Form 10-QSB
Page 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------
For the Quarter Ended Commission File Number
February 28, 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 March 31, 2006
was 12,205,236 shares.
Form 10-QSB
Page 2
SOFTECH, INC.
INDEX
PART I. Financial Information Page Number
-----------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
February 28, 2006 and May 31, 2005 3
Consolidated Condensed Statements of Operations -
Three Months Ended February 28, 2006 and 2005 4
Consolidated Condensed Statements of Operations -
Nine Months Ended February 28, 2006 and 2005 5
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended February 28, 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)
February 28, May 31,
2006 2005
------------- -------------
ASSETS
------
Cash and cash equivalents $ 276 $ 399
Accounts receivable, net 2,634 1,618
Prepaid and other assets 240 346
------------- -------------
Total current assets 3,150 2,363
------------- -------------
Property and equipment, net 144 165
Capitalized software costs, net 3,633 4,968
Other intangible assets, net - 183
Goodwill, net 4,598 4,598
Notes receivable 134 134
Other assets 3 5
------------- -------------
TOTAL ASSETS $ 11,662 $ 12,416
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Accounts payable $ 333 $ 213
Accrued expenses 1,096 1,058
Deferred maintenance revenue 3,758 4,019
Current portion of long term debt 1,416 1,416
------------- -------------
Total current liabilities 6,603 6,706
------------- -------------
Long-term debt, net of current portion 12,142 11,785
------------- -------------
Stockholders' deficit (7,083) (6,075)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 11,662 $ 12,416
============= =============
See accompanying notes to consolidated condensed financial statements.
Form 10-QSB
Page 4
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
Three Months Ended
-----------------------------------------
February 28, February 28,
2006 2005
--------------- ---------------
Revenue
Products $ 887 $ 770
Services 2,037 2,240
--------------- ---------------
Total revenue 2,924 3,010
Cost of products sold: materials 29 27
Cost of product sold: amortization of capitalized software costs
and other intangible assets 354 611
Cost of services provided 403 433
--------------- ---------------
Gross margin 2,138 1,939
Research and development expenses 742 712
Selling, general and administrative 1,656 1,405
--------------- ---------------
Loss from operations before interest expense (260) (178)
Interest expense 321 216
--------------- ---------------
Net loss $ (581) $ (394)
=============== ===============
Basic and diluted net loss per common share $ (0.05) $ (0.03)
Weighted average common shares outstanding 12,205 12,205
See accompanying notes to consolidated condensed financial statements.
Form 10-QSB
Page 5
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
Nine Months Ended
-----------------------------------------
February 28, February 28,
2006 2005
--------------- ---------------
Revenue
Products $ 2,604 $ 1,875
Services 6,779 7,133
--------------- ---------------
Total revenue 9,383 9,008
Cost of products sold: materials 155 54
Cost of product sold: amortization of capitalized software costs
and other intangible assets 1,518 1,832
Cost of services provided 1,184 1,231
--------------- ---------------
Gross margin 6,526 5,891
Research and development expenses 2,112 2,064
Selling, general and administrative 4,581 4,088
--------------- ---------------
Loss from operations before interest expense (167) (261)
Interest expense 850 682
--------------- ---------------
Net loss $ (1,017) $ (943)
=============== ===============
Basic and diluted net loss per common share $ (0.08) $ (0.08)
Weighted average common shares outstanding 12,205 12,205
See accompanying notes to consolidated condensed financial statements.
Form 10-QSB
Page 6
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Nine Months Ended
---------------------------------
February 28, February 28,
2006 2005
-------------- --------------
Cash flows from operating activities:
Net loss $ (1,017) $ (943)
-------------- --------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 1,566 1,901
Change in current assets and liabilities:
Accounts receivable (1,016) 307
Prepaid expenses and other assets 108 15
Accounts payable and accrued expenses 158 (281)
Deferred maintenance revenue (261) 269
-------------- --------------
Total adjustments 555 2,211
-------------- --------------
Net cash (used) provided by operating activities (462) 1,268
-------------- --------------
Cash flows used by investing activities:
Payments for business acquisition, net of cash acquired - (189)
Capital expenditures (27) (44)
-------------- --------------
Net cash used by investing activities (27) (233)
-------------- --------------
Cash flows from financing activities:
Borrowings (repayments) under line of credit agreements, net 357 (127)
-------------- --------------
Net cash provided (used) by financing activities 357 (127)
-------------- --------------
Effect of exchange rates on cash 9 -
-------------- --------------
(Decrease) increase in cash and cash equivalents (123) 908
Cash and cash equivalents, beginning of period 399 275
-------------- --------------
Cash and cash equivalents, end of period $ 276 $ 1,183
============== ==============
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 2005 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 or nine month periods ended February 28, 2006 or 2005.
Substantially all of the recorded balance represents software acquired
from third parties. Amortization expense related to capitalized software
costs for the three and nine month periods ended February 28, 2006 were
$354,000 and $1,518,000, respectively. Amortization expense related to
capitalized software costs for the three and nine month periods ended
February 28, 2005 were $611,000 and $1,832,000, 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, 2005, 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
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
in accounting for its stock option plans. Because the number of shares
is known and the exercise price of options granted has been equal to
fair value at date of grant, no compensation expense has been recognized
in the statements of operations. The Company has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" and SFAS No. 148 "Accounting for Stock-Based Compensation
- An Amendment of SFAS No. 123." 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 Ended February 28,
(in thousands, except per share data) 2006 2005
--------------------------------------------------------------------------------------------
Net loss - as reported $ (581) $ (394)
Stock based compensation determined under
fair value based method (1) (3)
------- -------
Net loss - pro forma (582) (397)
Loss per share - diluted - as reported (.05) (.03)
Loss per share - diluted - pro forma (.05) (.03)
Nine Month Periods Ended February 28,
(in thousands, except per share data) 2006 2005
--------------------------------------------------------------------------------------------
Net loss - as reported $ (1,017) $ (943)
Stock based compensation determined under
fair value based method (3) (8)
--------- -------
Net loss - pro forma (1,020) (951)
Loss per share - diluted - as reported (. 08) (.08)
Loss per share - diluted - pro forma (.08) (.08)
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123R, "Share-Based
Payment," which is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation". SFAS No. 123(R) supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees", and amends SFAS No. 95,
"Statement of Cash Flows". Generally, the approach in SFAS No. 123(R) is
similar to the approach described in SFAS No. 123. However, SFAS No.
123(R) requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income statement
based on their fair values. Pro forma disclosure is no longer an
alternative. SFAS No. 123(R) is effective for public companies that file
as small business issuers for annual periods beginning after June 15,
2005; accordingly, the Company will adopt SFAS 123(R) on June 1, 2006.
The Company is currently evaluating the impact that this statement will
have on its financial condition or results of operations.
Form 10-QSB
Page 9
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.
RECLASSIFACATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation. Specifically, amortization of capitalized
software and other intangible assets totaling $611,000 and $1,832,000
for the three and nine month periods ended February 28, 2005,
respectively, were classified on the face of the income statement as a
separate line item under operating expenses. This non-cash expense
resulting from acquisitions was reclassified to cost of products sold in
these financial statements. This reclassification had no impact on the
net loss or cash flow reported.
(C) LIQUIDITY
As of February 28, 2006, the Company had cash of $276,000, a decrease of
$123,000 from May 31, 2005. Operating activities used $462,000 of cash
during the first nine months of the fiscal year. The net loss adjusted
for non-cash expenditures related to amortization and depreciation
together with a decrease in prepaid and other assets and an increase in
accounts payable and accrued expenses generated cash of about $815,000.
The increase in accounts receivable and the decrease in deferred
maintenance revenue used $1,277,000. During the first nine months of
fiscal 2006 the Company borrowed $357,000 in excess of its debt
repayments from its line of credit and purchased approximately $27,000
of capital equipment.
The Company believes its current cost structure together with reasonable
revenue run rates based on historical performance will generate positive
cash flow in fiscal 2006. 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. At February 28, 2006, the
Company had available borrowings on its debt facilities of approximately
$3.1 million.
Form 10-QSB
Page 10
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(D) BALANCE SHEET COMPONENTS
Details of certain balance sheet captions are as follows (000's):
February 28, May 31,
2006 2005
-------------- --------------
Property and equipment $ 3,961 $ 3,934
Accumulated depreciation
and amortization
(3,817) (3,769)
-------------- --------------
Property and equipment, net $ 144 $ 165
-------------- --------------
Common stock, $.10 par value $ 1,274 $ 1,274
Capital in excess of par value 19,544 19,544
Accumulated deficit (26,066) (25,049)
Accumulated other comprehensive income (274) (283)
Less treasury stock (1,561) (1,561)
-------------- --------------
Stockholders' deficit $ (7,083) $ (6,075)
-------------- --------------
(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 2006 and 2005 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 and Nine Month Periods
Ended February 28,
2006 2005
-------------- --------------
Basic weighted average shares outstanding 12,205 12,205
Effect of employee stock options outstanding --- ---
-------------- --------------
12,205 12,205
============== ==============
Form 10-QSB
Page 11
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(F) COMPREHENSIVE LOSS
The Company's comprehensive loss includes accumulated foreign currency
translation adjustments and was as follows (000's):
Three Month Periods Ended February 28,
2006 2005
-------------- -------------
Net loss $ (581) $ (394)
Changes in:
Foreign currency translation adjustment 4 (18)
------- -------
Comprehensive loss $ (577) $ (412)
======= =======
Nine Month Periods Ended February 28,
2006 2005
-------------- -------------
Net loss $ (1,017) $ (943)
Changes in:
Foreign currency translation adjustment 9 (28)
-------- -------
Comprehensive loss $ (1,008) $ (971)
======== =======
(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 Month Periods Ended February 28,
Revenue: 2006 2005
-------------------------------------------
North America $ 2,269 $ 2,294
Asia 236 306
Europe 436 642
Eliminations (17) (232)
------- -------
Consolidated Total $ 2,924 $ 3,010
------- -------
Nine Month Periods Ended February 28,
Revenue: 2006 2005
-------------------------------------------
North America $ 7,106 $ 6,569
Asia 813 849
Europe 1,733 1,890
Eliminations (269) (300)
------- -------
Consolidated Total $ 9,383 $ 9,008
------- -------
Form 10-QSB
Page 12
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
February 28, May 31,
2006 2005
Long Lived Assets:
----------------------------------------
North America $ 8,367 $ 9,901
Europe 145 152
------- --------
Consolidated Total $ 8,512 $ 10,053
------- --------
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 2006 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, 2005, the Company conducted its annual impairment test of goodwill
by comparing fair value to the carrying amount of its underlying assets and
liabilities. The Company determined that the fair value exceeded the carrying
amount of the assets and liabilities, therefore no impairment existed as of the
testing date.
ESTIMATING ALLOWANCES FOR DOUBTFUL ACCOUNTS RECEIVABLE
We perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current credit worthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past. A significant change in the liquidity or
financial position of any of our significant customers could have a material
adverse effect on the collectibility of our accounts receivable and our future
operating results.
VALUATION OF DEFERRED TAX ASSETS
We regularly evaluate our ability to recover the reported amount of our deferred
income taxes considering several factors, including our estimate of the
likelihood of the Company generating sufficient taxable income in future years
during the period over which temporary differences reverse. The Company's
deferred tax assets are currently fully reserved.
RESULTS OF OPERATIONS
Revenue for the three and nine month periods ended February 28, 2006 was $2.9
million and $9.4 million, respectively, as compared to $3.0 million and $9.0
million for the same periods in the prior fiscal year. This represents a
decrease of 2.9% for fiscal 2006 Q3 and an increase of 4.2% for the first nine
months of fiscal 2006 as compared to the same periods in fiscal 2005. Increases
in product revenue for the three and nine month periods ended February 28, 2006
as compared to the same periods in fiscal 2005 offset decreases in our service
revenue.
Product revenue for the three and nine month periods ended February 28, 2006 was
approximately $887,000 and $2.6 million, respectively, as compared to $770,000
and $1.9 million for the same periods in the prior fiscal year. This represents
an increase of 15.2% for fiscal 2006 Q3 and 38.9 % for the first nine months of
fiscal 2006 as compared to the same periods in fiscal 2005. Product revenue from
our ProductCenter offering more than doubled for both the three and nine month
periods ended February 28, 2006 from the comparable periods in fiscal 2005 and
more than offset declines in product revenue from our Cadra and AMT technology
offerings.
Service revenue for the three and nine month periods ended February 28, 2006 was
approximately $2.0 million and $6.8 million, respectively, as compared to
approximately $2.2 million and $7.1 million for the same period in fiscal 2005.
This represents a decrease of 9.1% for fiscal 2006 Q3 as compared to the same
period in fiscal 2005 and a decrease of 5.0% for the first nine months of fiscal
2006 compared to the same period in fiscal 2005. Service revenue is composed of
software maintenance revenue and consulting/training revenue.
Maintenance revenue decreased by $99,000 and $103,000 for the three and nine
months ended February 28, 2006 as compared to the same periods in fiscal 2005.
For the three months ended February 28, 2006, maintenance revenue increased for
our ProductCenter offering by $124,000 but that increase was offset by declines
in our maintenance revenue generated from our Cadra and AMT product lines. For
the nine months ended February 28, 2006, maintenance revenue increased for our
ProductCenter offering by $429,000 but that increase was offset by declines in
our maintenance revenue generated from our Cadra and AMT product lines.
Maintenance revenue from our ProductCenter offering has experienced growth due
to our success in the last two years in winning new customers and maintaining
our renewal rates. Our Cadra and AMT maintenance renewal rates have declined in
fiscal 2006 as compared to 2005.
Form 10-QSB
Page 15
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Our consulting/training revenue for the three and nine month periods ended
February 28, 2006 declined by $105,000 and $214,000, respectively, as compared
to the same periods in fiscal 2005. These declines were related to completion of
a large project in fiscal 2005 that was not replaced entirely with new
consulting activity in fiscal 2006.
Revenue generated in the U.S. accounted for 78% and 76% of total revenue for the
three and nine month periods ended February 28, 2006, respectively, as compared
to 76% and 73% of total revenue for the same periods in the previous year.
Revenue generated in Europe for the three and nine month periods ended February
28, 2006 was 15% and 18% of total revenue, respectively, as compared to 21% of
total revenue for both the three and nine month periods in fiscal 2005. Revenue
generated in Asia for the three and nine month periods ended was February 28,
2006 8% and 9% of total revenue, respectively, as compared to 10% and 9% of
total revenue for the same period in fiscal 2005. The Cadra product line is the
primary revenue source for both Europe and Asia. The decline in revenue in the
three and nine month periods ended February 28, 2006 as compared to the same
periods in fiscal 2005 is a result of lower product revenue and maintenance
renewal rates for that legacy product line.
Gross margin as a percentage of revenue was 73.1% and 69.6 % for the three and
nine month periods ended February 28, 2006, respectively, as compared to 64.4%
and 65.4% for the same periods in fiscal 2005. The improvement in gross margin
as a percentage of revenue is due to a decrease in amortization expense.
The non-cash expenses related to the amortization of capitalized software and
other intangible assets were $354,000 and $1.518 million for the three and nine
month periods ended February 28, 2006 as compared to $611,000 and $1.832 million
for the same periods in fiscal 2005. The decrease is related to the completion
of the amortization related to the intangible assets acquired in the acquisition
of WTC in December 2002.
Research and development expenses ("R&D") were $742,000 and $2.12 million for
the three and nine month periods ended February 28, 2006, respectively, as
compared to $712,000 and $2.064 million for the same periods in the prior fiscal
year. This represents an increase of 4.2% and 2.3% for the three and nine month
periods ended February 28, 2006, respectively, as compared to the same period in
the prior fiscal year. Increases in headcount directed towards adding
functionality to our ProductCenter offering is responsible for all of the
increased R&D spending.
Selling, general and administrative ("SG&A") expenses were $1.66 million and
$4.58 million, respectively, for the three and nine month periods ended February
28, 2006 as compared to $1.41 million and $4.09 million for the same period in
fiscal 2005. This represents an increase of approximately 17.9% and 12.1% for
the three and nine month periods ended February 28, 2006, respectively, as
compared to the same periods in the prior fiscal year. The increase for both
periods is due primarily to increased sales and sales support headcount, higher
commissions related to the increased product revenue and additional spending on
advertising and other market outreach initiatives aimed at our ProductCenter
technology offering.
Interest expense for the three and nine month periods ended February 28, 2006
was approximately $321,000 and $850,000, respectively, as compared to $216,000
and $682,000 for the same periods in fiscal 2005. This represents an increase of
48.6% for the third quarter of fiscal 2006 compared to the same period in the
previous fiscal year and an increase of 24.6% for the nine month period ended
February 28, 2006 compared to the same period in the prior fiscal year. The
average borrowings decreased to approximately $13.5 million during the current
quarter as compared to $14.2 million for the same period in fiscal 2005,
however, the interest rate on those borrowings increased to 9.5% in the current
quarter from 6.1% for the same period in fiscal 2005. The average borrowings
decreased to approximately $13.4 million during the first half of fiscal 2006 as
compared to $14.2 million for the same period in fiscal 2005, however, the
interest rate on those borrowings increased to about 8.5% during the first nine
months of fiscal 2006 as compared to 6.4% for the same period in fiscal 2005.
The changes in the interest rate on our borrowings in fiscal 2006 as compared to
2005 are due to the increase in the prime rate, on which our interest rate is
based.
The net loss for the three and nine month periods ended February 28, 2006 was
$(581,000) and $(1,017,000), respectively, as compared to a net loss of
$(394,000) and $(943,000) for the same period in the prior fiscal year. The loss
per share for each of the three and nine month periods ended February
Form 10-QSB
Page 16
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
28, 2006 was $(.05) and $(.08) respectively. The loss per share for each of the
three and nine month periods ended February 28, 2005 was $(.03) and $(.08)
respectively.
CAPITAL RESOURCES AND LIQUIDITY
As of February 28, 2006, the Company had cash of $276,000, a decrease of
$123,000 from May 31, 2005. Operating activities used $462,000 of cash during
the first nine months of the fiscal year. The net loss adjusted for non-cash
expenditures related to amortization and depreciation together with a decrease
in prepaid and other assets and an increase in accounts payable and accrued
expenses generated cash of about $815,000. The increase in accounts receivable
and the decrease in deferred maintenance revenue used $1,277,000. During the
first nine months of fiscal 2006 the Company borrowed $357,000 in excess of its
debt repayments from its line of credit and purchased approximately $27,000 of
capital equipment.
The Company believes its current cost structure together with reasonable revenue
run rates based on historical performance will generate positive cash flow in
fiscal 2006. 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. At February 28, 2006, the Company had available borrowings on its debt
facilities of approximately $3.1 million.
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. 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.
Form 10-QSB
Page 17
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
THE COMPANY IS DEPENDENT ON ITS LENDER FOR CONTINUED SUPPORT. We have a very
strong relationship with our sole lender, Greenleaf Capital. They currently
represent our sole source of financing and it is our belief that it would be
difficult to find alternative financing sources in the event whereby the
relationship with Greenleaf changed.
THE CONTINUED INTEGRATION OF WTC MAY EXPERIENCE DIFFICULTY. Since acquiring WTC
in December 2002, much progress has been made in integrating our operations,
reducing redundant functions and consolidating our 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. There can
be no assurance that this continued integration of our technologies or offering
ProductCenter outside the U.S. will be successful.
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
The Company filed a Form 8-K on January 17, 2006 related to its press
release announcing second quarter results for fiscal 2006.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOFTECH, INC.
Date: April 14, 2006 /s/ Joseph P. Mullaney
----------------------- -----------------------------
Joseph P. Mullaney
President and
Chief Operating Officer