FORM 10-Q

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

February 28, 2010

 

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. Yes  X . No      .


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted an posted pursuant to Rule 405 of regulation ST (Sec. 232.405)  during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes      . No  X .


The number of shares outstanding of registrant’s common stock at April 12, 2010 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  X .


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes      . No  X .




SOFTECH, INC.


INDEX


PART I.

Financial Information

Page Number

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Condensed Balance Sheets – February 28, 2010 and May 31, 2009

3

 

 

 


Consolidated Condensed Statements of Operations – Three Months Ended February 28, 2010 and February 28, 2009

4

 

 

 

 

Consolidated Condensed Statements of Operations – Nine Months Ended February 28, 2010 and February 28, 2009

5

 

 

 

 

Consolidated Condensed Statements of Cash Flows – Nine Months Ended February 28, 2010 and February 28, 2009

6

 

 

 

 

Notes to Consolidated Condensed Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

20

 

 

 

Item 4T.

Controls and Procedures

20

 

 

 

PART II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

20

 

 

 

Item 1A.

Risk Factors

20

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of proceeds

20

 

 

 

Item 3.

Defaults on Senior Securities

20

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

21

 

 

 

Item 5.

Other Information

21

 

 

 

Item 6.

Exhibits

21




2



FINANCIAL STATEMENTS

SOFTECH, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS


 

 

(dollars in thousands)

(unaudited)

 

 

February 28,

 

May 31,

 

 

2010

 

2009

ASSETS

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

665

$

758

Accounts receivable (less allowance for uncollectible accounts of $29 as of February 28, 2010 and May 31, 2009)

 

1,035

 

1,272

Prepaid and other assets

 

383

 

572

Total current assets

 

2,083

 

2,602

 

 

 

 

 

Property and equipment, net

 

89

 

118

Capitalized software costs, net

 

25

 

113

Goodwill

 

4,608

 

4,611

Other assets

 

136

 

136

 

 

 

 

 

TOTAL ASSETS

$

6,941

$

7,580

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

 

Accounts payable

$

278

$

463

Accrued expenses

 

681

 

778

Deferred maintenance revenue

 

2,937

 

3,022

Current portion of capital lease

 

35

 

31

Current portion of long term debt

 

1,995

 

1,914

 

 

 

 

 

Total current liabilities

 

5,926

 

6,208

 

 

 

 

 

Capital lease, net of current portion

 

13

 

20

Long-term debt, net of current portion

 

8,301

 

9,108

 

 

 

 

 

Total long-term liabilities

 

8,314

 

9,128

 

 

 

 

 

Stockholders' deficit

 

(7,299)

 

(7,756)

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

$

6,941

$

7,580

 

 

 

 

 

See accompanying notes to consolidated condensed financial statements.




3



SOFTECH, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS


 

 

(in thousands, except for share and per share data)

 

 

Three Months Ended

 

 

(unaudited)

 

 

February 28,

 

February 28,

 

 

2010

 

2009

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

   Products

$

365

$

437

   Services

 

1,517

 

1,793

 

 

 

 

 

Total revenue

 

1,882

 

2,230

 

 

 

 

 

Cost of products sold: materials

 

9

 

6

 

 

 

 

 

Cost of products sold: amortization of capitalized software costs and other intangible assets

 

26

 

101

Cost of services provided

 

381

 

390

 

 

 

 

 

Gross margin

 

1,466

 

1,733

 

 

 

 

 

Research and development expenses

 

480

 

478

Selling, general and administrative

 

718

 

868

 

 

 

 

 

Income from operations

 

268

 

387

 

 

 

 

 

Foreign currency transaction losses

 

46

 

4

Interest expense

 

148

 

178

 

 

 

 

 

Net income

$

74

$

205

 

 

 

 

 

Basic and diluted net income per common share

$

0.01

$

0.02

Weighted average common shares outstanding-basic

 

12,213,236

 

12,213,236

Weighted average common shares outstanding-diluted

 

12,239,678

 

12,213,236

 

See accompanying notes to consolidated condensed financial statements.




4



SOFTECH, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS


 

 

(in thousands, except for share and per share data)

 

 

Nine Months Ended

 

 

(unaudited)

 

 

February 28,

 

February 28,

 

 

2010

 

2009

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

   Products

$

829

$

1,527

   Services

 

4,926

 

5,730

 

 

 

 

 

Total revenue

 

5,755

 

7,257

 

 

 

 

 

Cost of products sold: materials

 

17

 

36

 

 

 

 

 

Cost of products sold: amortization of capitalized software costs and other intangible assets

 

89

 

304

Cost of services provided

 

1,082

 

1,125

 

 

 

 

 

Gross margin

 

                   4,567

 

5,792

 

 

 

 

 

Research and development expenses

 

1,391

 

1,382

Selling, general and administrative

 

2,252

 

2,724

 

 

 

 

 

Income from operations

 

924

 

1,686

 

 

 

 

 

Foreign currency transaction losses, net

 

31

 

83

Interest expense

 

447

 

631

 

 

 

 

 

Net income

$

446

$

972

 

 

 

 

 

Basic and diluted net income per common share

$

0.04

$

0.08

Weighted average common shares outstanding-basic

 

12,213,236

 

12,213,236

Weighted average common shares outstanding-diluted

 

12,267,848

 

12,213,236

 

See accompanying notes to consolidated condensed financial statements.



5



SOFTECH, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS


 

 

(dollars in thousands)

 

 

Nine Months Ended

 

 

(unaudited)

 

 

February 28,

 

February 28,

 

 

2010

 

2009

Cash flows from operating activities:

 

 

 

 

   Net income

$

446

$

972

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

   Depreciation and amortization

 

143

 

352

   Provision for uncollectable accounts

 

-

 

25

Change in current assets and liabilities:

 

 

 

 

   Accounts receivable

 

237

 

144

   Prepaid expenses and other assets

 

189

 

(70)

   Accounts payable and accrued expenses

 

(282)

 

(59)

   Deferred maintenance revenue

 

(85)

 

(241)

Total adjustments

 

202

 

              151

Net cash provided by operating activities

 

648

 

1,123

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

   Capital expenditures

 

(5)

 

(34)

Net cash used in investing activities

 

(5)

 

(34)

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

   Borrowings under debt agreements

 

700

 

-

   Repayments under debt agreements

 

(1,426)

 

(1,252)

   Repayments under capital lease

 

(24)

 

(23)

Net cash used in financing activities

 

(750)

 

(1,275)

 

 

 

 

 

Effect of exchange rates on cash

 

14

 

71

Decrease in cash and cash equivalents

 

(93)

 

(115)

Cash and cash equivalents, beginning of period

 

758

 

900

Cash and cash equivalents, end of period

$

665

$

785

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

   Interest paid

 

447

 

631

   Income taxes paid

 

-

 

-

Supplemental disclosures of noncash investing and financing activities:

 

 

 

 

   Acquisition of equipment under capital lease

 

20

 

-

 

See accompanying notes to consolidated condensed financial statements.



6



SOFTECH, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED 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 2009 Annual Report on Form 10-K.


(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, now included in Accounting Standards Codification (“ASC”) 985 Software. 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 ASC 985. 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 is recognized as those services are rendered using a proportional performance model.


CAPITALIZED SOFTWARE COSTS AND RESEARCH AND DEVELOPMENT


The Company accounts for its software development costs in accordance with Statements of Financial Accounting Standards (“SFAS”) No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed, now included in ASC 985. Accordingly, the Company capitalizes certain costs incurred to internally develop and/or purchase software that it then licenses 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 the assets 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 in fiscal year 2010 or 2009. Substantially all of the recorded balance represents software acquired from third parties. Amortization expense related to capitalized software costs was $26,000 and $89,000 for the three and nine month periods ended February 28, 2010, respectively, as compared to $101,000 and $304,000 for the comparable prior periods.


ACCOUNTING FOR GOODWILL


The Company accounts for goodwill pursuant to ASC 350 Intangibles – Goodwill and Other. This requires that goodwill be reviewed annually, or more frequently as a result of an event or change in circumstances, for possible impairment with impaired assets written down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified within the statement's criteria.


As of May 31, 2009, the Company conducted its annual impairment test of goodwill by comparing fair value to the carrying amount of the underlying assets and liabilities of its single reporting unit. 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. The Company concluded that no facts or circumstances arose during the first nine months of fiscal year 2010 to warrant an interim impairment test.



7



SOFTECH, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Continued)


LONG-LIVED ASSETS:


The Company periodically reviews the carrying value of all intangible (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.


STOCK BASED COMPENSATION


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 year 2004 but options granted prior to that time continued to vest. As of February 28, 2010 and May 31, 2009, all outstanding stock options have vested.


The following table summarizes information for stock options outstanding and exercisable at February 28, 2010:


 

Number of

Options

Weighted

Average

Exercise

Price

Per

Share

Weighted

Average

Remaining Contractual

Life in

Years

Aggregate

Intrinsic

Value

Outstanding at May 31, 2009

220,000

$ .21

2.92

-

Granted

-

-

-

-

Exercised

-

-

-

-

Forfeited or expired

-

-

-

-

Outstanding at February 28, 2010

220,000

$.21

2.17

$3,540

Exercisable at February 28, 2010

220,000

$.21

2.17

$3,540



8



SOFTECH, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Continued)



FOREIGN CURRENCY TRANSLATION:


The functional currency of the Company's foreign operations (Germany and Italy) is the local currency. 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 were included in other income (expense) during the three and nine month periods ending February 28, 2010 and 2009. For the three and nine month periods ended February 28, 2010, the Company recorded to Foreign currency transaction losses, a net loss from foreign currency related transactions of approximately ($46,000) and ($31,000), respectively, as compared to ($4,000) and ($83,000) for the comparable prior periods.


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 pertain to revenue recognition, the allowance for doubtful accounts receivable, the valuation of long term assets including intangibles (goodwill, capitalized software costs and other intangible assets) and deferred tax assets. 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.


In June 2006, FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109 ("FIN 48"), now included in ASC 840 Income Taxes. 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. ASC 840 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. The Company believes that there are no uncertain tax positions or liabilities for interest and penalties associated with uncertain tax positions as of May 31, 2009 and February 28, 2010. If the Company had interest and penalties related to uncertain tax positions it would be accounted for as part of the 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 for the fiscal years ended 2003 to 2009 and in various states depending upon when returns were filed.




9



SOFTECH, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Continued)


NEW ACCOUNTING PRONOUNCEMENTS:


In May 2009, the FASB issued Statement No. 165 Subsequent Events, now included in ASC 855 Subsequent Events. ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The Company adopted ASC 855 on June 1, 2009. The adoption of this Statement did not impact the Company’s Consolidated Financial Statements. Management has reviewed events occurring through the date the financial statements were issued, and no subsequent events occurred requiring accrual or disclosure.


Effective July 1, 2009, the Company adopted the FASB Accounting Standards Codification ("ASC or Codification"), Generally Accepted Accounting Principles ("ASC 105-10"). The Codification, which was issued in June 2009, is the new source of authoritative U.S. GAAP for Securities and Exchange Commission ("SEC") registrants. The Codification reorganizes current U.S. GAAP into a topical format that eliminates the previous U.S. GAAP hierarchy and establishes two levels of U.S. GAAP - authoritative and non-authoritative. The Codification superseded all existing non-SEC accounting and reporting standards upon its effective date and carries the same level of authority as pronouncements issued under the previous hierarchy of U.S. GAAP. The adoption of the Codification did not have a significant impact on the Company's Condensed Consolidated Financial Statements.



(C)

BALANCE SHEET COMPONENTS


Details of certain balance sheet captions are as follows:


 

 

February 28, 2010

 

May 31, 2009

 

 

(Amounts in thousands, except share and per share data)

 

 

 

 

 

Property and equipment

$

4,055

$

4,047

Accumulated depreciation and amortization

 

(3,966)

 

(3,929)

Property and equipment, net

$

89

$

118

 

 

 

 

 

Common stock, $.10 par value; authorized 20,000,000 shares; issued 12,213,236

$

1,221

$

1,221

Capital in excess of par value

 

18,037

 

18,037

Accumulated deficit

 

(26,141)

 

(26,588)

Accumulated other comprehensive income

 

(416)

 

(426)

Stockholders’ deficit

$

(7,299)

$

(7,756)



10



SOFTECH, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Continued)


(D)

EARNINGS PER SHARE


Basic net income per share is computed by dividing the net income by the weighted-average number of common shares outstanding. Diluted net income per share is computed by dividing net income 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 if their inclusion would be anti-dilutive.


The following depicts a reconciliation of earnings per share and weighted average shares outstanding:


 

 

Three Month Periods Ended

 

 

February 28, 2010

 

February 28, 2009

 

 

(Amounts in thousands, except share and per share data)

 

 

 

 

 

Net income available to common shareholders

$

74

$

205

 

 

 

 

 

Weighted average number of common shares outstanding used in calculation of basic earnings per share

 

12,213,236

 

12,213,236


Incremental shares from the assumed exercise of dilutive stock options

 

26,442

 

-

 

 

 

 

 

Weighted average number of common shares outstanding used in calculating diluted earnings per share

 

12,239,678

 

12,213,236

 

 

 

 

 

Earnings per share:

 

 

 

 

   Basic

$

.01

$

.02

   Diluted

$

.01

$

.02


 

 

Nine Month Periods Ended

 

 

February 28, 2010

 

February 28, 2009

 

 

(Amounts in thousands, except share and per share data)

 

 

 

 

 

Net income available to common shareholders

$

446

$

972

 

 

 

 

 

Weighted average number of common shares outstanding used in calculation of basic earnings per share

 

12,213,236

 

12,213,236


Incremental shares from the assumed exercise of dilutive stock options

 

54,612

 

-

 

 

 

 

 

Weighted average number of common shares outstanding used in calculating diluted earnings per share

 

12,267,848

 

12,213,236

 

 

 

 

 

Earnings per share:

 

 

 

 

   Basic

$

.04

$

.08

   Diluted

$

.04

$

.08



11



SOFTECH, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Continued)


For the three and nine month periods ending February 28, 2010, 31,000 options to purchase common shares were anti-dilutive and were excluded from the above calculation. For the three and nine month periods ending February 28, 2009, 229,000 options to purchase common shares were anti-dilutive and were excluded from the above calculation.


 (E)

COMPREHENSIVE INCOME


The Company’s comprehensive income includes accumulated foreign currency translation adjustments. The comprehensive income was as follows (000’s):

 

 

 

Three Month Periods Ended

 

 

February 28, 2010

 

February 28, 2009

 

 

 

 

 

Net income

$

74

$

205

Changes in:

 

 

 

 

Foreign currency translation adjustment

 

10

 

6

 

 

 

 

 

Comprehensive income

$

84

$

211


 

 

Nine Month Periods Ended

 

 

February 28, 2010

 

February 28, 2009

 

 

 

 

 

Net income

$

446

$

972

Changes in:

 

 

 

 

Foreign currency translation adjustment

 

10

 

59

 

 

 

 

 

Comprehensive income

$

456

$

1,031



12



SOFTECH, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Continued)


(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

February 28, 2010

 

Three Months Ended

February 28, 2009

North America

$

1,577

 

1,723

Asia

 

153

 

228

Europe

 

375

 

460

Eliminations

 

(223)

 

(181)

Consolidated Total

$

1,882

 

2,230


Revenue:

 

Nine Months Ended

February 28, 2010

 

Nine Months Ended

February 28, 2009

North America

$

4,631

 

5,396

Asia

 

455

 

865

Europe

 

1,257

 

1,635

Eliminations

 

(588)

 

(639)

Consolidated Total

$

5,755

 

7,257


Long Lived Assets:

 

February 28, 2010

 

May 31, 2009

North America

$

4,702

 

4,807

Europe

 

156

 

171

Consolidated Total

$

4,858

 

4,978



13



SOFTECH, INC. AND SUBSIDIARIES

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS


Any “forward looking statements” made in this Report, including with respect to our outlook for fiscal year 2010 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, including but not limited to our ability to:


4

generate, despite declining revenues, sufficient cash flow from our operations or other sources to fund our working capital needs, including our business plan


4

maintain the relationship with our lender


4

successfully introduce and attain market acceptance of any new products and/or enhancements of existing products


4

attract and retain qualified personnel


4

prevent further obsolescence of our technologies


4

maintain agreements with our critical software vendors


4

secure renewals of existing software maintenance contracts, as well as contracts with new maintenance customers; and


4

secure new business, both from existing and new customers


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 Information Statement. Except as otherwise required by law, SofTech expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein 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. SofTech qualifies all 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.



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Our significant accounting policies are described in Note B to the financial statements included elsewhere in this report, as well as in the Company’s annual report on Form 10-K. 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), now included in ASC 985 Software, 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 ASC 985. 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 assets we consider to be impaired.


Valuation of Goodwill


We account for goodwill pursuant to ASC 350, Intangibles - Goodwill and Other Assets. This statement requires that goodwill be reviewed annually, or more frequently as a result of an event or change in circumstances, for possible impairment with impaired assets written down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified within the statement's criteria.


As of May 31, 2009, we conducted our annual impairment test of goodwill by comparing fair value to the carrying amount of the underlying assets and liabilities of its single reporting unit. We determined that the fair value exceeded the carrying amount of the assets and liabilities, therefore no impairment existed as of the testing date. We concluded that no facts or circumstances arose during the first nine months of fiscal year 2010 to warrant an interim impairment test.


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. At February 28, 2010 and May 31, 2009, the allowance for doubtful accounts was $29,000.



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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. As of February 28, 2010 and May 31, 2009, our deferred tax assets are fully reserved.


Results of Operations


Our quarterly revenue and operating results are difficult to predict and fluctuate significantly from quarter to quarter. Our quarterly revenue has fluctuated 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; variability in 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 for the three and nine month periods ended February 28, 2010 was approximately $1.9 million and $5.8 million, respectively, as compared to $2.2 million and $7.3 million for the comparable prior periods (a decrease of approximately $348,000 (16%) and $1.5 million (21%), respectively). This negative revenue trend has had a material adverse effect on our profitability and operating cash flows. We may experience further significant declines in revenue, until there is meaningful improvement in economic conditions. If this revenue trend continues, there will be a further material adverse effect on our profitability.


Product revenue was approximately $365,000 and $829,000 for the three and nine month periods ended February 28, 2010, respectively, as compared to $437,000 and $1.5 million, for the comparable prior periods (a decrease of approximately $72,000 (17%) and $698,000 (46%), respectively). The decrease was attributable to the difficult economic climate, with existing and potential new customers attempting to minimize their expenses, and thus delaying or suspending their procurements, as well as the legacy nature of our Cadra and AMT product lines. The table below summarizes product revenue (in 000’s) by product line for the third quarter of fiscal year 2010, 2009 and 2008:


Product Line

Q3 2010

Q3 2009

Q3 2008

ProductCenter

$ 232

$ 235

$ 302

Cadra

114

   189

   232

AMT

19

    13

    43

Total

$ 365

  $ 437

   $ 577


Service revenue for each product line consists of consulting revenue and maintenance revenue. Service revenue was approximately $1.5 million and $4.9 million for the three and nine month periods ended February 28, 2010, as compared to $1.8 million and $5.7 million for the comparable prior periods (a decrease of approximately $276,000 (15%) and $804,000 (14%), respectively). The decrease in total service revenue was primarily attributable to the difficult economic climate, with customers attempting to minimize their expenses, and thus delaying or suspending consulting engagements, and a decline in new customer orders. These circumstances have had a substantial detrimental impact on the revenue generated from product consulting and maintenance services.



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The table below summarizes service revenue by product line for the third quarter of fiscal year 2010, 2009 and 2008:


Product Line

Q3 2010

Q3 2009

Q3 2008

ProductCenter

$   868

$   988

$1,051

Cadra

549

682

653

AMT

100

123

164

Total

$1,517

$1,793

$1,868


Revenue by Geographic Area - Three Months Ended February 28, 2010: Revenue generated in the U.S. accounted for 84% of total revenue for the three months ended February 28, 2010, as compared to 77% of total revenue in the comparable prior period. Revenue generated in Europe was 20% of total revenue for the three months ended February 28, 2010, as compared to 21% of total revenue in the comparable prior period. Revenue generated in Asia for the three months ended February 28, 2010 was 8% of total revenue, as compared to 10% of total revenue for the comparable prior period. During the three months ended February 28, 2010, revenue from the U.S decreased by approximately 8%, revenue from Europe decreased by approximately 18%, and revenue from Asia decreased by approximately 32%, in each case, compared to same period in fiscal year 2009. The decrease in all three geographic areas was primarily attributable to the difficult economic climate, with customers attempting to minimize their expenses, and thus delaying or suspending orders, as well as the legacy nature of our Cadra product line.


Revenue by Geographic Area - Nine Months Ended February 28, 2010: Revenue generated in the U.S. accounted for 80% of total revenue for the nine months ended February 28, 2010, as compared to 74% of total revenue in the comparable prior period. Revenue generated in Europe was 22% of total revenue for the nine months ended February 28, 2010, as compared to 23% of total revenue in the comparable prior period.  Revenue generated in Asia for the nine months ended February 28, 2010 was 8% of total revenue, as compared to 12% of total revenue for the comparable prior period. During the nine months ended February 28, 2010, revenue from the U.S decreased by approximately 14%, revenue from Europe decreased by approximately 23%, and revenue from Asia decreased by approximately 47%, in each case, compared to same period in fiscal year 2009. The decrease in all three geographic areas was primarily attributable to the difficult economic climate, with customers attempting to minimize their expenses, and thus delaying or suspending orders, as well as the legacy nature of our Cadra product line.  During the first nine months of fiscal year 2009, Asia exceeded its revenue trend due to a large customer upgrading to the latest version of Cadra.


Gross Margin


Gross margin as a percentage of revenue was 78% and 79% for the three and nine month periods ended February 28, 2010, respectively, as compared to 78% and 80% for the comparable prior periods. There were decreases in the amortization of capitalized software costs and the cost of services provided, but these decreases were largely offset by decreases in total revenue. The decrease in amortization of capitalized software is due to the Cadra software being fully amortized. Total revenue for each of the three and nine month periods ended February 28, 2010, decreased by 16% and 21%, respectively, compared to the same periods in fiscal year 2009.


Research and Development Expenses


Research and development expenses (“R&D”) were $480,000 and $1.4 million for the three and nine months ended February 28, 2010, as compared to $478,000 and $1.4 million, unchanged, as compared to the comparable prior period. We remain committed to improving our technologies and ensuring their compatibility with current operating systems.



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Selling, General and Administrative Expenses


Selling, general and administrative (“SG&A”) expenses were $718,000 and $2.3 million for the three and nine months ended February 28, 2010, as compared to $868,000 and $2.7 million in the comparable prior period, in each case, a decrease of 17%, as compared to the three and nine month periods. The decrease is due primarily to a decline in commission based compensation resulting from lower product revenue and a reduction in personnel expense associated with a decrease in headcount.  At this time, we do not anticipate further decreases in personnel, recruiting or professional services expenses.


Amortization of Capitalized Software


Amortization of capitalized software and other intangible assets (non-cash expenses) was $26,000 and $89,000 for the three and nine months ended February 28, 2010, respectively, as compared to $101,000 and $304,000 for the comparable prior periods (a decrease of $75,000 (74%) and $215,000 (71%), respectively). This decrease in amortization of capitalized software is due to our AMT software being fully amortized during the quarter ended May 31, 2009. Thus, this decrease in amortization expense will not continue in future quarters.


Interest Expense


Interest expense for the three and nine month periods ended February 28, 2010 was approximately $148,000 and $447,000, as compared to $178,000 and $631,000 for the comparable prior period. This decrease in interest expense was primarily attributable to a decrease in the average amount outstanding under our debt facility and a decrease in the applicable interest rates. Average borrowings under our debt facility were approximately $10.5 million and $10.6 million for the three and nine month periods ending February 28, 2010, as compared to $11.6 million and $12.1 million for the comparable prior periods, and the interest rate on those borrowings decreased to about 5.5% in the first quarter of 2009, from 6.25% for the comparable prior period. The change in the interest rate on our borrowings in fiscal year 2010 as compared to 2009 is due to a decrease in the prime rate. Although we increased the amount of borrowings under our line of credit during fiscal year 2010, our overall level of indebtedness at February 28, 2010 has declined, compared to May 31, 2009.   



Net Income/Earnings Per Share


Net income for the three and nine months ended February 28, 2010 was $74,000 and $446,000, respectively, as compared to $205,000 and $972,000 for the comparable prior periods. Earnings per share for the three and nine months ended February 28, 2010 were $.01 and $.04, as compared to $.02 and $.08 for the comparable prior periods. As previously described, the current economic contraction, as well as declining demand for our Cadra and AMT product lines, is materially and adversely affecting our maintenance and product revenues. We expect that there will be further significant declines in revenue. We are reviewing our business/product strategy and cost structure with a view to mitigating the adverse impact of declining revenue on our financial condition and operating results.


Changes in Financial Condition


Accounts receivable decreased $237,000 (19%) from $1.3 million at May 31, 2009 to $1.0 million at February 28, 2010. Deferred maintenance revenue (a current liability) decreased $85,000 (3%) from $3.0 million at May 31, 2009 to $2.9 million at February 28, 2010. 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 reduced licensed seats under maintenance and a decrease in maintenance renewals related to our legacy product lines.



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Liquidity and Capital Resources


As of February 28, 2010, we had cash on hand of $665,000, a decrease of $93,000 from May 31, 2009. The decrease in cash was primarily due a decrease in net income, partially offset by a decrease in cash used by financing activities, all as more fully explained below.


Our operating activities generated $648,000 of cash during the nine months ended February 28, 2010, compared with generating $1.1 million during the comparable prior period. The $475,000 decrease in cash generated by operating activities was primarily attributable to a $526,000 decrease in net income, a $223,000 change in the decrease in accounts payable and accrued expenses, and a $209,000 decrease in depreciation and amortization, partially offset by a $156,000 change in the decrease in deferred revenue and a $259,000 change (increase) in prepaid expenses. During the nine months ended February 28, 2010, our financing activities used net cash of approximately $750,000, compared to approximately $1.3 million during the comparable prior period. The approximate $525,000 decrease in cash used by financing activities was attributable to increased borrowing of $700,000 from our line of credit, partially off set by increased debt repayments of $174,000. At February 28, 2010, we had an approximate working capital deficit of $3.8 million, compared to a working capital deficit of $3.6 million at May 31, 2009. The approximate $200,000 increase in our working capital deficit was primarily attributable to a decrease in cash, accounts receivable and prepaid expenses of approximately $519,000, partially offset by a decrease in accounts payable, accrued expense and deferred revenue of approximately $367,000.


We currently fund our operations through a combination of cash flow from operations and our debt facilities with Greenleaf Capital. During the quarter ended November 30, 2009, we amended our line of credit with Greenleaf Capital to increase it from $3.0 million to $3.5 million. This line of credit expires in March of 2011. As of February 28, 2010, about $3.1 million was outstanding, leaving approximately $379,000 available under this facility. At February 28, 2010, we had total long-term debt of approximately $8.3 million and current debt of $2 million (for total debt of $10.3 million), consisting of $7.2 million under a promissory note and $3.1 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 aggregate principal amount payable to Greenleaf at February 28, 2010 was $10.3 million. The monthly minimum principal and interest payments are approximately $210,000 on these borrowings. Of the $10.3 million, $2 million is payable by February 28, 2011 and $8.3 million is payable by March 31, 2011. Historically, Greenleaf has, on a quarterly basis, extended our line of credit and term note for an additional year. If the terms of our debt were not extended, we would be obligated to pay Greenleaf $2 million on February 28, 2011 and $8.3 million on March 31, 2011 (for an aggregate of $10.3 million by March 31, 2011), which funds we do not currently have. Thus, if the term of our borrowings were not extended, 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, there would be an event of default under our notes and Greenleaf could foreclose on our assets, in which case we would be unable to continue as a going concern. If the terms and conditions of any refinancing were onerous, there would be a material adverse effect on our financial condition and results of operations.


During the nine months ended February 28, 2010, our operating activities generated $648,000 in cash. It is our intention to continue to manage the business with a view to achieve positive cash flows from operating activities in fiscal year 2010. We may not however be able to achieve positive cash flows from our operating activities during the balance of fiscal year 2010.


During fiscal year 2010, we anticipate that we will incur capital expenditures of approximately $50,000 in order to keep our computer systems and peripheral equipment current and compatible with the latest operating systems.


We believe that the cash on hand together with anticipated cash flow from operations and available borrowings under our credit facility will be sufficient to meet our liquidity and capital resources needs for the next year.



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As previously described, the current economic contraction, as well as declining demand for our Cadra and AMT product lines, is materially and adversely affecting our maintenance and product revenues. We expect that there will be further significant declines in revenue. We are reviewing our business/product strategy and cost structure with a view to mitigate the adverse impact of declining revenue on our financial condition and operating results.


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.


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 February 28, 2010, 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, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, provide a reasonable level of assurance that they 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



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Item 4. Submission of Matters to a Vote of Security Holders


None


Item 5. Other Information


Not Applicable


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 $9.8 million Term Note, filed as the same Exhibit number on the Company’s Form 8K filed on March 30, 2009.


(10)(ii)

Greenleaf Capital $3.0 million Revolving Line of Credit, filed as the same Exhibit number on the Company’s Form 8K filed on November 9, 2009.


(10)(iii)

Security Agreement dated March 25, 2009, filed as Exhibit 10.3 on the Company’s Form 8K filed on March 30, 2009.


(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 Form 10Q for the quarter ended August 31, 2009.


(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.



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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: April 12, 2010

/s/ Amy E. McGuire

 

Amy E. McGuire

 

Chief Financial Officer

 

 

 

 

Date: April 12, 2010

/s/ Jean J. Croteau

 

Jean J. Croteau

 

President





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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 $9.8 million Term Note, filed as the same Exhibit number on the Company’s Form 8K filed on March 30, 2009.


(10)(ii)

Greenleaf Capital $3.0 million Revolving Line of Credit, filed as the same Exhibit number on the Company’s Form 8K filed on November 9, 2009.


(10)(iii)

Security Agreement dated March 25, 2009, filed as Exhibit 10.3 on the Company’s Form 8K filed on March 30, 2009.


(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


(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.




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