2005
-------- --------
Revenue
Products $ 759 $ 878
Services 2,247 2,513
-------- --------
Total revenue 3,006 3,391
Cost of products sold: materials 34 69
Cost of product sold: amortization of capitalized software costs
and other intangible assets 354 553
Cost of services provided 385 381
-------- --------
Gross margin 2,233 2,388
Research and development expenses 520 692
Selling, general and administrative 1,569 1,512
-------- --------
Income from operations 144 184
Interest expense 367 286
-------- --------
Net loss $ (223) $ (102)
======== ========
Basic and diluted net loss per common share $ (0.02) $ (0.01)
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)
Six Months Ended
----------------------------------------
November 30, November 30,
2006 2005
----------- ------------
Revenue
Products $ 1,147 $ 1,717
Services 4,355 4,742
-------- --------
Total revenue 5,502 6,459
Cost of products sold: materials 40 126
Cost of product sold: amortization of capitalized software costs
and other intangible assets 708 1,164
Cost of services provided 779 781
-------- --------
Gross margin 3,975 4,388
Research and development expenses 1,225 1,370
Selling, general and administrative 3,004 2,925
-------- --------
Income (loss) from operations (254) 93
Interest expense 707 529
-------- --------
Net loss $ (961) $ (436)
======== ========
Basic and diluted net loss per common share $ (0.08) $ (0.04)
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)
Six Months Ended
-----------------------------
November 30, November 30,
2006 2005
------- -------
Cash flows from operating activities:
Net loss $ (961) $ (436)
------- -------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 730 1,197
Change in current assets and liabilities:
Accounts receivable 3 (15)
Prepaid expenses and other assets 16 47
Accounts payable and accrued expenses 37 (27)
Deferred maintenance revenue (653) (977)
------- -------
Total adjustments 133 225
------- -------
Net cash used by operating activities (828) (211)
------- -------
Cash flows used by investing activities:
Capital expenditures (12) (18)
------- -------
Net cash used by investing activities (12) (18)
------- -------
Cash flows from financing activities:
Borrowings under line of credit agreements, net 653 259
------- -------
Net cash provided by financing activities 653 259
------- -------
Effect of exchange rates on cash (41) 5
------- -------
(Decrease) increase in cash and cash equivalents (228) 35
Cash and cash equivalents, beginning of period 680 399
------- -------
Cash and cash equivalents, end of period $ 452 $ 434
======= =======
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 has adopted 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 six month periods ended November 30, 2006 or 2005.
Substantially all of the recorded balance represents software acquired
from third parties. Amortization expenses related to capitalized
software costs for the three and six month periods ended November 30,
2006 were $354,000 and $708,000, respectively, as compared to $553,000
and $1,164,000 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 November 30, 2005
------------------------------------------------------------------
Net loss - as reported $ (102)
Stock-based compensation expense determined
under fair value based method (1)
------
Net loss - pro forma (103)
======
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
----------------------------------------------------
Six Month Period
(in thousands, except per share data) Ended November 30, 2005
------------------------------------------------------------------
Net loss - as reported $ (436)
Stock-based compensation expense determined
under fair value based method (2)
------
Net loss - pro forma (438)
======
Loss per share - diluted - as reported (.04)
Loss per share - diluted - pro forma (.04)
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 November 30, 2006:
Weighted
Weighted Average
Average Remaining
Number Of Exercise Price Contractual Life Aggregate
Options Per Share In Years Intrinsic Value
--------------- --------------- -------------- ------------------
Outstanding at
May 31, 2006 323,000 $ .58
Granted - -
Exercised - -
Forfeited or
expired (31,000) $ .98
--------------- --------------- -------------- ------------------
Outstanding at
November 30, 2006 292,000 $ .60 4.92 $ 140,541
=============== =============== ============== ==================
Exercisable at
November 30, 2006 258,200 $ .66 4.20 $ 139,368
=============== =============== ============== ==================
The following table summarizes the information related to non-vested
stock option awards outstanding as of November 30, 2006:
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 November 30, 2006 33,800 $ .03
================= ====================
As of November 30, 2006, the remaining prospective pre-tax cost of
non-vested stock option employee compensation was $704 which 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 November 30, 2006, the Company had cash of $452,000, a decrease of
$228,000 from May 31, 2006. Operating activities used $828,000 of cash
during the first six months of the fiscal year and the Company borrowed
$653,000 in excess of its debt repayments from its line of credit. At
November 30, 2006, the Company had available borrowings on its debt
facilities of approximately $2.5 million.
The Company believes its current cost structure 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):
November 30, May 31,
2006 2006
-------- --------
Property and equipment $ 4,004 $ 3,985
Accumulated depreciation
and amortization (3,871) (3,842)
-------- --------
Property and equipment, net $ 133 $ 143
-------- --------
Common stock, $.10 par value $ 1,221 $ 1,221
Capital in excess of par value 18,037 18,037
Accumulated deficit (27,342) (26,381)
Accumulated other comprehensive income (335) (294)
-------- --------
Stockholders' deficit $ (8,419) $ (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.
Options to purchase shares of common stock 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 for each of the
income statements included in this filing are presented below (000's):
Three and Six Month Periods
Ended November 30,
2006 2005
------ ------
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 November 30,
2006 2005
----- -----
Net loss $ (223) $ (102)
Changes in:
Foreign currency translation adjustment (39) 1
------ ------
Comprehensive loss $ (262) $ (101)
====== ======
Six Month Periods
Ended November 30,
2006 2005
------- -------
Net loss $ (961) $ (436)
Changes in:
Foreign currency translation adjustment (41) 5
------- -------
Comprehensive loss $(1,002) $ (431)
======= =======
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
November 30, November 30,
2006 2005
-------------------------------------------------
Revenue:
North America $ 2,372 $ 2,492
Asia 238 318
Europe 576 787
Eliminations (180) (206)
------- -------
Consolidated Total $ 3,006 $ 3,391
------- -------
Six Months Ended Six Months Ended
November 30, November 30,
2006 2005
-------------------------------------------------
Revenue:
North America $ 4,156 $ 4,796
Asia 503 618
Europe 1,068 1,297
Eliminations (225) (252)
------- -------
Consolidated Total $ 5,502 $ 6,459
------- -------
November 30, May 31,
2006 2006
-------------------------------------------------
Long Lived Assets:
North America $ 7,287 $ 8,004
Europe 153 155
------- -------
Consolidated Total $ 7,440 $ 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 has adopted 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 six month periods ended November 30, 2006 was $3.0
million and $5.5 million, respectively, as compared to $3.4 million and $6.5
million for the same periods in the prior fiscal year. This represents a
decrease of 11.4% for the second quarter of fiscal 2007 and 14.8% for the first
half of fiscal 2007 as compared to the same periods in fiscal 2006.
Product revenue for the three and six month periods ended November 30, 2006 was
approximately $759,000 and $1.15 million, respectively, as compared to $878,000
and $1.72 million for the same periods in the prior fiscal year. This represents
a decrease of 13.6% for Q2 2007 and 33.2 % for the first half of fiscal 2007 as
compared to the same periods in fiscal 2006. The majority of the product revenue
decrease in the current quarter was related to reduced order flow for the Cadra
product line, especially in Europe. The majority of the product revenue decrease
in the first half of fiscal 2007 was related to the ProductCenter technology
which experienced a temporary product revenue decline in the first quarter
before recovering in Q2. The Cadra product line is a technology that has
experienced steady revenue declines over the last five years or more as part of
the normal lifecycle of technology. The ProductCenter decline for the first half
of fiscal 2007 was related to the timing of purchase orders in Q1 2007.
Service revenue for the three and six month periods ended November 30, 2006 was
approximately $2.2 million and $4.4 million, respectively, as compared to
approximately $2.5 million and $4.7 million for the same period in fiscal 2006.
This represents a decrease of 10.6% for Q2 2007 as compared to the same period
in fiscal 2006 and a decrease of 8.2% for the first half of fiscal 2007 compared
to the same period in fiscal 2006. The decrease in service revenue for the three
and six month periods ended November 30, 2006 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 26% in Q2 2007 as compared to
the same period in fiscal 2006 and by 18% for the first half 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 79% and 76% of total revenue for the
three and six month periods ended November 30, 2006, respectively, as compared
to 74% of total revenue for each of the same periods in the previous year.
Revenue generated in Europe for each of the three and six month periods ended
November 30, 2006 was 19% of total revenue as compared to 23% and 20% of total
revenue for the same periods in fiscal 2006, respectively. Revenue generated in
Asia for the three and six month periods ended November 30, 2006 was 8% and 9%
of total revenue, respectively, as compared to 10% and 9% of total revenue for
the same period in fiscal 2006. Revenue generated in the U.S. decreased by about
5% and 13% for the three and six month periods ended November 30, 2006,
respectively, as compared to the same periods in the prior fiscal year. Revenue
generated in Europe decreased by about 27% and 18% for the three and six month
periods ended November 30, 2006 and revenue generated in Asia decreased about
25% and 19% for the three and six month periods ended November 30, 2006,
respectively, when compared to the same periods in fiscal 2006.
Gross margin as a percentage of revenue was 74.3% and 72.3 % for the three and
six month periods ended November 30, 2006, respectively, as compared to 70.4%
and 67.9% for the same periods in fiscal 2006. The improvement in gross margin
for the three and the six months ended November 30, 2006 as compared to 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 $520,000 and $1.225 million for
the three and six month periods ended November 30, 2006, respectively, as
compared to $692,000 and $1.37 million for the same periods in the prior fiscal
year. This represents a decrease of 24.9% and 10.6% for the three and six month
periods ended November 30, 2006, 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, on our 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 $1.57 million and
$3.0 million, respectively, for the three and six month periods ended November
30, 2006 as compared to $1.51 million and $2.93 million for the same period in
fiscal 2006. This represents an increase of approximately 3.8% and 2.7% for the
three and six month periods ended November 30, 2006, respectively, as compared
to the same periods in the prior fiscal year. The increase for both periods is
due primarily to severance costs incurred in Q2 2007 related to the reduction of
certain Cadra sales and support personnel in the U.S. and Europe which totaled
about $300,000.
The non-cash expenses related to the amortization of capitalized software and
other intangible assets were $354,000 and $708,000 for the three and six month
periods ended November 30, 2006 as compared to $553,000 and $1.164 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 six month periods ended November 30, 2006 was
approximately $367,000 and $707,000, respectively, as compared to $286,000 and
$529,000 for the same periods in fiscal 2006. This represents an increase of
28.3% for the second quarter of fiscal 2007 compared to the same period in the
previous fiscal year and an increase of 33.7% for the six month period ended
November 30, 2006 compared to the same period in the prior fiscal year. The
average borrowings increased to approximately $14.1 million during the current
quarter as compared to $13.3 million for the same period in fiscal 2006 and the
interest rate on those borrowings increased to about 10.4% in the current
quarter from 8.6% for the same period in fiscal 2006. The average borrowings
increased to approximately $13.9 million during the first half of fiscal 2007 as
compared to $13.3 million for the same period in fiscal 2006 and the interest
rate on those borrowings increased to about 10.2% during the first half of
fiscal 2007 as compared to 8.0% 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 six month periods ended November 30, 2006 was
$(223,000) and $(961,000), respectively, as compared to a net loss of $(102,000)
and $(436,000) for the same period in the prior fiscal year. The loss per share
for the three and six month periods ended November 30, 2006 was $(.02) and
$(.08), respectively. The loss per share for the three and six month periods
ended November 30, 2005 was $(.01) and $(.04), respectively.
CAPITAL RESOURCES AND LIQUIDITY
As of November 30, 2006, the Company had cash of $452,000, a decrease of
$228,000 from May 31, 2006. Operating activities used $828,000 of cash during
the first six months of the fiscal year and the Company borrowed $653,000 in
excess of its debt repayments from its line of credit. At November 30, 2006, the
Company had available borrowings on its debt facilities of approximately $2.5
million.
The Company believes its current cost structure 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 have greatly reduced our fixed costs and
resulted in positive cash flow from operations for the last four full fiscal
years. Over the six fiscal quarters beginning in June 2005 and extending through
the end of the current quarter we have generated a cash loss from operations of
more than $800,000 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. (See Note I to the Consolidated Financial
Statements.)
THE CONTINUED INTEGRATION OF WTC MAY EXPERIENCE DIFFICULTY. Since acquiring WTC
in December 2002, much progress has been made in integrating our operations and
reducing redundant functions and facilities. The strategy includes more closely
integrating our technologies and offering our combined customer base these
solutions. The strategy also includes translating ProductCenter for users other
than the U.S. English speaking market. This translation for our European
customers was completed during fiscal 2006. In addition, during 2006 interfaces
were created to proprietary CAD tools that have higher use in our European
customer base. Our plans for 2007 include leveraging that technology investment
by offering ProductCenter to our European customers based on the recent
improvements. However, there can be no assurance that this continued integration
of our technologies or offering ProductCenter outside the U.S. will be
successful.
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 2006 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 Operating 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: January 16, 2007 /s/ Joseph P. Mullaney
---------------- ----------------------
Joseph P. Mullaney
President and
Chief Operating Officer