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
August 31, 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 September 30,
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 -
August 31, 2006 and May 31, 2006 3
Consolidated Condensed Statements of Operations -
Three Months Ended August 31, 2006 and 2005 4
Consolidated Condensed Statements of Cash Flows -
Three Months Ended August 31, 2006 and 2005 5
Notes to Consolidated Condensed Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Operations 13-15
Item 3. Controls and Procedures 16
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Form 10-QSB
Page 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
(dollars in thousands)
August 31, May 31,
2006 2006
-------- --------
ASSETS
------
Cash and cash equivalents $ 404 $ 680
Accounts receivable, net 1,315 1,657
Prepaid and other assets 353 317
-------- --------
Total current assets 2,072 2,654
-------- --------
Property and equipment, net 140 143
Capitalized software costs, net 2,925 3,279
Goodwill, net 4,600 4,600
Notes receivable 134 134
Other assets 2 3
-------- --------
TOTAL ASSETS $ 9,873 $ 10,813
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Accounts payable $ 286 $ 339
Accrued expenses 842 913
Deferred maintenance revenue 3,022 3,423
Current portion of long term debt 623 608
-------- --------
Total current liabilities 4,773 5,283
-------- --------
Long-term debt, net of current portion 13,257 12,947
-------- --------
Stockholders' deficit (8,157) (7,417)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 9,873 $ 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
---------------------------
August 31, August 31,
2006 2005
Revenue ---------- ---------
Products $ 388 $ 839
Services 2,108 2,229
---------- ---------
Total revenue 2,496 3,068
Cost of products sold: materials 6 58
Cost of product sold: amortization of capitalized software costs
and other intangible assets 354 610
Cost of services provided 394 400
---------- ---------
Gross margin 1,742 2,000
Research and development expenses 705 678
Selling, general and administrative 1,435 1,413
---------- ---------
Loss from operations before interest expense (398) (91)
Interest expense 340 243
---------- ---------
Net loss $ (738) $ (334)
========== =========
Basic and diluted net loss per common share $ (0.06) $ (0.03)
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 CASH FLOWS
(dollars in thousands)
Three Months Ended
------------------------
August 31, August 31,
2006 2005
Cash flows from operating activities: -------- --------
Net loss $(738) $(334)
-------- --------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 367 625
Change in current assets and liabilities:
Accounts receivable 342 (195)
Prepaid expenses and other assets (35) 48
Accounts payable and accrued expenses (126) 48
Deferred maintenance revenue (401) (347)
-------- --------
Total adjustments 147 179
-------- --------
Net cash used by operating activities (591) (155)
-------- --------
Cash flows used by investing activities:
Capital expenditures (10) (4)
-------- --------
Net cash used by investing activities (10) (4)
-------- --------
Cash flows from financing activities:
Borrowings (repayments) under line of credit agreements, net 325 (6)
-------- --------
Net cash provided (used) by financing activities 325 (6)
-------- --------
Decrease in cash and cash equivalents (276) (165)
Cash and cash equivalents, beginning of period 680 399
-------- --------
Cash and cash equivalents, end of period $ 404 $ 234
======== ========
See accompanying notes to consolidated condensed financial statements.
Form 10-QSB
Page 6
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 month periods ended August 31, 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 month periods ended August 31, 2006 and 2005 were $354,000 and
$610,000, respectively.
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 7
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
SFAS 123R 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. For the first quarter of
fiscal 2005, 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, the Company's net loss and loss per share would have approximated
the pro forma amounts indicated below:
Three Month Periods
(in thousands, except per share data) Ended August 31, 2005
-----------------------------------------------------------------------
Net loss - as reported $(334)
Stock-based compensation expense determined
under fair value based method (1)
-----
Net loss - pro forma (335)
=====
Loss per share - diluted - as reported (.03)
Loss per share - diluted - pro forma (.03)
Form 10-QSB
Page 8
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
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 August 31, 2006:
WEIGHTED
AVERAGE
WEIGHTED AVERAGE REMAINING
EXERCISE PRICE CONTRACTUAL AGGREGATE
NUMBER OF OPTIONS PER SHARE LIFE IN YEARS INTRINSIC VALUE
----------------- --------- ------------- ---------------
Outstanding at May
31, 2006 323,000 $ .58
Granted - -
Exercised - -
Forfeited or
expired (15,000) $ .16
-------
Outstanding at
August 31, 2006 308,000 $ .60 4.67 $150,165
-------
Exercisable at
August 31, 2006 271,200 $ .88 4.45 $148,892
The following table summarizes the information related to non-vested
stock option awards outstanding as of August 31, 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 - -
-------
Non-vested at August 31, 2006 36,800 $ .03
As of August 31, 2006, the remaining prospective pre-tax cost of
non-vested stock option employee compensation was $1,255 which will be
expensed on a pro rata basis going forward.
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
Form 10-QSB
Page 9
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
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 August 31, 2006, the Company had cash of $404,000, a decrease of
$276,000 from May 31, 2006. Operating activities used $591,000 of cash
during the first three months of the fiscal year and the Company
borrowed $325,000 in excess of its debt repayments from its line of
credit. At August 31, 2006, the Company had available borrowings on its
debt facilities of approximately $2.8 million.
In September 2006 the Company implemented a cost reduction program to
reduce its quarterly cash expenses to approximately $2.5 million. These
reductions were focused primarily in the European sales offices and the
legacy technology offerings. We expect to incur an expense of
approximately $300,000 related to these actions in September.
The Company believes its cost structure subsequent to these cost
reduction actions 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):
August 31, May 31,
2006 2006
-------- --------
Property and equipment $ 3,995 $ 3,985
Accumulated depreciation
and amortization (3,855) (3,842)
-------- --------
Property and equipment, net $ 140 $ 143
-------- --------
Common stock, $.10 par value $ 1,221 $ 1,221
Capital in excess of par value 18,037 18,037
Accumulated deficit (27,119) (26,381)
Accumulated other comprehensive income (296) (294)
-------- --------
Stockholders' deficit $ (8,157) $ (7,417)
-------- --------
Form 10-QSB
Page 10
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 Month Periods
Ended August 31,
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 August 31,
2006 2005
----- -----
Net loss $(738) $(334)
Changes in:
Foreign currency translation adjustment (2) 4
----- -----
Comprehensive loss $(740) $(330)
===== =====
Form 10-QSB
Page 11
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
August 31, August 31,
Revenue: 2006 2005
-----------------------------------------------
North America $ 1,734 $ 2,340
Asia 314 264
Europe 493 510
Eliminations (45) (46)
------- -------
Consolidated Total $ 2,496 $ 3,068
------- -------
August 31, May 31,
2006 2006
Long Lived Assets:
-----------------------------------------------
North America $7,555 $8,004
Europe 106 155
------ ------
Consolidated Total $7,661 $8,159
------ ------
Form 10-QSB
Page 12
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 13
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 month period ended August 31, 2006 was about $2.5 million
as compared to $3.1 million for the same period in the prior fiscal year, a
decrease of $572,000 or about 19%. Product revenue for the quarter ended August
31, 2006 was $388,000 as compared to $839,000 for the same period in the prior
fiscal year, a decrease of $451,000 or 54%. Service revenue for the quarter
ended August 31, 2006 was about $2.1 million as compared to about $2.2 million
for the same period in fiscal 2006, a decrease of about $121,000 or 5%.
The product revenue decrease of $451,000 in the current quarter as compared to
the same period in fiscal 2006 was primarily due to a decrease of 84% in our
ProductCenter technology offering. The sales cycle for this product line is
often in excess of a year and the final decision prior to the issuance of a
purchase order is often extended beyond the expected date. It is our opinion
based on pre-sale activity and identified qualified sales leads, that this
quarter's product revenue for our ProductCenter technology offering is the
result of delays in the decision making rather than an indication of future
performance.
The service revenue decline of about 5% in the current quarter as compared to
the same period in fiscal 2006 was due to a decline of about 10% in our
maintenance revenue that was partially offset by a 29% increase in our
consulting revenue. The decrease in our maintenance revenue was the result of
our lower than normal product revenue performance for ProductCenter and
continued weakness in renewal rates for our legacy technologies. The increase in
our consulting revenue was due to the availability of consultants to be deployed
on billable projects given the lower than normal pre-sale activity.
Gross margin as a percentage of revenue was 69.8% for the quarter ended August
31, 2006 as compared to 65.2% for the quarter ended August 31, 2005. Product
gross margin was 7.2% for the current quarter as compared to 20.4% for the same
period in fiscal 2006. The reduced product gross margin is due to a 54% decrease
in product revenue offset by a reduction in amortization expense of 42%. Gross
margin on service revenue was 81.3% in Q1 fiscal 2007 as compared to 82.1% in
the same period in fiscal 2006.
Research and development expenses ("R&D") increased by about 4% for Q1 fiscal
2007 as compared to the same period in fiscal 2006. The increased spending in
fiscal 2007 is due primarily to additional resources aimed at increasing the
applicability of our ProductCenter technology to new markets. Our R&D spending
as a percentage of revenue was 28.2% in Q1 FY2007 as compared to 22.1% for the
same period last year primarily as a result of the decrease in revenue.
Form 10-QSB
Page 14
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
--------------------------------------------------
Selling, general and administrative ("SG&A") expense was $1.4 million for the
three month period ended August 31, 2006 and 2005. The majority of the Company's
SG&A expenses are fixed costs and therefore do not fluctuate materially with the
decrease in revenue. SG&A as a percentage of revenue increased to 57.5% in the
current quarter as compared to 46.1% in the same period last year due to the
reduced revenue.
The non-cash expenses related to the amortization of capitalized software and
other intangible assets was $354,000 for the quarter ended August 31, 2006 as
compared to $610,000 for the same period in fiscal 2006. This decrease was the
result of the intangible assets relating to the acquisition of WTC in fiscal
2002 being fully amortized in the second quarter of the prior year.
Interest expense for the three month period ended August 31, 2006 was
approximately $340,000 as compared to $243,000 for the same period in fiscal
2006. The average borrowings increased to approximately $13.7 million during the
current quarter as compared to $13.2 million for the same period in fiscal 2005
and the interest rate on those borrowings increased to about 10% in the current
quarter from 7.4% for the same period in fiscal 2006.
The net loss for the three month period ended August 31, 2006 was $738,000 as
compared to a net loss of $334,000 for the same period in the prior fiscal year.
The loss per share for the three month periods ended August 31, 2006 and 2005
was $(.06) and $(.03), respectively.
CAPITAL RESOURCES AND LIQUIDITY
-------------------------------
As of August 31, 2006, the Company had cash of $404,000, a decrease of $276,000
from May 31, 2006. Operating activities used $591,000 of cash during the first
three months of the fiscal year and the Company borrowed $325,000 in excess of
its debt repayments from its line of credit. At August 31, 2006, the Company had
available borrowings on its debt facilities of approximately $2.8 million.
In September 2006 the Company implemented a cost reduction program to reduce its
quarterly cash expenses to approximately $2.5 million. These reductions were
focused primarily in the European sales offices and the legacy technology
offerings. We expect to incur an expense of approximately $300,000 related to
these actions in September.
The Company believes its cost structure subsequent to these cost reduction
actions 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.
Form 10-QSB
Page 15
SOFTECH, INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
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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 five fiscal quarters beginning in June 2005 and extending
through the end of the current quarter, we have generated a cash loss from
operations of nearly $600,000 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 in fiscal
2006. 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.
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 Product Center 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
negatively impact the Company's overall financial performance.
Form 10-QSB
Page 16
SOFTECH, INC. AND SUBSIDIARIES
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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
The Company filed a Form 8-K on August 30, 2006 related to its press
release announcing fourth quarter results for fiscal 2006 and a Form 8-K
on August 15, 2006 announcing the resignation of a member of its Board
of Directors.
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: OCTOBER 16, 2006 /S/ JOSEPH P. MULLANEY
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Joseph P. Mullaney
President and
Chief Operating Officer