SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
__________________
For the Quarter Ended |
| Commission File Number |
November 30, 2008 |
| 0-10665 |
SOFTECH, INC.
State of Incorporation |
| IRS Employer Identification |
Massachusetts |
| 04-2453033 |
59 Composite Way Suite 401, Lowell, MA 01851
Telephone (978) 513-2700
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. YesS No£
The number of shares outstanding of registrant’s common stock at January 2, 2008 was 12,213,236 shares.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer £ Accelerated filer £ Non-accelerated filer £ Smaller reporting company S
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes £ No S
SOFTECH, INC.
INDEX
PART I. | Financial Information | Page Number |
|
|
|
Item 1. | Financial Statements |
|
|
|
|
| Consolidated Condensed Balance Sheets – November 30, 2008 and May 31, 2008 | 3 |
|
|
|
| Consolidated Condensed Statements of Operations – Three Months Ended November 30, 2008 and 2007 | 4 |
| ||
|
|
|
| Consolidated Condensed Statements of Operations – Six Months Ended November 30, 2008 and 2007 | 5 |
|
|
|
| Consolidated Condensed Statements of Cash Flows – Six Months Ended November 30, 2008 and 2007 | 6 |
|
|
|
| Notes to Consolidated Condensed Financial Statements | 7-13 |
|
|
|
Item 2. | Management’s Discussion and Analysis of Financial Condition |
|
| and Results of Operations | 14-18 |
|
|
|
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 18 |
|
|
|
Item 4T. | Controls and Procedures | 19 |
|
|
|
PART II. | Other Information |
|
|
|
|
Item 1. | Legal Proceedings | 19 |
|
|
|
Item 1A. | Risk Factors | 19 |
|
|
|
Item 2. | Unregistered Sales of Equity Securities and Use of proceeds | 19 |
|
|
|
Item 3. | Defaults on Senior Securities | 19 |
|
|
|
Item 4. | Submission of Matters to a Vote of Security Holders | 19 |
|
|
|
Item 5. | Other Information | 19 |
|
|
|
Item 6. | Exhibits | 20 |
2
FINANCIAL STATEMENTS | ||||
SOFTECH, INC. AND SUBSIDIARIES | ||||
CONSOLIDATED CONDENSED BALANCE SHEETS | ||||
|
|
|
|
|
|
| (dollars in thousands) (unaudited) | ||
|
| November 30, |
| May 31, |
|
| 2008 |
| 2008 |
ASSETS |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 536 | $ | 900 |
Accounts receivable, net |
| 964 |
| 1,405 |
Prepaid and other assets |
| 528 |
| 475 |
Total current assets |
| 2,028 |
| 2,780 |
|
|
|
|
|
Property and equipment, net |
| 155 |
| 157 |
Capitalized software costs, net |
| 316 |
| 517 |
Goodwill |
| 4,603 |
| 4,618 |
Other assets |
| 136 |
| 137 |
|
|
|
|
|
TOTAL ASSETS | $ | 7,238 | $ | 8,209 |
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT |
|
|
|
|
|
|
|
|
|
Accounts payable | $ | 489 | $ | 368 |
Accrued expenses |
| 719 |
| 784 |
Deferred maintenance revenue |
| 2,317 |
| 3,341 |
Current portion of capital lease |
| 31 |
| 31 |
Current portion of long term debt |
| 1,829 |
| 1,646 |
|
|
|
|
|
Total current liabilities |
| 5,232 |
| 6,170 |
|
|
|
|
|
Capital lease, net of current portion |
| 35 |
| 51 |
Long-term debt, net of current portion |
| 10,101 |
| 11,091 |
|
|
|
|
|
Total long-term liabilities |
| 10,289 |
| 11,142 |
|
|
|
|
|
Stockholders' deficit |
| (8,283) |
| (9,103) |
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 7,238 | $ | 8,209 |
|
|
|
|
|
See accompanying notes to consolidated condensed financial statements. | ||||
3
4
SOFTECH, INC. AND SUBSIDIARIES | ||||
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS | ||||
| ||||
|
| (in thousands, except for per share data) | ||
|
| Six Months Ended | ||
|
| (unaudited) | ||
|
| November 30, |
| November 30, |
|
| 2008 |
| 2007 |
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
Products | $ | 1,090 | $ | 948 |
Services |
| 3,937 |
| 4,261 |
|
|
|
|
|
Total revenue |
| 5,027 |
| 5,209 |
|
|
|
|
|
Cost of products sold: materials |
| 30 |
| 32 |
Cost of product sold: amortization of capitalized software costs |
|
|
|
|
and other intangible assets |
| 203 |
| 708 |
Cost of services provided |
| 735 |
| 851 |
|
|
|
|
|
Gross margin |
| 4,059 |
| 3,618 |
|
|
|
|
|
Research and development expenses |
| 904 |
| 907 |
Selling, general and administrative |
| 1,856 |
| 2,224 |
|
|
|
|
|
Income from operations |
| 1,299 |
| 487 |
|
|
|
|
|
Other expense |
| 79 |
| - |
Interest expense |
| 453 |
| 704 |
|
|
|
|
|
Net income (loss) | $ | 767 | $ | (217) |
|
|
|
|
|
Basic and diluted net income (loss) per common share | $ | 0.06 | $ | (0.02) |
Weighted average common shares outstanding-basic |
| 12,213 |
| 12,213 |
Weighted average common shares outstanding-diluted |
| 12,213 |
| 12,213 |
| ||||
See accompanying notes to consolidated condensed financial statements. | ||||
5
SOFTECH, INC. AND SUBSIDIARIES | ||||
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS | ||||
|
|
| ||
|
| (dollars in thousands) | ||
|
| Six Months Ended | ||
|
| (unaudited) | ||
|
| November 30, |
| November 30, |
|
| 2008 |
| 2007 |
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
Net income (loss) | $ | 767 | $ | (217) |
|
|
|
|
|
Adjustments to reconcile net loss to |
|
|
|
|
net cash used by operating activities: |
|
|
|
|
Depreciation and amortization |
| 231 |
| 743 |
Provision for uncollectable accounts |
| 25 |
| - |
Change in current assets and liabilities: |
|
|
|
|
Accounts receivable |
| 416 |
| 379 |
Prepaid expenses and other assets |
| (52) |
| (78) |
Accounts payable and accrued expenses |
| 56 |
| (114) |
Deferred maintenance revenue |
| (1,024) |
| (948) |
|
|
|
|
|
Total adjustments |
| (348) |
| (18) |
|
|
|
|
|
Net cash provided by (used in) operating activities |
| 419 |
| (235) |
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
Capital expenditures |
| (33) |
| - |
|
|
|
|
|
Net cash used in investing activities |
| (33) |
| - |
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
Repayments under debt agreements |
| (807) |
| (304) |
Repayments under capital lease |
| (16) |
| (16) |
|
|
|
|
|
Net cash used in financing activities |
| (823) |
| (320) |
|
|
|
|
|
Effect of exchange rates on cash |
| 73 |
| (49) |
|
|
|
|
|
Decrease in cash and cash equivalents |
| (364) |
| (604) |
|
|
|
|
|
Cash and cash equivalents, beginning of period |
| 900 |
| 1,048 |
|
|
|
|
|
Cash and cash equivalents, end of period | $ | 536 | $ | 444 |
|
|
|
|
|
See accompanying notes to consolidated condensed financial statements. | ||||
6
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
(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 2008 Annual Report on Form 10-K, as amended.
(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 collectability 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 tho se 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 of capitalized costs 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 November 30, 2008 and 2007. Substantially all of the recorded balance in Capitalized Software Costs, net, represents software acquired from third parties. Amortization expenses related to capitalized software costs for the three months ended November 30, 2008 and 2007 were $101,000 and $3 54,000, respectively.
ACCOUNTING FOR GOODWILL
The Company follows the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”, which 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 are amortized over such useful lives.
As of May 31, 2008, 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.
7
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
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 six month period ended November 30, 2008.
The Company’s 1994 Stock Option Plan provided for the granting of stock options at an exercise price not less than fair market value of the stock on the date of the grant and with vesting schedules as determined by the Board of Directors. No new options could be granted under the Plan after fiscal 2004 but options granted prior to that time continue to vest.
The following table summarizes information for stock options outstanding and exercisable at November 30, 2008:
| Number of Options | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Life in Years | Aggregate Intrinsic Value |
Outstanding at May 31, 2008 | 229,000 | $ .28 | 3.73 | $10,860 |
Granted | - | - | - | - |
Exercised | - | - | - | - |
Forfeited or expired | - | - | - | - |
Outstanding at November 30, 2008 | 229,000 | $.28 | 3.26 | - |
Exercisable at November 30, 2008 | 226,600 | $.28 | 3.23 | - |
8
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
The following table summarizes the information related to non-vested stock option awards outstanding as of November 30, 2008:
| Number of Options | Weighted Average Grant Date Fair Value Per Share |
Non-vested at May 31, 2008 | 2,400 | $ .04 |
Granted | - | - |
Vested | - | - |
Forfeited | - | - |
Non-vested at November 30, 2008 | 2,400 | $ .04 |
As of November 30, 2008, the remaining prospective pre-tax cost of non-vested stock option employee compensation is nominal and 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 related to foreign operations are translated at period-end exchange rates and related revenues and expenses are translated at the average exchange rates. Adjustments resulting from translation of such financial accounts are classified in accumulated other comprehensive income (loss). Foreign currency gains and losses arising from transactions are included in the statement of operations. The Company recorded foreign currency transaction losses of approximately $53,000 during the quarter ending November 30, 2008, which is included in other income (expense) in the Company’s consolidated 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, the 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.
INCOME TAXES:
The provision for income taxes is based on the earnings or losses reported in the consolidated financial statements. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company provides a valuation allowance against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized.
9
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
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 adopted the provisions of FIN 48. The Company believes that there are no uncertain tax positions or liabilities for interest and penalties associated with uncertain tax positions as of June 1, 2007 and May 31, 2008. The Company accounts for interest and penalties re lated to uncertain tax positions as part of its provision for federal and state income taxes. In accordance with the applicable statute of limitations, the Company’s tax returns could be audited by the Internal Revenue Service and various states for the fiscal years ended 2002 to 2007.
NEW ACCOUNTING PRONOUNCEMENTS:
In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.” This Statement establishes the disclosure requirements forderivative instruments and for hedging activities. It amends and expands the disclosure requirements of SFAS No.133 with the intent to provide users of financial statements with an enhanced understanding of derivative instrumentsand hedging activities. This Statement is effective for fiscal years and interim periods beginning after November 15,2008, with early adoption encouraged. The Company does not expect that the adoption of this standard will have amaterial impact on the Company’s Consolidated Financial Statements.
In May 2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles.”This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generallyaccepted accounting principles in the United States. It will be effective 60 days following the SEC’s approval of thePublic Company Accounting Oversight Board amendment to AU 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.”The Company does not expect the implementation of this standard tohave a material impact on its Consolidated Financial Statements.
(C)
BALANCE SHEET COMPONENTS
Details of certain balance sheet captions are as follows (000’s):
|
| November 30, 2008 |
| May 31, 2008 |
|
|
|
|
|
Property and equipment | $ | 3,942 | $ | 4,003 |
Accumulated depreciation and amortization |
| (3,787) |
| (3,846) |
Property and equipment, net | $ | 155 | $ | 157 |
|
|
|
|
|
Common stock, $.10 par value | $ | 1,221 | $ | 1,221 |
Capital in excess of par value |
| 18,037 |
| 18,037 |
Accumulated deficit |
| (27,142) |
| (27,909) |
Accumulated other comprehensive income |
| (399) |
| (452) |
Stockholders’ deficit | $ | (8,283) | $ | (9,103) |
10
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
(D)
EARNINGS 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 because their inclusion would be antidilutive.
The following depicts a reconciliation of earnings per share (unaudited) and weighted average shares outstanding):
|
| Three Month Periods Ended | ||
|
| November 30, 2008 |
| November 30, 2007 |
|
| (Amounts in thousands, except per share amounts) | ||
|
|
|
|
|
Net income (loss) available to common shareholders | $ | 348 | $ | (218) |
Weighted average number of common shares outstanding |
|
|
|
|
used in calculation of basic earnings per share |
| 12,213 |
| 12,213 |
Incremental shares from the assumed exercise of |
|
|
|
|
dilutive stock options |
| - |
| - |
Weighted average number of common shares |
|
|
|
|
outstanding used in calculating diluted earning |
|
|
|
|
per share |
| 12,213 |
| 12,213 |
Earnings (loss) per share: |
|
|
|
|
Basic | $ | .03 | $ | (.02) |
Diluted | $ | .03 | $ | (.02) |
|
| Six Month Periods Ended | ||
|
| November 30, 2008 |
| November 30, 2007 |
|
| (Amounts in thousands, except per share amounts) | ||
|
|
|
|
|
Net income (loss) available to common shareholders | $ | 767 | $ | (217) |
Weighted average number of common shares outstanding |
|
|
|
|
used in calculation of basic earnings per share |
| 12,213 |
| 12,213 |
Incremental shares from the assumed exercise of |
|
|
|
|
dilutive stock options |
| - |
| - |
Weighted average number of common shares |
|
|
|
|
outstanding used in calculating diluted earning |
|
|
|
|
per share |
| 12,213 |
| 12,213 |
Earnings (loss) per share: |
|
|
|
|
Basic | $ | .06 | $ | (.02) |
Diluted | $ | .06 | $ | (.02) |
At November 30, 2008 and 2007, respectively, 229,000 and 238,000 options to purchase common shares were anti-dilutive and were excluded from the above calculation for both the three and six month periods.
11
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
(E)
COMPREHENSIVE INCOME
The Company’s comprehensive income includes accumulated foreign currency translation adjustments and unrealized gain (loss) on marketable securities. The comprehensive loss was as follows (000’s):
|
| Three Month Periods Ended | ||
|
| November 30, 2008 |
| November 30, 2007 |
|
|
|
|
|
Net income (loss) | $ | 348 | $ | (218) |
Changes in: |
|
|
|
|
Foreign currency translation adjustment |
| 10 |
| (37) |
|
|
|
|
|
Comprehensive Income | $ | 358 | $ | (255) |
|
| Six Month Periods Ended | ||
|
| November 30, 2008 |
| November 30, 2007 |
|
|
|
|
|
Net income (loss) | $ | 767 | $ | (217) |
Changes in: |
|
|
|
|
Foreign currency translation adjustment |
| 53 |
| (39) |
|
|
|
|
|
Comprehensive Income | $ | 820 | $ | (256) |
(F)
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 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):
Revenue: |
| Three Months Ended November 30, 2008 |
| Three Months Ended November 30, 2007 |
North America | $ | 1,717 |
| 1,761 |
Asia |
| 399 |
| 236 |
Europe |
| 543 |
| 554 |
Eliminations |
| (186) |
| (58) |
Consolidated Total | $ | 2,473 |
| 2,493 |
12
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
Revenue: |
| Six Months Ended November 30, 2008 |
| Six Months Ended November 30, 2007 |
North America | $ | 3,673 |
| 3,840 |
Asia |
| 637 |
| 516 |
Europe |
| 1,175 |
| 1,135 |
Eliminations |
| (458) |
| (282) |
Consolidated Total | $ | 5,027 |
| 5,209 |
|
|
|
|
|
Long Lived Assets: |
| November 30, 2008 |
| May 31, 2008 |
North America | $ | 5,096 |
| 5,259 |
Europe |
| 114 |
| 170 |
Consolidated Total | $ | 5,210 |
| 5,429 |
13
SOFTECH, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This report may contain “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 (including any statements regarding the Company’s outlook for fiscal 2009 and beyond). Any forward looking statements are subject to a number of risks and uncertainties. These include, among other risks and uncertainties, whether we will be able to generate sufficient cash flow from our operations or other sources to fund our working capital needs, maintain our existing relationship with our lender, successfully introduce and attain market acceptance of any new products, attract and retain qualified personnel both in our existing markets and in new territories in an extremely competitive environment, and aging and potential obsolescence of our technologies.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. Exce pt as otherwise required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this report to reflect any change in our expectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based. We qualify all of our forward-looking statements by these cautionary statements.
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.
Our significant accounting policies are described in Note B to these financial statements. We believe that the following accounting policies require the application of our most difficult, subjective or complex judgments:
Revenue Recognition
We follow 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 collectability have been determined. We do 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. Revenue from engineering, consulting and training services is recognized as those services are rendered.
Valuation of Long-lived and Intangible Assets
We periodically review 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, we compare 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. We do not have any long-lived or intangible assets we consider to be impaired.
14
Valuation of Goodwill
We follow 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 are amortized over such useful lives.
As of May 31, 2008, we conducted our annual impairment test of goodwill by comparing fair value to the carrying amount of our underlying assets and liabilities. We determined that the fair value exceeded the carrying amount of the assets and liabilities, therefore no impairment existed as of the testing date. In addition, we do not believe any events or circumstances have occurred subsequent to the annual impairment test of goodwill to warrant an interim impairment analysis.
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 collectability 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, based on several factors, including our estimate of the likelihood of our generating sufficient taxable income in future years during the period over which temporary differences reverse. Our deferred tax assets are currently fully reserved.
Results of Operations
Our 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, but not limited to, the timing and success of introductions of any 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, we have often recognized a substantial portion of our 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 our results of operations should not be relied upon as indications of future performance.
Revenues
Total Revenue was approximately $2.5 million and $5.0 million for the three and six months ended November 30, 2008, respectively, as compared to $2.5 million and $5.2 million for the comparable prior periods (unchanged and a decrease of approximately $200,000 (3.5%) for the three and six month periods, respectively).
Product revenue was approximately $550,000 and $1.1 million for the three and six months ended November 30, 2008, respectively, as compared to $471,000 and $948,000 for the comparable prior periods (an increase of approximately $79,000 (3.5%) and $142,000 (15%) for the three and six month periods, respectively). The increase in product revenue for the quarter ended November 30, 2008, as compared to the same period in fiscal 2008, was primarily attributable to an increase in sales of the Cadra product line, partially offset by a decline in sales of the AMT product line. The increase in Cadra product revenue was predominantly a result of an upgrade purchase by a major Asian customer and we do not expect such large Asian orders to be repeatable in future quarters.
15
The table below summarizes product revenue by product line for the second quarter of fiscal 2009, 2008 and 2007:
Product Line | Q2 2009 | Q2 2008 | Q2 2007 | |||
ProductCenter | $ | 138 | $ | 146 | $ | 431 |
Cadra | 384 | 258 | 285 | |||
AMT | 28 | 67 | 44 | |||
Total | 550 | 471 | 760 | |||
Service revenue for each product line consists of consulting revenue and maintenance revenue. Service revenue was approximately $1.9 million and $3.9 million for the three and six months ended November 30, 2008, respectively, as compared to $2.0 million and $4.3 million for the comparable prior periods (a decrease of approximately $100,000 (4.9%) and $400,000 (7.6%) for the three and six month periods, respectively). The decrease in total service revenue for the quarter ended November 30, 2008 was mainly attributable to a decrease in Cadra maintenance revenue due to the non renewal of maintenance contacts, the timing of its incoming maintenance renewals and the decrease in the dollar value of the contracts due to currency fluctuation.
The table below summarizes service revenue by product line for the second quarter of fiscal 2009, 2008 and 2007:
Product Line | Q2 2009 | Q2 2008 | Q2 2007 | |||
ProductCenter | $ | 1,118 | $ | 1,112 | $ | 1,182 |
Cadra | 663 | 763 | 716 | |||
AMT | 142 | 147 | 164 | |||
Total | 1,923 | 2,022 | 2,062 | |||
Revenue by Geographic Area - Three Months Ended November 30, 2008 - Revenue generated in the U.S. accounted for 69% and 71% of total revenue for the quarter ended November 30, 2008 and 2007, respectively. Revenue generated in Europe was 22% of total revenue for the quarter ended November 30, 2008 and 2007, respectively. Revenue generated in Asia for the quarter ended November 30, 2008 was 16% of total revenue, as compared to 9% of total revenue for the comparable prior period. During the quarter ended November 30, 2008, revenue from the U.S. decreased by approximately 2.5%, revenue from Europe decreased by approximately 2%, and revenue from Asia increased by approximately 69%, in each case, compared to same quarter in fiscal 2008. The decreased revenue from the European and U.S. markets was primarily a result of timing of incoming maintenance renewals and fluctuation in the foreign exchange rate. The increase in Asia was primarily attributable to a customer upgrading to the latest version of Cadra.
Revenue by Geographic Area - Six Months Ended November 30, 2008 - Revenue generated in the U.S. accounted for 73% and 74% of total revenue for the six months ended November 30, 2008 and 2007, respectively. Revenue generated in Europe was 23% and 22% of total revenue for the six months ended November 30, 2008 and 2007, respectively. Revenue generated in Asia for the six months ended November 30, 2008 was 13% of total revenue, as compared to 10% of total revenue for the comparable prior period. During the six months ended November 30, 2008, revenue from the U.S. decreased by approximately 4.3%, revenue from Europe increased by approximately 3.5%, and revenue from Asia increased by approximately 23.4%, in each case, compared to same period in fiscal 2008. The increase in Asia was primarily attributable to a major customer upgrading to the latest version of Cadra.
Gross Margin
Gross margin as a percentage of revenue was 80% and 81% for the three and six months ended November 30, 2008, as compared to 68% and 70% for the comparable prior periods. The increase in gross margin percentage was primarily due to the decreases in amortization of capitalized software costs, and decreases in the cost of services provided, partially offset by a decrease in total revenue. This decrease in amortization of capitalized software is due to a component of the Cadra software being fully amortized during the quarter ended May 31, 2008. Thus, this decrease in amortization expense will not continue during the remaining quarters of this fiscal year. The decrease in the cost of services provided was due primarily to a reduction in our professional services staff in late fiscal year 2008. Total revenue for the six month period ended November 30, 2008 decreased by 3.5%, compared to the same period in 2008.
16
Research and Development Expenses
Research and development expenses (“R&D”) were essentially unchanged ($460,000 and $904,000 for the three and six months ended November 30, 2008, as compared to $460,000 and $907,000 in the comparable prior period). We remain committed to improving our technologies and ensuring their compatibility with current operating systems.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses were $903,000 and $1.86 million for the three and six months ended November 30, 2008, as compared to $1.1 million and $2.22 million for the comparable prior periods (a decrease of approximately $216,000 (19.3%) and $368,000 (16.5%) for the three and six month periods, respectively). The decrease is due primarily to the reduction in rent expense arising from our relocation in November 2007 to new appropriately sized corporate headquarters, the decrease in the dollar amount of foreign operating expenses due to foreign currency fluctuations and the suspension of the monthly management fee of $44,000, which is subject to reinstatement, as explained in the following paragraph.
Under an agreement with our lender, Greenleaf Capital, among other obligations, we were required to pay an annual management fee of approximately $500,000 (for management advisory services and available debt facilities). Under an amendment of the agreement, effective January 1, 2008, Greenleaf agreed to waive the monthly management fee (approximately $44,000) for a three month period, with such waiver to renew automatically for additional three month periods, unless Greenleaf notifies us in writing at least thirty days prior to expiration of a three month period that it is terminating its waiver. As of this date, we have received no such notice of termination from Greenleaf. Notwithstanding the amendment, we intend to continue to pay Greenleaf $44,000 per month (the amount that was otherwise payable under the Agreement) which will be applied as additional principal payments towards the principal amount owing to Greenleaf Capital pursuant to a certain prom issory note. Thus, while these payments will reduce the amounts owing under our debt facilities, suspension of the management fee will not improve our overall cash flow. In addition, if Greenleaf terminates its waiver of the management fee, our operating expenses will increase by approximately $132,000 per quarter.
Amortization of Capitalized Software
Amortization of capitalized software and other intangible assets (non-cash expenses) was $101,000 and $203,000 for the three and six months ended November 30, 2008 as compared to $354,000 and $708,000 for the comparable prior period (a decrease of $253,000 (71%) and $505,000 (71%), respectively). This decrease in amortization of capitalized software is due to a component of the Cadra software being fully amortized during the quarter ended May 31, 2008. Thus, this decrease in amortization expense will not continue in future quarters.
Interest Expense
Interest expense for the three and six month periods ended November 30, 2008 was approximately $223,000 and $453,000, as compared to $345,000 and $704,000 for the comparable prior periods. The decrease in interest expense is primarily attributable to a decrease in the average amount outstanding under our debt facilities and a decrease in the applicable interest rates. Average borrowings decreased to approximately $12.1 million during the current quarter, as compared to $13.4 million for the comparable prior period, and the interest rate on those borrowings decreased to about 6.25% in the current quarter from 10% for the comparable prior period. The change in the interest rate on our borrowing in fiscal year 2009 as compared to 2008 is due to a decrease in the prime rate.
Net income for the three and six months ended November 30, 2008 was $348,000 and $767,000, as compared to the net loss of ($218,000) and ($217,000) for the comparable prior period. Earnings (loss) per share for the six months ended November 30, 2008 and 2007 was $.06 and ($.02), respectively.
Changes in Financial Condition
Accounts receivable decreased $441,000 (31%) from $1.41 million at May 31, 2008 to $964,000 at November 30, 2008. Deferred maintenance revenue (a current liability) decreased $1.02 million (31%) from $3.34 million at May 31, 2008 to $2.32 million at November 30, 2008. The decrease in accounts receivable and deferred maintenance revenue was primarily attributable to the timing of maintenance renewals, a decrease in the dollar value of maintenance contracts due to foreign currency fluctuation and a decrease in maintenance renewals related to our legacy product lines.
17
Liquidity and Capital Resources
As of November 30, 2008 we had cash on hand of $536,000, a decrease of $364,000 from May 31, 2008. The decrease in cash was primarily due to cash used by our financing activities (debt repayments), partially offset by cash flows from our operating activities. Operating activities generated $421,000 of cash during the first six months of fiscal year 2009, compared with using $235,000 in cash during the comparable prior period. The $656,000 increase in cash generated by operating activities was primarily attributable to a $984,000 increase in net income, a $37,000 increase in the change (decrease) in accounts receivable, a $170,000 increase in the change (increase) in accounts payable and accrued expenses, partially offset by a $512,000 decrease in amortization and depreciation expenses and a $76,000 increase in the change (increase) in deferred revenue. During the six months ended November 30, 2008, our fina ncing activities used net cash of $823,000, compared to using net cash of approximately $320,000 during the comparable prior period. The $503,000 increase in cash used by our financing activities was attributable to higher repayments of principal. At November 30, 2008, we had an approximate working capital deficit of $3.2 million, compared to a working capital deficit of $3.4 million at May 31, 2008. The approximate $184,000 decrease in our working capital deficit was primarily attributable to a $1.0 million decrease in deferred revenue (current liability), partially offset by a $58,000 increase in accounts payable and accrued expenses, a $364,000 decrease in cash and a $441,000 decrease in accounts receivable.
We currently fund our operations through a combination of cash flow from operations and, if required, our debt facilities with Greenleaf Capital. We have a $3.0 million Line of Credit with Greenleaf Capital which expires annually in June, subject to extension, by agreement of our lender. As of November 30, 2008, approximately $579,000 was available under this facility which has been extended to December 10, 2009. At November 30, 2008, we had total long-term debt of approximately $10.1 million and current debt of $1.8 million (for total debt of $11.9 million), consisting of $9.48 million under a promissory note and $2.42 million under our revolving credit facility with Greenleaf. We are dependent on availability under our debt facilities and cash flow from operations to meet our near term working capital needs and to make debt service payments.
The monthly principal and interest payments are approximately $210,000 on these borrowings. Of the $11.9 million, $1.8 million is payable by November 30, 2009 and the remaining $10.1 million is payable by December 10, 2009. As noted above, our line of credit with Greenleaf expires and is due in June of each year. Historically, Greenleaf has on a quarterly basis extended our line of credit and term note for an additional year. If Greenleaf did not extend the terms of our debt, we would be obligated to pay Greenleaf $11.9 on December 10, 2009, which funds we do not currently have. While we do not believe Greenleaf would decline extending the term of our borrowings, if they were to do so, we would have to seek capital from third parties in order to pay the balance of the borrowings. In the event we were unable to secure the necessary funds or if the terms and conditions were onerous, there would be a material adverse effect on our financial condition and results of operations.
During the remainder of fiscal 2009, we anticipate that we will incur capital expenditures of approximately $70,000 in order to keep our computer systems and peripheral equipment current and compatible with the latest operating systems.
We anticipate that our operating activities will generate positive net cash flow during the third quarter of fiscal 2009. However, we cannot ensure that our operating activities will generate positive net cash flow in the future. We believe that the cash on hand together with cash flow from operations and available borrowings under our credit facility will be sufficient for meeting our liquidity and capital resource needs for the next year.
We are dependent on our lender, Greenleaf Capital, for its continued support. We have a strong relationship with Greenleaf, which currently represents our sole source of external financing. Greenleaf is also our largest shareholder, owning approximately 44.6% of our issued and outstanding common stock, and it has been our sole debt provider since 1996.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
This Item is not applicable because we are a “smaller reporting company,” as defined by applicable SEC regulation.
18
Item 4T. Controls and Procedures
Management’s Report on Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating the cost-benefit relationship of possible changes or additions to our controls and procedures.
As of November 30, 2008, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in our periodic SEC filings within the required time period.
Changes in Internal control Over Financial Reporting. There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
This Item is not applicable because we are a “smaller reporting company,” as defined by applicable SEC regulation.
Item 2. Unregistered Sales of Equity Securities and Use of proceeds
None
Item 3. Defaults on Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Not Applicable
19
Item 6. Exhibits
(3)(i)
Articles of Organization and Amendments, filed as Exhibit 3.1 to Form 10Q for the quarter ended February 29, 2008 and incorporated by reference.
(3)(ii)
By-laws of the Company, filed as Exhibit 3.2 to Form 10Q for the quarter ended February 29, 2008 and incorporated by reference.
(4)
Form of common stock certificate, filed as Exhibit 4(A), to Registration statement number 2-73261, filed with the Securities and Exchange Commission and incorporated by reference.
(10)(i)
Greenleaf Capital $11.0 million Promissory Note, filed as the same Exhibit number to the Company’s Form 10K for the year ended May 31, 2008.
(10)(ii)
Greenleaf Capital $3.0 million Revolving Line of Credit, filed as the same Exhibit number to the Company’s Form 10K for the year ended May 31, 2008.
(10)(iii)
Amendment to Promissory Note dated November 8, 2002, filed as the same Exhibit number to the Company’s Form 10K for the year ended May 31, 2008.
(10.1)
Amendment of Agreement with Greenleaf Capital, filed as Exhibit 10.1 to Form 10Q for the quarter ended February 29, 2008.
(14)
Code of Ethics for Officers, filed as Exhibit 14 to the Form 10-KSB for the year ended May 31, 2004, is incorporated by reference.
(21)
Subsidiaries of the Registrant, filed as the same Exhibit number to the Company’s Form 10K for the year ended May 31, 2008.
(31.1)
Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
(31.2)
Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
(32.1)
Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(32.2)
Certification of the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
20
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:January 13, 2009 | /s/ Amy E. McGuire |
| Amy E. McGuire |
| Chief Financial Officer |
|
|
|
|
Date:January 13, 2009 | /s/ Jean J. Croteau |
| Jean J. Croteau |
| President |
21
Exhibit Index
(3)(i)
Articles of Organization and Amendments, filed as Exhibit 3.1 to Form 10Q for the quarter ended February 29, 2008 and incorporated by reference.
(3)(ii)
By-laws of the Company, filed as Exhibit 3.2 to Form 10Q for the quarter ended February 29, 2008 and incorporated by reference.
(4)
Form of common stock certificate, filed as Exhibit 4(A), to Registration statement number 2-73261, filed with the Securities and Exchange Commission and incorporated by reference.
(10)(i)
Greenleaf Capital $11.0 million Promissory Note, filed as the same Exhibit number to the Company’s Form 10K for the year ended May 31, 2008.
(10)(ii)
Greenleaf Capital $3.0 million Revolving Line of Credit, filed as the same Exhibit number to the Company’s Form 10K for the year ended May 31, 2008.
(10)(iii)
Amendment to Promissory Note dated November 8, 2002, filed as the same Exhibit number to the Company’s Form 10K for the year ended May 31, 2008.
(10.1)
Amendment of Agreement with Greenleaf Capital, filed as Exhibit 10.1 to Form 10Q for the quarter ended February 29, 2008.
(14)
Code of Ethics for Officers, filed as Exhibit 14 to the Form 10-KSB for the year ended May 31, 2004, is incorporated by reference.
(21)
Subsidiaries of the Registrant, filed as the same Exhibit number to the Company’s Form 10K for the year ended May 31, 2008.
(31.1)
Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
(31.2)
Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
(32.1)
Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(32.2)
Certification of the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
22