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
August 31, 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 October 1, 2007
was 12,213,236 shares.
Form 10-QSB
Page 2
SOFTECH, INC.
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INDEX
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PART I. Financial Information Page Number
-----------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
August 31, 2007 and May 31, 2007 3
Consolidated Condensed Statements of Operations -
Three Months Ended August 31, 2007 and 2006 4
Consolidated Condensed Statements of Cash Flows -
Three Months Ended August 31, 2007 and 2006 5
Notes to Consolidated Condensed Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Operations 12-16
Item 3. Controls and Procedures 16
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
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,
2007
--------
ASSETS
------
Cash and cash equivalents $ 940
Accounts receivable, net 1,354
Prepaid and other assets 447
--------
Total current assets 2,741
--------
Property and equipment, net 207
Capitalized software costs, net 1,509
Goodwill, net 4,600
Other assets 136
--------
TOTAL ASSETS $ 9,193
========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Accounts payable $ 258
Accrued expenses 725
Deferred maintenance revenue 3,257
Current portion of capital lease 31
Current portion of long term debt 657
--------
Total current liabilities 4,928
--------
Capital lease, net of current portion 74
Long-term debt, net of current portion 12,885
--------
Total long-term liabilities 12,959
Stockholders' deficit (8,694)
--------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 9,193
========
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,
2007 2006
------------------- ------------------
Revenue
Products $ 477 $ 388
Services 2,239 2,108
------------------- ------------------
Total revenue 2,716 2,496
Cost of products sold: materials 14 6
Cost of product sold: amortization of capitalized software costs 354 354
Cost of services provided 436 394
------------------- ------------------
Gross margin 1,912 1,742
Research and development expenses 447 705
Selling, general and administrative 1,105 1,435
------------------- ------------------
Income (Loss) from operations before interest expense 360 (398)
Interest expense 359 340
------------------- ------------------
Net Income (Loss) $ 1 $ (738)
=================== ==================
Basic and diluted net loss per common share $ 0.00 $ (0.06)
Basic Weighted average common shares outstanding 12,213 12,213
Diluted Weighted average common shares outstanding 12,245 12,213
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,
2007 2006
----------- -----------
Cash flows from operating activities:
Net Income $ 1 $ (738)
----------- -----------
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Depreciation and amortization 373 367
Change in current assets and liabilities:
Accounts receivable 142 342
Prepaid expenses and other assets 29 (35)
Accounts payable and accrued expenses (186) (126)
Deferred maintenance revenue (311) (401)
----------- -----------
Total adjustments 47 147
----------- -----------
Net cash provided by (used in) by operating activities 48 (591)
---------- -----------
Cash flows used by investing activities:
Capital expenditures - (10)
---------- -----------
Net cash used by investing activities - (10)
---------- -----------
Cash flows from financing activities:
Borrowings under debt agreements - 1,000
Repayments under debt agreements (146) (675)
Repayments under capital lease (8) -
---------- -----------
Net cash (used in) provided by financing activities (154) 325
----------- -----------
Effect of exchange rates on cash (2) -
----------- -----------
Decrease in cash and cash equivalents (108) (276)
Cash and cash equivalents, beginning of period 1,048 680
----------- -----------
Cash and cash equivalents, end of period $ 940 $ 404
=========== ===========
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 2007 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 month periods ended August 31, 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 month periods ended August 31, 2007 and 2006 were $354,000.
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, 2007, 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 in the current
quarter was nominal. No stock options were granted during the period
ended August 31, 2007.
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, 2007:
WEIGHTED
WEIGHTED AVERAGE AVERAGE
EXERCISE PRICE REMAINING AGGREGATE
NUMBER OF PER CONTRACTUAL INTRINSIC
OPTIONS SHARE LIFE IN YEARS VALUE
----------- ----------- ----------- -----------
Outstanding at May
31, 2007 238,000 $ .49 4.69 $ 1,770
----------- ----------- ----------- -----------
Granted -- --
----------- ----------- ----------- -----------
Exercised -- --
----------- ----------- ----------- -----------
Forfeited or
expired --
----------- ----------- ----------- -----------
Outstanding at
August 31, 2007
238,000 $ .45 4.36 $ 3,540
----------- ----------- ----------- -----------
Exercisable at
August 31, 2007
230,800 $ .45 4.30 $ 3,540
----------- ----------- ----------- -----------
Form 10-QSB
Page 8
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
The following table summarizes the information related to non-vested
stock option awards outstanding as of August 31, 2007:
--------------------------------------------------------------------------------
WEIGHTED AVERAGE GRANT DATE
NUMBER OF OPTIONS FAIR VALUE PER SHARE
--------------------------------------------------------------------------------
Non-vested at May 31, 2007 27,200 $ .03
--------------------------------------------------------------------------------
Granted -
--------------------------------------------------------------------------------
Vested (20,000) $ .03
--------------------------------------------------------------------------------
Forfeited -
--------------------------------------------------------------------------------
Non-vested at August 31, 2007 7,200 $ .03
--------------------------------------------------------------------------------
As of August 31, 2007, the remaining prospective pre-tax cost of
non-vested stock option employee compensation was $1,000 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 intangibles (goodwill,
capitalized software and other intangible assets), deferred tax assets
and the allowance for doubtful accounts. Actual results could differ
from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS:
FIRST QUARTER DISCLOSURE FOR FIN 48
In June, 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement 109" ("FIN 48"). This statement
clarifies the criteria that an individual tax position must satisfy for
some or all of the benefits of that position to be recognized in a
company's financial statements. FIN 48 prescribes a recognition
threshold of more likely -than-not, and a measurement attribute for all
tax positions taken or expected to be taken on a tax return, in order
for those tax positions to be recognized in the financial statements.
Effective June 1, 2007, the Company has adopted the provisions of FIN
48. The Company does not expect that the amounts of unrecognized tax
benefits will change significantly within the next 12 months.
The Company is currently subject to audit by the Internal Revenue
Service for the fiscal years ended 2004, 2005 and 2006. The Company and
its Subsidiaries state income tax returns are subject to audit for the
fiscal years ended 2004, 2005 and 2006.
The Company has determined that no liability exists for interest and
penalties related to uncertain tax positions as of May 31, 2007 and
August 31, 2007. The Company accounts for interest and penalties related
to uncertain tax positions as part of its provision for federal and
state income taxes.
Form 10-QSB
Page 9
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements," which provides enhanced guidance for using fair value to
measure assets and liabilities. SFAS No. 157 establishes a common
definition of fair value, provides a framework for measuring fair value
under U.S. generally accepted accounting principles and expands
disclosure requirements about fair value measurements. SFAS No. 157 is
effective for financial statements issued in fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years.
The Company is currently evaluating the impact, if any, the adoption of
SFAS No. 157 will have on the consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Standards No.
159 ("FASB 159"), "The Fair Value Option for Financial Assets and
Financial Liabilities -- Including an Amendment of FASB Statement No.
115". This Statement provides companies with an option to measure, at
specified election dates, many financial instruments and certain other
items at fair value that are not currently measured at fair value. A
company that adopts SFAS 159 will report unrealized gains and losses on
items for which the fair value option has been elected in earnings at
each subsequent reporting date. This Statement also establishes
presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. This Statement
is effective for fiscal years beginning after November 15, 2007. The
Company does not believe that the adoption of SFAS 159 will have a
material impact on our results of operations or financial condition.
(C) LIQUIDITY
As of August 31, 2007, the Company had cash of $940,000, a decrease of
$108,000 from May 31, 2007. Operating activities generated $48,000 of
cash during the first three months of the fiscal year. At August 31,
2007, the Company had available borrowings on its debt facilities of
approximately $579,000.
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 2008. 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,
2007
-----------
Property and equipment $ 4,143
Accumulated depreciation
and amortization (3,936)
-----------
Property and equipment, net $ 207
-----------
Common stock, $.10 par value $ 1,221
Capital in excess of par value 18,037
Accumulated deficit (27,602)
Accumulated other comprehensive income (350)
-----------
Stockholders' deficit $ (8,694)
-----------
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. At
August 31, 2007 61,000 stock option shares have been excluded from the
denominator for the computation of diluted earnings per share because
their inclusion would be antidilutive. The weighted average shares
outstanding are as follows (000's):
Three Month Periods Ended
August 31,
2007 2006
------ ------
Basic weighted average shares outstanding 12,213 12,213
Incremental shares from dilutive options 32 ---
------ ------
Weighted average of diluted shares outstanding 12,245 12,213
====== ======
(F) COMPREHENSIVE INCOME/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,
2007 2006
------ ------
Net income (loss) $ 1 $ (738)
Changes in:
Foreign currency translation adjustment 1 (2)
------ ------
Comprehensive income (loss) $ 2 $ (740)
====== ======
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: 2007 2006
---------------------------------------
North America $ 2,079 $ 1,734
Asia 280 314
Europe 581 493
Eliminations (224) (45)
------- -------
Consolidated Total $ 2,716 $ 2,496
------- -------
August 31,
2007
Long Lived Assets:
North America $ 6,307
Europe 145
-------
Consolidated Total $ 6,452
-------
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
2008 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 13
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
----------------------------------------------------------
As of May 31, 2007, 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, 2007 was approximately $2.7
million as compared to approximately $2.5 million for the same periods in the
prior fiscal year. This represents an increase of 8.8% for the first quarter of
fiscal 2008.
Product revenue for the three month period ended August 31, 2007 was
approximately $477,000 as compared to $388,000 for the same period in the prior
fiscal year. This represents an increase of 22.9% for Q1 2008. The majority of
the product revenue increase for the quarter ended August 31, 2007 as compared
to the same period in fiscal 2007 was related to an increase in order flow from
the ProductCenter and Cadra product lines.
Service revenue for the three month period ended August 31, 2007 was
approximately $2.2 million as compared to approximately $2.1 million for the
same period in fiscal 2007. This represents an increase of 6.2% for Q1 2008 as
compared to the same period in fiscal 2007. The 43% increase in service revenue
was mainly attributed to ProductCenter consulting services as a result of an
increase in license sales in the U.S. and Europe as compared to the same period
in the prior fiscal year. Maintenance revenue for the three month period
increase by 2% as compared to the same period in fiscal 2007.
Revenue generated in the U.S. accounted for 77% of total revenue for the three
month period ended August 31, 2007 as compared to 69% of total revenue for the
same period in the previous year. Revenue generated in Europe for the three
month period ended August 31, 2007 was 21% of total revenue as compared to 20%
of total revenue for the same period in prior fiscal year. Revenue generated in
Asia for the three month period ended August 31, 2007 was 10% of total revenue,
as compared to 13% of total revenue for the same period in fiscal 2007. For the
three month period ended August 31, 2007 revenue changes as compared to the same
period in the prior fiscal year by geography were as follows: the U.S. increased
by about 17%, Europe increased by about 18%, and Asia decreased by about 11%." .
The increased revenue in the U.S. and Europe were primarily a result of
increased orders for our ProductCenter offering. The decrease in Asia revenue
was attributed to the timing of incoming Cadra maintenance renewals.
Form 10-QSB
Page 14
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
--------------------------------------------------
Gross margin as a percentage of revenue was 70.4% for the three month period
ended August 31, 2007, as compared to 69.8% and for the same period in fiscal
2007. The gross margin increase in Q108 compared to Q107 was due to the increase
in revenue. Total revenue increased by 8.8% in Q108 compared to Q107 and
royalties for third party products increased 6.6% when compared to the same
period in the prior year.
Research and development expenses ("R&D") were $447,000 for the three month
period ended August 31, 2007, as compared to $705,000 the same period in the
prior fiscal year. This represents a decrease of 36.6% for the three month
period ended August 31, 2007, 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. 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 $1.1 million for the
three month period ended August 31, 2007 as compared to $1.4 million for the
same period in fiscal 2007. This represents a decrease of approximately 23% for
the three month period ended August 31, 2007, as compared to the same period in
the prior fiscal year. The decrease 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 for the three month period ended August
31, 2007 and 2006.
Interest expense for the three month period ended August 31, 2007 was
approximately $359,000, as compared to $340,000 for the same period in fiscal
2007. This represents an increase of 5.6% for the first quarter of fiscal 2008
compared to the same period in the previous fiscal year. For the quarter, the
average borrowings decreased to approximately $13.5 million during the current
quarter as compared to $13.7 million for the same period in fiscal 2007 and the
interest rate on those borrowings increased to about 10.5% in the current
quarter from 10% for the same period in fiscal 2007.
The net income for the three month period ended August 31, 2007 was $1,000 as
compared to a net loss of $(738,000) for the same period in the prior fiscal
year. The earnings per share for the three month period ended August 31, 2007
was zero. The loss per share for the three month period ended August 31, 2006
was $(.06).
CAPITAL RESOURCES AND LIQUIDITY
As of August 31, 2007, the Company had cash of $940,000, a decrease of $108,000
from May 31, 2007. Operating activities generated $48,000 of cash during the
first three months of the fiscal year and debt payments under the line of credit
utilized $154,000. At August 31, 2007, the Company had available borrowings on
its debt facilities of approximately $579,000.
The Company believes its cost structure subsequent to the cost reduction actions
in the prior fiscal year together with reasonable revenue run rates based on
historical performance will generate positive cash flow during the remainder of
fiscal 2008. 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.
Form 10-QSB
Page 15
SOFTECH, INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
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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 five of our last six fiscal
years. During Q1 2008 we also generated positive cash flow and net income,
although nominal, for the first time in many years. It is our expectation that
we can continue to improve on our recent success, 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.
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. Greenleaf Capital is the company's largest
shareholder owning 44.6% and has been the company's sole debt provider since
1996. (See Note I to the Consolidated Financial Statements.)
The Company utilizes partnerships with various third party vendors and relies
upon certain of their software and utilities to continue to develop and support
ProductCenter customers with their integrations from ProductCenter to their
respective CAD solution. These agreements are subject to termination at will by
the vendor and would require the Company to seek alternative methods of
providing continuing support for its existing customers and an alternative
solution to meet the needs of prospective customers which could have a material
effect on future performance. On July 20, 2007, the Company was informed that
its agreement with one such vendor, Parametric Technology Corporation (PTC) will
not be extended beyond its renewal date of January 31, 2008. The Company is
investigating and validating viable alternatives for our current and future
customers who would require a Pro/ENGINEER integrator solution and we are also
assessing the impact that this non-renewal will have on our current and future
business. Approximately 60% of our current ProductCenter customer base utilizes
our current Pro/ENGINEER integrator solution.
Form 10-QSB
Page 16
SOFTECH, INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
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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 2008 revenue decline for these product lines continue it will
materially negatively impact the Company's overall financial performance.
ITEM 3. CONTROLS AND PROCEDURES
The Company's President and Chief Financial Officer are responsible for
establishing and maintaining disclosure controls and procedures for the Company.
Such officers have concluded (based upon thier 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 Officers also have 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
registrants have duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOFTECH, INC.
Date: October 15, 2007 /s/ Amy E. McGuire
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Amy E. McGuire
Chief Financial Officer
Date: October 15, 2007 /s/ Jean J. Croteau
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Jean J. Croteau
President