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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
______________
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED JUNE 30, 2003 OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER 1-13725
______________
EDT LEARNING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0545043
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2999 NORTH 44TH STREET, SUITE 650, PHOENIX, ARIZONA 85018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(602) 952-1200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
______________
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 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 is an accelerated filer
(as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes ( ) No (X)
The number of shares of Common Stock of the Registrant, par value $.001
per share, outstanding at August 8, 2003 was 15,797,791, net of shares held in
treasury.
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FORM 10-Q REPORT INDEX
PART I--FINANCIAL INFORMATION PAGE
----
Item 1--Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2003 and
March 31, 2003........................................................................ 3
Unaudited Condensed Consolidated Statements of Operations for the Three
Months Ended June 30, 2003 and June 30, 2002.......................................... 4
Unaudited Condensed Consolidated Statement of Changes in Shareholders'
Equity for the Three Months Ended June 30, 2003....................................... 5
Unaudited Condensed Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 2003 and June 30, 2002.......................................... 6
Notes to Unaudited Condensed Consolidated Financial Statements........................ 7
Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................... 16
Item 3--Quantitative and Qualitative Disclosures about Market Risk................................... 28
Item 4--Controls and Procedures...................................................................... 28
PART II--OTHER INFORMATION
Item 1--Legal Proceedings............................................................................ 28
Item 2--Change in Securities and Use of Proceeds..................................................... 29
Item 3--Defaults of Senior Securities................................................................ 29
Item 4--Submission of Matters to a Vote of Security Holders.......................................... 29
Item 5--Other Information............................................................................ 29
Item 6--Exhibits and Reports on Form 8-K............................................................. 29
Signatures........................................................................................... 32
Certifications....................................................................................... 33
A copy of the annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and all amendments to those
reports are available for free on the Company's website,
www.edtlearning.com, as soon as reasonably practical after such
material is electronically filed with the Securities and Exchange
Commission.
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EDT LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30,
2003 MARCH 31,
(UNAUDITED) 2003 (A)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 124 $ 409
Accounts receivable, net of allowance for doubtful accounts of $424 and $425,
respectively ................................................................ 861 675
Notes receivable, net of allowance for doubtful accounts of $489 and $553,
respectively .............................................................. 223 270
Prepaid and other current assets ............................................ 101 33
------------ ------------
Total current assets ...................................................... 1,309 1,387
Property and equipment, net .................................................... 429 485
Goodwill ....................................................................... 8,844 8,823
Intangible assets, net ......................................................... 1,265 1,346
Notes receivable, net of allowance for doubtful accounts of $663 and $607,
Respectively ............................................................. 289 326
Other assets .................................................................. 54 56
------------ ------------
Total assets .............................................................. $ 12,190 $ 12,423
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt ........................................... $ 596 $ 728
Accounts payable and accrued liabilities .................................... 2,005 2,040
Current portion of capital lease liabilities ................................ 502 462
Current portion of deferred revenue ......................................... 752 817
------------ ------------
Total current liabilities ................................................. 3,855 4,047
Long term debt, less current maturities, net of discount of $1,981 and $2,038,
Respectively ............................................................. 5,979 5,863
Capital lease liabilities, less current maturities ............................. 126 193
------------ ------------
Total liabilities ......................................................... 9,960 10,103
------------ ------------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value 40,000,000 shares authorized, 17,042,504 and
17,018,184 issued, respectively ............................................. 17 17
Additional paid-in capital .................................................. 32,890 32,854
Accumulated deficit ......................................................... (29,426) (29,300)
Less: 1,244,713 treasury share at cost ..................................... (1,251) (1,251)
------------ ------------
Total shareholders' equity ................................................ 2,230 2,320
------------ ------------
Total liabilities and shareholders' equity ................................ $ 12,190 $ 12,423
============ ============
(A) Derived from the audited consolidated financial statements as of March 31, 2003.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
EDT LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
JUNE 30,
-----------------------
2003 2002
--------- ---------
Revenues
Licenses ........................................... $ 600 $ 12
Service and maintenance ............................ 742 1,119
--------- ---------
Total e-Learning revenue ....................... 1,342 1,131
Dental contract revenue ............................ 83 1,171
--------- ---------
Total revenues ................................. 1,425 2,302
--------- ---------
Operating expenses
Research and development ........................... 565 907
Sales and marketing ................................ 312 360
General and administrative ......................... 588 713
Depreciation and amortization ...................... 107 479
--------- ---------
Total operating expenses ....................... 1,572 2,459
--------- ---------
Loss from operations .................................. (147) (157)
Interest expense ................................... (351) (415)
Interest income and other .......................... 6 36
Gain on termination of service agreements
with Affiliated Practices ..................... 14 181
Gain on settlement of debt and other
obligations ................................... 352 --
--------- ---------
Loss before income taxes ........................... (126) (355)
Income taxes ....................................... -- --
--------- ---------
Net loss .............................................. $ (126) $ (355)
========= =========
Net loss per share - basic and diluted ................ $ (0.01) $ (0.02)
========= =========
Number of shares used in calculation of loss per share,
basic and diluted ................................. 15,798 14,429
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
EDT LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID -IN ACCUMULATED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY
--------- --------- --------- --------- --------- ---------
Balances, April 1, 2003 ........... 17,018 $ 17 $ 32,854 $(29,300) $ (1,251) $ 2,320
Issuances of common stock ......... 24 -- 14 -- -- 14
Repricing of warrants ............. -- -- 12 -- -- 12
Vesting of restricted stock grant . -- -- 10 -- -- 10
Net loss .......................... -- -- -- (126) -- (126)
--------- --------- --------- --------- --------- ---------
Balances, June 30, 2003 ........... 17,042 $ 17 $ 32,890 $(29,426) $ (1,251) $ 2,230
========= ========= ========= ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
EDT LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
JUNE 30,
-------------------------
2003 2002
---------- ----------
Net cash used in operating activities ............ $ (332) $ (832)
---------- ----------
Cash flows from investing activities:
Repayment of notes receivable ................. 78 337
Proceeds from practice terminations ........... 61 382
Acquisition, royalty earnout .................. (21) --
Capital expenditures .......................... -- (72)
---------- ----------
Net cash provided by investing activities ... 118 647
---------- ----------
Cash flows from financing activities:
Repayment of long-term debt ................... (44) (97)
Repayment of capital lease liabilities ........ (27) (155)
Proceeds from stock option exercise ........... -- 17
---------- ----------
Net cash used in financing activities ....... (71) (235)
---------- ----------
Net change in cash and cash equivalents .......... (285) (420)
Cash and cash equivalents, beginning of period ... 409 1,498
---------- ----------
Cash and cash equivalents, end of period ......... $ 124 $ 1,078
========== ==========
Non cash investing and financing activities:
Issuance of common stock for acquisitions ..... $ -- $ 2,307
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
EDT LEARNING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND NATURE OF OPERATIONS
Headquartered in Phoenix, Arizona, EDT Learning, Inc. ("EDT Learning" or
the "Company") is a leading provider of e-Learning and Web collaboration
software and services. The Company's software has become well recognized for
providing industry-leading software with the most robust set of features and
functionality. With over 15 years of combined e-Learning expertise, EDT Learning
provides proven solutions to corporate, government, and education clients alike.
As a comprehensive provider of e-Learning software and services, EDT Learning's
products and services are offered either as an integrated suite or sold
separately.
The Company began in March of 1998 as a dental practice management
company under the name Pentegra Dental Group, Inc. Its formation included the
simultaneous rollup of dental practices ("Affiliated Practices") and an initial
public offering raising $25 million in initial capital. The Company's initial
goals were to provide training and practice enhancement services to its
affiliated dental practices spread over 31 states. The Company subsequently
shifted its focus away from the dental practice management industry and toward
the e-Learning sector in the summer of 2001, and changed its name to EDT
Learning, Inc. The Company has elected not to enter into new dental practice
management contacts, and intends to not renew existing dental practice
management contracts as they expire.
The unaudited condensed consolidated financial statements included herein
have been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Pursuant to such regulations,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The Company believes the presentation and
disclosures herein are adequate to make the information not misleading, but do
not purport to be a complete presentation inasmuch as all note disclosures
required by generally accepted accounting principles are not included. In the
opinion of management, the unaudited condensed consolidated financial statements
reflect all elimination entries and normal recurring adjustments that are
necessary for a fair statement of the results for the interim periods ended June
30, 2003 and 2002.
Fiscal operating results for interim periods are not necessarily
indicative of the results for full years. It is suggested that these unaudited
condensed consolidated financial statements be read in conjunction with the
financial statements of the Company and related notes thereto, and management's
discussion and analysis related thereto, all of which are included in the
Company's annual report on Form 10-K as of and for the year ended March 31,
2003, as filed with the SEC.
The accompanying consolidated financial statements have been prepared on
a basis which assumes that the Company will continue as a going concern and
which contemplates the realization of assets and the satisfaction of liabilities
and commitments in the normal course of business. The Company changed its
business model from a dental practice management company to an e-Learning
company in the summer of 2001. The Company is currently implementing its
e-Learning strategy and has a limited operating history in the e-Learning
business.
The Company had a working capital deficiency, and incurred an operating
loss and had negative cash flows from operations during the three months ended
June 30, 2003 and during fiscal 2003. As part of the Company's legacy business,
services were provided to affiliated dental practices in accordance with
modified service agreements. Those services generally were access to online
enhancement, online payroll processing and online consulting and seminars. As
anticipated and previously announced, nearly all of those legacy service
agreements terminated during fiscal 2003 which will reduce revenues and cash
flow from this source and accordingly will negatively affect the Company's
liquidity and operating results. These matters, among others, including those
discussed above and the limited operating history as an e-Learning company,
raise substantial doubt about the Company's ability to continue as a going
concern.
Management's plan with regard to these matters include continued
development, marketing and licensing of its e-Learning products and services
through both internal growth and acquisition. Although management continues to
pursue these plans, there is no assurance that the Company will be successful in
obtaining sufficient revenues from its products and services to provide adequate
cash flows to sustain operations. Continuation of the Company is dependent on
7
the Company's ability to raise additional equity or debt capital, to increase
its e-Learning revenues, to generate positive cash flows from operations and to
achieve profitability. The consolidated financial statements do not include any
adjustments related to the recoverability of assets and classification of
liabilities that might result from the outcome of this uncertainty.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The Company has not materially added to or changed its significant
accounting policies since March 31, 2003. For a description of these policies,
refer to Note 3 of the consolidated financial statements in the Company's annual
report on Form 10-K as of and for the year ended March 31, 2003.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent asset and
liabilities. The more significant areas requiring use of estimates relate to
revenue recognition, accounts receivable and notes receivable valuation
reserves, realizability of intangible assets, realizability of income tax assets
and the evaluation of contingencies and litigation. Management bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. The results of such estimates
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
materially differ from these estimates under different assumption or conditions.
STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," for disclosure purposes. Under SFAS No. 123, the Company measures
compensation expense for its stock-based employee compensation plan using the
intrinsic value method prescribed in Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees" and its related interpretations. The
Company provides pro forma disclosure of the effect on net income or loss as if
the fair value based method prescribed in SFAS No. 123 has been applied in
measuring compensation expense.
The fair value for options granted was estimated at the date of grant
using a Black-Scholes option-pricing model with the following weighted-average
assumptions for the three months ended June 30, 2003. There were no options
granted during the three months ended June 30, 2002.
THREE MONTHS ENDED JUNE 30,
--------------------------------------
2003 2002
------------------ -------------------
Risk free interest rate 3.88% --
Dividend yield 0% --
Volatility factors of the expected
market price of the Company's
common stock 70% --
Weighted-average expected life of
options 5-9 years --
8
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
THREE MONTHS ENDED JUNE 30,
---------------------------
2003 2002
---------- ----------
Net Loss, as reported ..................................... $ (126) $ (355)
Plus: Stock based employee compensation expense included in
reported net income (loss) ............................. -- --
Less: Total stock based employee compensation expense
determined using fair value based method ............... (57) (164)
---------- ----------
Pro forma net income (loss) ............................... $ (183) $ (519)
========== ==========
Loss per share:
Basic and diluted - as reported ........................... $ (0.01) $ (0.02)
========== ==========
Basic and diluted - pro forma ............................. $ (0.01) $ (0.04)
========== ==========
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES" was issued. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for contracts entered into or modified after June 30,
2003. Adoption of this statement is not expected to have a significant effect on
the Company's consolidated financial position or results of operations.
In May 2003, SFAS No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS
WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY" was issued. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003. The adoption of SFAS No. 150 is not expected to have a significant
effect on the Company's consolidated financial position, results of operations,
or cash flows.
In July 2003, the EITF reached a consensus on EITF 03-5, "Applicability
of AICPA SOP 97-2 to Non-Software Deliverables." EITF 03-5 provides accounting
guidance on whether non-software deliverables (e.g., non-software related
equipment or services) included in an arrangement that contains software are
within the scope of SOP 97-2. In general, any non-software deliverables are
within the scope of SOP 97-2 if the software deliverable is essential to its
functionality. Companies are required to adopt this consensus in the first
reporting period (annual or interim) beginning after ratification by the FASB,
which is expected to be August 13, 2003. The Company believes the adoption of
EITF 03-5 will not have a material impact on the Company's financial position or
results of operations.
3. EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income available to
common stockholders by the weighted-average number of common shares outstanding
for the reporting period. Diluted earnings per share are computed similar to
basic earnings per share while giving effect to all potential dilutive common
stock equivalents that were outstanding during the period. For the three months
ended June 30, 2003 and 2003, options and warrants to purchase 8,435,977 and
8,347,315 shares of common stock were excluded from the computation of diluted
earnings per share because of their anti-dilutive effect. Furthermore, a
restricted stock grant of 450,000 shares and 500,000 shares contingently
issuable in the Quisic acquisition has been excluded from the earnings per share
calculations.
9
4. SEGMENT INFORMATION
During the three months ended June 30, 2003 and 2002, the Company had two
reportable segments, learning and dental practice management. The e-Learning
segment included revenues and operating expenses related to the development and
sale of the Company's e-Learning products. The dental practice segment included
revenues from service contracts, operating expenses related to the delivery of
the dental services and other non-operating expenses. There are no intersegment
revenues. Summary financial information of the segments is as follows:
THREE MONTHS ENDED
JUNE 30,
-------------------------
2003 2002
---------- ----------
Revenues:
Licenses ........................ $ 600 $ 12
Service and maintenance ......... 742 1,119
---------- ----------
Total e-Learning revenues .... 1,342 1,131
Dental practice management ...... 83 1,171
---------- ----------
Total revenues .............. $ 1,425 $ 2,302
========== ==========
Operating expenses:
e-Learning ...................... $ 1,522 $ 1,222
Dental practice management ...... 50 1,237
---------- ----------
Total operating expenses .... $ 1,572 $ 2,459
========== ==========
Loss from operations:
e-Learning ...................... $ (180) $ (91)
Dental practice management ...... 33 (66)
---------- ----------
Total loss from operations .. $ (147) $ (157)
========== ==========
Capital expenditures:
e-Learning ...................... $ -- $ 72
Dental practice management ...... -- --
---------- ----------
Total capital expenditures .. $ -- $ 72
========== ==========
JUNE 30, MARCH 31,
2003 2003
---------- ----------
Total assets:
e-Learning ...................... $ 10,965 $ 11,081
Dental practice management ...... 1,225 1,342
---------- ----------
Total assets .................. $ 12,190 $ 12,423
========== ==========
5. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill consisted of the following:
JUNE 30, MARCH 31,
2003 2003
---------- ----------
(IN THOUSANDS)
Goodwill........................... $ 8,844 $ 8,823
========== ==========
10
The changes in the carrying amount of the goodwill for the three months
ended June 30, 2003:
LEARNING
SEGMENT
----------
Balance, March 31, 2003....................................... $ 8,823
LearnLinc royalty earnout.................................. 21
----------
Balance, June 30, 2003........................................ $ 8,844
==========
Intangible assets consisted of the following (in thousands):
JUNE 30, 2003
----------------------------------------------
GROSS
CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET
------------ ------------ ------------
AMORTIZED INTANGIBLE ASSETS:
Deferred offering costs . $ 1,020 $ (270) $ 750
Purchase software ....... 675 (174) 501
Customer relationship ... 32 (18) 14
------------ ------------ ------------
$ 1,727 $ (462) $ 1,265
============ ============ ============
MARCH 31, 2003
----------------------------------------------
GROSS
CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET
------------ ------------ ------------
AMORTIZED INTANGIBLE ASSETS:
Deferred offering costs . $ 1,020 $ (249) $ 771
Purchase software ....... 675 (118) 557
Customer relationship ... 32 (14) 18
------------ ------------ ------------
$ 1,727 $ (381) $ 1,346
============ ============ ============
6. ACCOUNT PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following:
JUNE 30, MARCH 31,
--------------------
2003 2003
--------- ---------
(IN THOUSANDS)
Accounts payable trade .......................... $ 832 $ 681
Accrued state sales tax ......................... 32 384
Accrued interest ................................ 320 310
Amount payable to Quisic shareholders ........... 200 150
Amounts related to acquisitions ................. 71 73
Accrued salaries and related benefits ........... 137 160
Amount payable to third party providers ......... 120 37
Deferred rent liability ......................... 116 89
Lease termination liability ..................... 103 101
Other ........................................... 74 55
--------- ---------
Total accounts payable and accrued liabilities $ 2,005 $ 2,040
========= =========
11
7. LONG-TERM DEBT
Long-term debt consisted of the following:
JUNE 30, MARCH 31,
---------------------
2003 2003
-------- --------
(IN THOUSANDS)
Convertible redeemable subordinated notes $ 5,775 $ 5,775
Convertible subordinated notes, Series A 849 849
Subordinated promissory notes ........... 1,072 1,072
Shareholders' notes payable ............. 391 430
Notes payable ........................... 469 503
-------- --------
8,556 8,629
Less: current portion of long-term debt . (596) (728)
discount .......................... (991) (1,019)
beneficial conversion feature ..... (990) (1,019)
-------- --------
Long-term debt .......................... $ 5,979 $ 5,863
======== ========
In March 2002, the Company completed a Private Placement Offering (the
"Offering") raising capital of $5,775,000. Under the terms of the Offering, the
Company issued convertible redeemable subordinated notes ("the notes") and
warrants to purchase 5,775,000 shares of the Company's common stock. The notes
bear interest at 12% per annum and require quarterly interest payments with the
principal due at maturity on March 29, 2012. The note holders may convert the
notes into shares of the Company's common stock at a price equal to $1.00 per
share. The Company may force redemption of the notes into shares of the
Company's common stock at the conversion price, if at any time the closing price
of the Company's common stock equals or exceeds $3.00 per share for 20
consecutive trading days. The notes are subordinated to any present or future
senior indebtedness, with no waiver required.
The exercise price for the warrants is $3.00 per share. The Company may
force redemption of the warrants into shares of the Company's common stock at
the exercise price, if at any time the closing price of the Company's common
stock equals or exceeds $5.50 per share for 20 consecutive trading days. The
warrants expire on March 29, 2005. The fair value of the warrants was estimated
using a Black-Scholes pricing model with the following assumptions: contractual
and expected life of three years, volatility of 75%, dividend yield of 0%, and a
risk-free rate of 3.87%. The fair value was then used to calculate a discount of
$1,132,000, which is being amortized to interest expense over ten years, the
term of the notes. As the carrying value of the notes is less than the
conversion value, a beneficial conversion feature of $1,132,000 was calculated
and recorded as an additional discount to the notes and is being amortized to
interest expense over the term of the notes. Upon conversion, any remaining
discount associated with the beneficial conversion feature will be expensed in
full at the time of conversion.
In October 2001, the Company issued $1.1 million of subordinated
promissory notes to the shareholders of Learning-Edge, Inc. under the terms of
the acquisition agreement (the "Learning-Edge Notes"). The Learning-Edge Notes
bear interest at rates ranging from at 7.5% to 9.0% and are due in two equal
installments on April 5, 2005 and on October 1, 2005, respectively. If the
Company raises additional capital equal to or in excess of $3 million, 25% of
the principal of the Learning-Edge Notes is to be repaid. For each $500,000
raised above $3 million, the repayment percentage increases by 15%. If more than
$5 million is raised, 100% of the principal of the Learning-Edge Notes is to be
repaid. The holders of the Learning-Edge Notes waived the accelerated payment
schedule in relation to the Offering.
The Convertible Subordinated Notes Series A Securities ("Series A
Securities") were issued in connection with the acquisition of certain
Affiliated Practices. The Series A Securities bear interest at 12% and can be
converted to Common Stock of the Company at conversion prices ranging from $6.75
to $7.00 per share. The conversion period began on November 1, 1999 and ends on
July 1, 2004. The principal amount of the Series A Securities, if not converted,
is payable on July 1, 2004.
In connection with the IPO, the Company issued $468,000 of notes payable
to certain shareholders formerly owning preferred stock. The notes bear 6%
interest and were originally payable on the earlier of March 30, 2003 or the
date upon which the Company offers and sells an amount of equity securities
equal or greater to the gross proceeds of the IPO. During the three months ended
June 30, 2003 and the year ended March 31, 2003, $4,000 and $58,000 of accrued
12
interest on certain of these notes was added to the principal balance and the
maturity date was extended to April 1, 2005. The new principal balance on the
extended notes is $267,000 and the interest rate was increased to 10%. The
remaining $124,000 is currently past due.
In connection with the acquisition of certain assets of LearnLinc
Corporation, the Company issued a $250,000 note payable. The note bears interest
at 6% with quarterly interest payments and is due on December 13, 2003.
The aggregate maturities of long-term debt excluding capital leases for
each of the next five years subsequent to June 30, 2003 were as follows (in
thousands):
Amounts past due........................................... $ 124
2004....................................................... 472
2005....................................................... 1,653
2006....................................................... 532
2007....................................................... --
2008....................................................... --
Thereafter................................................. 5,775
----------
$ 8,556
==========
8. STOCK OPTION PLANS AND WARRANTS
The Company grants stock options under its 1997 Stock Compensation Plan
(the "Plan"). The Company recognizes stock-based compensation issued to
employees at the intrinsic value between the exercise price of options granted
and the fair value of stock for which the options may be exercised. However, pro
forma disclosures as if the Company recognized stock-based compensation at the
fair value of the options themselves are presented below.
Under the Plan, the Company is authorized to issue 3,500,000 shares of
Common Stock pursuant to "Awards" granted to officers and key employees in the
form of stock options.
There were 1,788,313 options granted under the Plan at June 30, 2003. The
Compensation Committee administers the Plan. These stock options have
contractual terms of 10 years and have an exercise price no less than the fair
market value of the stock at grant date. The options vest at varying rates over
a one to five year period.
Following is a summary of the status of the Company's stock options as of
June 30, 2003:
NUMBER OF WEIGHTED WEIGHTED
SHARES AVERAGE AVERAGE
UNDERLYING EXERCISE FAIR-VALUE OF
OPTIONS PRICES OPTIONS GRANTED
------------- ----------- ---------------
Outstanding at March 31, 2003................... 1,835,865 $ 1.82
Granted......................................... 70,000 0.50 $ 0.21
======
Exercised....................................... --
Forfeited....................................... (117,552) 0.59
Expired......................................... --
-------------- -----------
Outstanding at June 30, 2003.................... 1,788,313 $ 1.87
============== ===========
13
The following table summarizes information about stock options
outstanding at June 30, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE AVERAGE
NUMBER OF EXERCISE REMAINING CONTRACTUAL NUMBER OF EXERCISE
SHARES PRICE LIFE (YEARS) SHARES PRICE
--------- -------- --------------------- --------- --------
(SHARE DATA IN THOUSANDS)
$ 0.01 - $ 0.99 1,029,581 $ 0.54 7.81 629,169 $ 0.53
$ 1.00 - $ 1.99 107,125 1.59 7.20 96,175 1.66
$ 2.00 - $ 2.99 430,000 2.22 6.03 378,000 2.25
$ 3.00 - $ 8.50 221,607 7.31 4.85 201,929 7.40
-------------- -------------
1,788,313 1,305,273
============== ===============
The following table summarizes information about stock purchase warrants
outstanding at June 30, 2003:
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
---------------------------------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE AVERAGE
NUMBER OF EXERCISE REMAINING CONTRACTUAL NUMBER OF EXERCISE
SHARES PRICE LIFE (YEARS) SHARES PRICE
--------- -------- --------------------- --------- --------
(SHARE DATA IN THOUSANDS)
$ 0.42 - $ 0.42 543,182 $ 0.42 8.15 543,182 $ 0.42
$ 0.44 - $ 0.44 132,972 0.44 8.21 132,972 0.44
$ 0.50 - $ 0.50 25,000 0.50 2.51 25,000 0.50
$ 1.50 - $ 1.50 171,510 1.50 8.56 171,510 1.50
$ 3.00 - $ 3.00 5,775,000 3.00 1.75 5,775,000 3.00
-------------- -------------
6,647,664 6,647,664
============== ===============
In December 2001, the Company, under the initiative of the Compensation
Committee with the approval of the Board of Directors, issued its chief
executive officer an incentive stock grant under the 1997 Stock Compensation
Plan of 450,000 restricted shares of the Company's common stock as a means to
retain and incentivize the chief executive officer. The shares 100% vest after
10 years from the date of grant. The shares were valued at $405,000 based on the
closing price of the stock on the date of grant, which is recorded as
compensation expense ratably over the ten-year vesting period.
The vesting of the incentive shares accelerates based on the Company's
share price as follows:
PERFORMANCE CRITERIA SHARES VESTED
--------------------------------------------------------------------- ----------------
Share price trades for $4.50 per share for 20 consecutive days 150,000 shares
Share price trades for $8.50 share for 20 consecutive days 150,000 shares
Share price trades for $12.50 per share for 20 consecutive days 150,000 shares
14
9. COMMITMENTS AND CONTINGENCIES
The Company is subject to various commitments and contingencies as
described in Note 16 to the consolidated financial statements in the Companies
annual report on Form 10-K as of and for the year ended March 31, 2003. The
significant items included were Lease Commitments, Employment Agreements,
Litigation and Royalty Agreements. During the three month period ended June 30,
2003, the following commitments and contingencies arose or were settled:
The Company's wholly owned subsidiary, TW Acquisition Subsidiary, Inc.
was a respondent in a claim asserted by the Tennessee Department of Revenue
alleging a sales and use tax liability of approximately $384,000 from sales made
by its predecessor, ThoughtWare Technologies, Inc. The Company was notified on
July 29, 2003, that the sales tax assessment was abated. Accordingly, the
Company has reversed $352,000 of the accrued liability as of June 30, 2003. As
the purchase allocation period to the acquisition was closed, the $352,000 was
recorded as other income rather than a reduction to goodwill.
Effective May 1, 2003, certain employees of the Company terminated their
employment with the Company and created a new company, Interactive Alchemy, Inc.
("IA"). The Company entered into a non-cancelable three-year subcontractor
agreement with IA whereby the Company is required to source its custom content
development services through IA. The Company provides IA with certain facilities
and administrative support for which in exchange it receives a specified amount
of support services. Furthermore, the agreement provides for a specified fee
sharing arrangement between the Company and IA for all custom content
development services provided. During the three month period ended June 30,
2003, the Company incurred approximately $151,000 of fees to IA in connection
with this agreement.
10. SUBSEQUENT EVENTS
The Company is in the process of raising $1 million to $1.5 million of
additional capital through a private placement offering. Under the terms of the
offering, the Company intends to sell 20 units at $50,000 each, or a total of $1
million in gross proceeds, with an additional 10 units available for sale at the
discretion of the Company, which would increase the gross proceeds to $1.5
million in the event the additional units are issued. Each unit will consist of
50,000 shares of preferred stock and a warrant to purchase 25,000 shares of
common stock. The preferred stock in each unit, which will have a par value of
$0.01, will be convertible into 100,000 shares of common stock at a price of
$0.50 per share (subject to adjustment in certain events). The warrants are
exercisable at a price of $1.50 per share and will expire three years after the
date of issuance of the warrant. The Company will pay an 8% dividend to holders
of the preferred stock, and the dividend will be cumulative. The preferred stock
will be non-voting and non-participating. The placement agent is to be paid a
commission totaling 10% of gross proceeds, plus a 3% non-accountable expense
allowance. Through August 12, 2003, the Company has received subscriptions for
approximately $1,000,000 and has extended the offering through August 31, 2003.
The Company intends to file a Form 8-K in early September 2003 with the full
results of the offering.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K THAT INVOLVE
WORDS LIKE "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS,"
"ESTIMATES" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995, THE SECURITIES ACT OF 1933, AS AMENDED, AND THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
ANTICIPATED RESULTS. THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED
TO, OUR DEPENDENCE ON OUR PRODUCTS OR SERVICES, MARKET DEMAND FOR OUR PRODUCTS
AND SERVICES, OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS AND CHANNEL PARTNERS,
OUR ABILITY TO EXPAND OUR TECHNOLOGICAL INFRASTRUCTURE TO MEET THE DEMAND FROM
OUR CUSTOMERS, OUR ABILITY TO RECRUIT AND RETAIN QUALIFIED EMPLOYEES, THE
ABILITY OF CHANNEL PARTNERS TO SUCCESSFULLY RESELL OUR SERVICES, THE STATUS OF
THE OVERALL ECONOMY, THE STRENGTH OF COMPETITIVE OFFERINGS, THE PRICING
PRESSURES CREATED BY MARKET FORCES, AND THE OTHER RISKS DISCUSSED HEREIN. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE BASED ON INFORMATION
AVAILABLE TO US AS OF THE DATE HEREOF. WE EXPRESSLY DISCLAIM 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 IN
EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED. OUR
REPORTS ARE AVAILABLE FREE OF CHARGE AS SOON AS REASONABLY PRACTICABLE AFTER WE
FILE THEM WITH THE SEC AND MAY BE OBTAINED THROUGH OUR WEBSITE.
OVERVIEW
As of June 30, 2003 we offered to our customers a wide array of
e-Learning and training products and services. Our four-product suite
(LearnLinc, MeetingLinc, ConferenceLinc, and SupportLinc) also lets customers
collaborate and present over the Internet in one-to-one, one-to-many, and
many-to-many communication formats. Our Web collaboration suite of products is
sold in both an application service provider ("ASP") or hosted basis (a periodic
license) and on a purchase client hosted basis (client server software sold as a
non-periodic, perpetual license). While we are a comprehensive provider of
e-Learning products, over the past 15 months we shifted our focus away from our
lower margin custom content service business and toward our higher margin
software products with particular emphasis since December of 2002 on our Web
collaboration and virtual classroom suite led by LearnLinc.
In addition to our web collaboration and virtual classroom software, we
also offer software that facilitates the management of users and e-Learning
content through EDT's Learning Management System (LMS). Our LMS has been
combined with a suite of workforce management solutions (the ThoughtWare Suite),
which includes Career Planner, Job Seeker, and Performance Coach. Our LMS
software is offered in an ASP format using a periodic per user per period annual
license agreement.
For the development of custom online content we offer an award winning
content development software, (i-Canvas) which is sold on an individual user
perpetual license basis. We continue to provide to our customers award winning
custom content services including the development of online course material
specific to our customers. Custom content services are bid on a
project-by-project basis and revenue is recognized on the
percentage-of-completed contract method.
Finally, we offer a library of online courses focused upon the training
of executives on essential business topics, including an online "mini-MBA"
program. Customers subscribe for a period of time per course, with the license
providing for access over typically one year from date the students first access
of the course.
The Company began operations in March of 1998 under the name Pentegra
Dental Group, Inc. Its formation included the simultaneous roll-up of 50
businesses and an initial public offering. The Company's initial goals were to
provide training and practice enhancement services nationwide to our affiliated
dental practices including the use of our proprietary Web-based management and
financial reporting system. Beginning in April of 2000, the Company modified its
affiliated service agreements and commensurate with that change the Company
recorded certain charges against earnings during the fiscal year ending March
31, 2001. The Company evolved from its legacy business into its current
e-Learning focus during its fiscal year 2002, and accordingly, changed its name
to EDT Learning, Inc. (now trading as AMEX:EDT).
16
During the three months ended June 30, 2003, the Company had two
reportable segments, e-Learning and dental practice management. The e-Learning
segment included revenues and operating expenses related to the development and
sale of the Company's e-Learning products. The dental practice segment included
revenues from service contracts, operating expenses related to the delivery of
the dental services and other non-operating expenses. There are no intersegment
revenues. Summary financial information of these segments is as follows:
THREE MONTHS ENDED
JUNE 30,
-------------------------
2003 2002
---------- ----------
Revenues:
Licenses ........................ $ 600 $ 12
Service and maintenance ......... 742 1,119
---------- ----------
Total e-Learning revenues .... 1,342 1,131
Dental practice management ...... 83 1,171
---------- ----------
Total revenues .............. $ 1,425 $ 2,302
========== ==========
Operating expenses:
e-Learning ...................... $ 1,522 $ 1,222
Dental practice management ...... 50 1,237
---------- ----------
Total operating expenses .... $ 1,572 $ 2,459
========== ==========
Loss from operations:
e-Learning ...................... $ (180) $ (91)
Dental practice management ...... 33 (66)
---------- ----------
Total loss from operations .. $ (147) $ (157)
========== ==========
Capital expenditures:
e-Learning ...................... $ -- $ 72
Dental practice management ...... -- --
---------- ----------
Total capital expenditures .. $ -- $ 72
========== ==========
JUNE 30, MARCH 31,
2003 2003
---------- ----------
Total assets:
e-Learning ...................... $ 10,965 $ 11,081
Dental practice management ...... 1,225 1,342
---------- ----------
Total assets .................. $ 12,190 $ 12,423
========== ==========
RESULTS OF OPERATIONS
As of June 30, 2003, we offered to our customers a wide array of
e-Learning and training products and services. Since December of 2002 we have
placed special emphasis on sales and marketing efforts that have been directed
at our virtual classroom Web casting and online collaboration four-product suite
led by LearnLinc. We continue to offer for those seeking to manage users and
e-Learning content EDT's Learning Management System, which has been combined
with a suite of workforce management solutions - which includes Career Planner,
Job Seeker, and Performance Coach. For the development of custom online content
we offer an award winning content development software, i-Canvas and award
winning custom content services, which have been providing proven results for
over 15 years. Finally, we offer a library of online courses focused upon the
training of executives on essential business topics.
The Company has implemented its e-Learning strategy. The Company
acquired the assets of two e-Learning entities during fiscal 2003 and acquired
two e-Learning entities during fiscal 2002.
On October 1, 2001, the Company acquired all of the outstanding capital
stock of Learning-Edge, Inc.; an Arizona based private e-learning company. The
Company issued 1,950,000 common shares and $1.1 million of debt under the terms
17
of the acquisition agreement. The debt bears interest at rates ranging from 7.5%
to 9.0% and is due in two equal installments on April 1, 2005 and on October 1,
2005, respectively. The Company also assumed approximately $2.9 million of
Learning-Edge debt as part of this acquisition. The operating results of
Learning-Edge are included with the Company as of October 1, 2001.
On January 15, 2002, the Company acquired all of the outstanding
capital stock of ThoughtWare Technologies, Inc.; a Tennessee based private
company. The Company issued 1,550,000 common shares under the terms of the
acquisition agreement. The Company also assumed approximately $1.5 million of
ThoughtWare debt as part of this acquisition. Since January 2002, operating
results of ThoughtWare are included with the Company's results from operations.
On June 14, 2002, the Company acquired certain assets of Quisic
Corporation ("Quisic"); a California based private e-Learning company for in an
asset purchase and common stock purchase transaction that involved the issuance
of 2,000,000 common shares to certain shareholders of Quisic. An additional
500,000 shares of common stock of the Company were contingently issuable upon
the achievement of certain cash basis sales targets, as defined, for the
12-month period following the close of the acquisition. As of June 30,2003, the
cash basis sales targets were not achieved. The operating results of Quisic have
been included in the consolidated operations of the Company commencing June 17,
2002.
The purchase agreement also provides for the Company to remit to the
seller, during the 5 year period following the close of the acquisition, 100% of
the first $1,250,000 of proceeds and 50% of the remaining proceeds from the
sales of software licenses for certain specified products, as defined, and
collection of notes. Since the closing date of the acquisition and through June
30, 2003, the Company has collected funds subject to this provision of the
agreement totaling $200,000, all of which has been withheld and not remitted to
the seller as of June 30, 2003 in accordance with the Company's understanding of
the escrow and indemnity provisions of the Asset Purchase Agreement.
Effective November 4, 2002, the Company acquired certain assets of
Mentergy, Inc. ("Mentergy"), a wholly owned subsidiary of Mentergy, Ltd, in
exchange for $500,000 and the assumption of $462,000 of liabilities. In
addition, the Company has agreed to pay a royalty of 20% for all revenues
collected from the sale or license of LearnLinc software over a three-year
period. The first $600,000 of sales is not subject to the royalty. The maximum
amount due under the Royalty Agreement is $5,000,000. The Company intends to
account for any such amounts collected as additional purchase consideration in
accordance with EITF No. 95-8 at the time such amounts are remitted to the
seller. As of June 30, 2003, the Company has collected $708,000 related to this
royalty agreement and has recorded additional purchase consideration of $21,000.
The operating results are included with the Company's as of November 4, 2002.
As a part of our legacy business we provided services to certain
affiliated practices in accordance with modified service agreements. Those
services generally included access to online enhancement, access to online
payroll processing, access to online consulting and seminars. For the fiscal
years ending March 31, 2003 and 2002, we earned dental revenues of $3.1 million
and $6.6 million, respectively. As anticipated and previously announced, nearly
all of those legacy service agreements terminated during fiscal 2003. In fiscal
2004, $200,000 is anticipated in dental revenues and $235,000 from the
collection of notes receivable from those dental practices that had executed a
legacy management services agreement ("Affiliated Practices").
The operations of the Company involve many risks, which, even through a
combination of experience, knowledge and careful evaluation, may not be
overcome. These risks include the fact that the market for e-learning products
and services is in the early stages of development and may not grow to a
sufficient size or at a sufficient rate to sustain the Company's business. The
Company also faces intense competition from other e-learning providers and may
be unable to compete successfully. Many of the Company's existing and potential
competitors have longer operating histories and significantly greater financial,
technical and other resources and therefore may be able to more quickly respond
to changing opportunities or customer requirements. New competitors are also
likely to enter this market in the future due to the lack of significant barrier
to entry in the market share.
REVENUES
Total revenues generated for the three months ended June 30, 2003 and
June 30, 2002 were $1.4 million and $2.3 million respectively, a decrease of
$900,000. e-Learning revenues for the three months ended June 30, 2003 and June
30, 2002 were $1.3 million and $1.1 million, respectively, an increase of
$588,000 in licenses and a decrease of $377,000 in e-Learning service and
18
maintenance revenues. The increase is a result of the Company's continuing
expansion into the e-Learning marketplace and has been fueled by the
acquisitions in fiscal 2003 of certain assets of LearnLinc and Quisic. Revenue
from dental contracts decreased by $1.1 million from $1.2 million for the three
months ended June 30, 2002 to $83,000 for the three months ended June 30, 2003
due to the previously announced and planned modification and termination of
certain dental management service contracts. As anticipated and previously
announced, nearly all of those legacy management service agreements terminated
during fiscal 2003 and only $200,000 is anticipated to be earned as dental
revenue for fiscal 2004.
OPERATING EXPENSES
Operating expenses consist of research and development, sales and
marketing, general and administrative, and depreciation and amortization
expenses. The Company incurred operating expenses of $1.6 million for the three
months ended June 30, 2003, a decrease of $900,000 from $2.5 million for the
three months ended June 30, 2002. This is due to decreases in salaries and wages
of $480,000, advertising and printing of $55,000, office expenses of $35,000,
telephone of $16,000, $121,000 of legal fees and $372,000 in depreciation and
amortization expense. These were offset by increases of $103,000 in product
development costs and $103,000 of bad debt expense. The Company has reduced head
count from a high of 83 in June of 2002 to 38 at June 30, 2003. In addition, the
Company has streamlined its operations by closing non-essential facilities and
consolidating those functions in its Phoenix and Troy locations.
Research and development expenses represent expenses incurred in
connection with the provision of e-learning services, development of new
products and new product versions and consist primarily of salaries and
benefits, communication equipment and supplies. Research and development
expenses for the three months ended June 30, 2003 and June 30, 2002 were
$565,000 and $907,000, respectively, a decrease of $342,000. The decrease is a
result of the Company's closure of the Memphis and Los Angeles offices, reducing
headcount by 25 since June 30, 2002 and salaries and wages by $278,000.
Sales and marketing expenses consist primarily of sales and marketing
salaries and benefits, travel, advertising, and other marketing literature.
Sales and marketing expenses were $312,000 and $360,000 for the three months
ended June 30, 2003 and June 30, 2002, respectively, a decrease of $48,000. The
decrease is a result of a decrease in advertising and printing of $45,000 and
travel expenses of $5,000.
General and administrative expenses consist of the corporate expenses of
the Company. These corporate expenses include salaries and benefits of
executive, finance and administrative personnel, rent, bad debt expense,
professional services, travel, office costs and other general corporate
expenses. During the three months ended June 30, 2003 and June 30,2002, general
and administrative expenses were $588,000 and $713,000, respectively, a decrease
of $125,000. The change in General and administrative expenses was primarily due
to increases in bad debt expense of $103,000, $25,000 in other taxes and $18,000
in occupancy costs; and decreases in legal fees of $121,000, compensation and
related benefit expense of $112,000, office expenses of $14,000, investor
relations of $26,000, and travel expenses of $10,000. The Company continues
efforts to reduce overhead, with those efforts including the elimination of
facilities, equipment, and personnel.
For the three months ended June 30, 2003 and June 30, 2002 depreciation
and amortization expense was $107,000 and $479,000, respectively. Beginning in
fiscal 2003 the Company ceased amortizing goodwill in accordance with SFAS No.
142. The decrease is also attributed to the modification and termination of the
service agreements that returned ownership of the dental practice equipment to
the related dental practices.
INTEREST EXPENSE
Interest expense of $351,000 in for the three months ended June 30,
2003 decreased by $64,000 from $415,000 for the three months ended June 30,
2002. The decrease was primarily a result of a reduction in interest expense
associated with the Company's interest bearing liabilities.
GAIN ON TERMINATION AND RESTRUCTURING OF SERVICE CONTRACTS WITH AFFILIATED
PRACTICES
The gains of $14,000 and $181,000 for the three months ended June 30,
2003 and 2002 relate to a variety of transactions with Affiliated Practices,
including the results of negotiated settlements, the results of litigation to
enforce contracts and modified service agreements.
19
GAIN ON SETTLEMENT OF DEBT AND OTHER OBLIGATIONS
During the three months ended June 30, 2003, the Company recognized a
gain of $352,000 relating to a state sales tax settlement. As part of the
acquisition of ThoughtWare in January of 2002, the Company assumed a sales and
use tax liability of $384,000. On July 29, 2003, the Company was notified by the
state taxing authorities that the amount due relating to the sales tax would be
removed from the assessment resulting in a net amount due of $32,000. As the
purchase allocation period to the acquisition was closed, the $352,000 was
recorded as other income rather than a reduction to goodwill.
INCOME TAX EXPENSE
The Company recorded no tax benefit during the three months ended June
30, 2003 or 2002 because it concluded it is not likely it would be able to
recognize the tax asset created due to the lack of operating history of its
e-Learning business strategy. At March 31, 2003, the Company has a net deferred
tax asset of $9.9 million with a corresponding valuation allowance. The
Company's tax benefits are scheduled to expire over a period of six to fourteen
years.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a working capital deficiency, incurred an operating loss
and had negative cash flows from operations during the three months ended June
30, 2003. As part of the Company's legacy business, services were provided to
affiliated dental practices in accordance with modified service agreements.
Those services generally were access to online enhancement, online payroll
processing and online consulting and seminars. As anticipated and previously
announced, nearly all of those legacy service agreements terminated during
fiscal 2003 which will reduce revenues and cash flow from this source and
accordingly will negatively affect the Company's liquidity and operating
results. These matters, among others, including those discussed above and the
limited operating history as an e-Learning company, raise substantial doubt
about the Company's ability to continue as a going concern.
Management's plan with regard to these matters includes continued
development, marketing and licensing of its e-Learning products and services.
Although management continues to pursue these plans, there is no assurance that
the Company will be successful in obtaining sufficient revenues from its
products and services to provide adequate cash flows to sustain operations.
In order to increase its liquidity, the Company has developed a plan
consisting of the following strategies; (i) implement its e-Learning based
strategic business plan and (ii) restructure or extend outstanding obligations
to reduce cash outflows for debt service and (iii) seek if necessary funding
from the placement of debt or equity securities providing additional capital.
However, there can be no assurance that the Company's e-Learning strategies will
be achieved or that creditors of the Company will accept delayed or reduced sums
or that the Company will be able to acquire additional sums.
The Company's service agreements with affiliated dental practices
nearly all terminated during fiscal 2003 which will reduce revenues and cash
flow from this source and accordingly could negatively affect the Company's
liquidity and operating results. During the three months ended June 30, 2003 and
2002, the Company received $61,000 and $382,000 respectively, in cash from
terminating the service agreements with affiliated practices. These cash
collections accelerate the date at which the Company will be required to sustain
its operations solely on cash collections derived from e-Learning revenues.
However, there can be no assurance that the Company's e-Learning strategies will
be achieved. The Company currently does not have existing working capital and
does not generate positive cash flows from operations. As a result, we may not
have sufficient financial resources to satisfy our obligations as they come due
in the near term.
As of June 30, 2003, the Company had a working capital deficit of $2.5
million. Current assets included $124,000 in cash, $861,000 in accounts
receivable and $223,000 in notes receivable. Current liabilities consisted of
$752,000 of deferred revenue, $1.1 million of current maturities of long-term
debt and capital leases and $2.0 million in accounts payable and accrued
liabilities.
Cash used in operating activities was $332,000 during the three months
ended June 30, 2003 and $832,000 during the three months ended June 30, 2002.
Cash used in operating activities during the three months ended June 30, 2003
20
was primarily attributable to a net loss of $126,000, increases in accounts
receivable and prepaid expenses of $186,000 and $68,000, respectively and a
decrease in deferred revenue of $65,000. These items were partially offset by
$107,000 of depreciation and amortization expense and discount accretion on debt
of $57,000. Cash used in operating activities during the three months ended June
30, 2002 was primarily attributable to a net loss of $355,000, decreases in
deferred revenue and accounts payable and accrued liabilities of $549,000 and
$406,000, respectively. These items were offset by $479,000 of depreciation and
amortization expense.
Cash provided by investing activities was $118,000 and $647,000 for the
three months ended June 30, 2003 and June 30, 2002, respectively. Cash provided
by investing activities for the three months ended June 30, 2003 was primarily
due to $78,000 from the repayment of notes receivable and proceeds received from
practice terminations of $61,000. Cash provided by investing activities during
the three months ended June 30, 2002 was primarily due to proceeds received from
practice terminations of $382,000 and the repayment of notes receivable of
$337,000.
Cash used in financing activities was $71,000 during the three months
ended June 30, 2003, and $235,000 during the three months ended June 30, 2002.
Cash used in financing activities during the three months ended June 30, 2003
was due to the repayment of debt and capital leases of $71,000. Cash used in
financing activities during the three months ended June 30, 2002 was primarily
attributable to the repayment of debt and capital leases totaling $252,000.
The Company is in the process of raising $1 million to $1.5 million of
additional capital through a private placement offering. Under the terms of the
offering, the Company intends to sell 20 units at $50,000 each, or a total of $1
million in gross proceeds, with an additional 10 units available for sale at the
discretion of the Company, which would increase the gross proceeds to $1.5
million in the event the additional units are issued. Each unit will consist of
50,000 shares of preferred stock and a warrant to purchase 25,000 shares of
common stock. The preferred stock in each unit, which will have a par value of
$0.01, will be convertible into 100,000 shares of common stock at a price of
$0.50 per share (subject to adjustment in certain events). The warrants are
exercisable at a price of $1.50 per share and will expire three years after the
date of issuance of the warrant. The Company will pay an 8% dividend to holders
of the preferred stock, and the dividend will be cumulative. The preferred stock
will be non-voting and non-participating. The placement agent is to be paid a
commission totaling 10% of gross proceeds, plus a 3% non-accountable expense
allowance. Through August 12, 2003, the Company has received subscriptions for
approximately $1,000,000 and has extended the offering through August 31, 2003.
The Company intends to file a Form 8-K in early September 2003 with the full
results of the offering.
In March 2002, the Company completed a Private Placement Offering (the
"Offering") raising capital of $5,775,000. Under the terms of the Offering, the
Company issued convertible redeemable subordinated notes ("the notes") and
warrants to purchase 5,775,000 shares of the Company's common stock. The notes
bear interest at 12% per annum and require quarterly interest payments with the
principal due at maturity on March 29, 2012. The note holders may convert the
notes into shares of the Company's common stock at a price equal to $1.00 per
share. The Company may force redemption of the notes into shares of the
Company's common stock at the conversion price, if at any time the closing price
of the Company's common stock equals or exceeds $3.00 per share for 20
consecutive trading days. The notes are subordinated to any present or future
senior indebtedness, with no waiver required.
The exercise price for the warrants is $3.00 per share. The Company may
force redemption of the warrants into shares of the Company's common stock at
the exercise price, if at any time the closing price of the Company's common
stock equals or exceeds $5.50 per share for 20 consecutive trading days. The
warrants expire on March 29, 2005. The fair value of the warrants was estimated
using a Black-Scholes pricing model with the following assumptions: contractual
and expected life of three years, volatility of 75%, dividend yield of 0%, and a
risk-free rate of 3.87%. The fair value was then used to calculate a discount of
$1,132,000, which is being amortized to interest expense over ten years, the
term of the notes. As the carrying value of the notes is less than the
conversion value, a beneficial conversion feature of $1,132,000 was calculated
and recorded as an additional discount to the notes and is being amortized to
interest expense over the term of the notes. Upon conversion, any remaining
discount associated with the beneficial conversion feature will be expensed in
full at the time of conversion.
In October 2001, the Company issued $1.1 million of subordinated
promissory notes to the shareholders of Learning-Edge, Inc. under the terms of
the acquisition agreement (the "Learning-Edge Notes"). The Learning-Edge Notes
bear interest at rates ranging from at 7.5% to 9.0% and are due in two equal
installments on April 5, 2005 and on October 1, 2005, respectively. If the
Company raises additional capital equal to or in excess of $3 million, 25% of
the principal of the Learning-Edge Notes is to be repaid. For each $500,000
raised above $3 million, the repayment percentage increases by 15%. If more than
$5 million is raised, 100% of the principal of the Learning-Edge Notes is to be
21
repaid. The holders of the Learning-Edge Notes waived the accelerated payment
schedule in relation to the Offering.
The Convertible Subordinated Notes Series A Securities ("Series A
Securities") were issued in connection with the acquisition of certain
Affiliated Practices. The Series A Securities bear interest at 12% and can be
converted to Common Stock of the Company at conversion prices ranging from $6.75
to $7.00 per share. The conversion period began on November 1, 1999 and ends on
July 1, 2004. The principal amount of the Series A Securities, if not converted,
is payable on July 1, 2004.
In connection with the IPO, the Company issued $468,000 of notes
payable to certain shareholders formerly owning preferred stock. The notes bear
6% interest and were originally payable on the earlier of March 30, 2003 or the
date upon which the Company offers and sells an amount of equity securities
equal or greater to the gross proceeds of the IPO. During the three months ended
June 30, 2003 and the year ended March 31, 2003, $4,000 and $58,000 of accrued
interest on certain of these notes was added to the principal balance and the
maturity date was extended to April 1, 2005. The new principal balance on the
extended notes is $267,000 and the interest rate was increased to 10%. The
remaining $124,000 is currently past due.
In connection with the acquisition of certain assets of LearnLinc
Corporation, the Company issued a $250,000 note payable. The note bears interest
at 6% with quarterly interest payments and is due on December 13, 2003.
Effective May 1, 2003, certain employees of the Company terminated
their employment with the Company and created a new company, Interactive
Alchemy, Inc. ("IA"). The Company entered into a non-cancelable three-year
subcontractor agreement with IA whereby the Company is required to source its
custom content development services through IA. The Company provides IA with
certain facilities and administrative support for which in exchange it receives
a specified amount of support services. Furthermore, the Company's fee sharing
arrangement generally provides for the Company and IA to receive 20% and 80% of
all custom content development services provided, respectively.
CONTRACTUAL OBLIGATIONS
The following schedule details all of the Company's indebtedness and the
required payments related to such obligations at June 30, 2003 (in thousands):
DUE IN DUE IN DUE IN
LESS THAN DUE IN YEAR YEARS FOUR DUE AFTER
TOTAL ONE YEAR YEAR TWO THREE AND FIVE FIVE YEARS
--------- --------- --------- --------- --------- ---------
Long term debt ............... $ 8,556 $ 596 $ 1,653 $ 532 $ -- $ 5,775
Capital lease obligations .... 628 502 115 11 -- --
Operating lease obligations .. 2,338 619 556 506 391 266
Base salary commitments
under employment
agreements ................ 840 465 375 -- -- --
--------- --------- --------- --------- --------- ---------
Total contractual obligations $ 12,362 $ 2,182 $ 2,698 $ 1,049 $ 391 $ 6,041
========= ========= ========= ========= ========= =========
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. The more significant areas
requiring use of estimates relate to revenue recognition, accounts receivable
and notes receivable valuation reserves, realizability of intangible assets,
realizability of deferred income tax assets, and the evaluation of contingencies
and litigation. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. The results of such estimates form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may materially differ from these
estimates under different assumptions or conditions.
22
Our critical accounting policies and estimates are included in the
Company's annual report on Form 10-K for the year ended March 31, 2003 as filed
with the SEC.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES" was issued. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for contracts entered into or modified after June 30,
2003. Adoption of this statement is not expected to have a significant effect on
the Company's consolidated financial position or results of operations.
In May 2003, SFAS No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY" was issued.
This statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This statement is effective for financial instruments entered into or
modified after May 31, 2003. The adoption of SFAS No. 150 is not expected to
have a significant effect on the Company's consolidated financial position,
results of operations, or cash flows.
In July 2003, the EITF reached a consensus on EITF 03-5, "Applicability
of AICPA SOP 97-2 to Non-Software Deliverables." EITF 03-5 provides accounting
guidance on whether non-software deliverables (e.g., non-software related
equipment or services) included in an arrangement that contains software are
within the scope of SOP 97-2. In general, any non-software deliverables are
within the scope of SOP 97-2 if the software deliverable is essential to its
functionality. Companies are required to adopt this consensus in the first
reporting period (annual or interim) beginning after ratification by the FASB,
which is expected to be August 13, 2003. The Company believes the adoption of
EITF 03-5 will not have a material impact on the Company's financial position or
results of operations.
ADDITIONAL RISK FACTORS THAT MAY AFFECT OUR OPERATING RESULTS AND THE MARKET
PRICE OF OUR COMMON STOCK
You should carefully consider the risks described below. The risks and
uncertainties described below are not the only ones we face. If any of the
following risks actually occur, our business, financial condition or results of
operations could be materially and adversely affected. In that case, the trading
price of our common stock could be adversely affected.
WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE OUR
BUSINESS.
We have a limited operating history in the e-Learning business and
particularly as a provider of web conferencing and web collaboration software.
While the organizations that we have acquired have been engaged in the
e-Learning business for over ten years, we only recently acquired those assets
and you should not rely on our historical results as an indication of our future
performance. Over the past 12 months we have made significant changes to our
product mix and service mix, our growth strategies, our sales and marketing
plans, and other operational matters, including a significant reduction in our
employee base. As a result, it may be difficult to evaluate an investment in our
company, and we cannot be certain that our business model and future operating
performance will yield the results that we intend. In addition, the competitive
and rapidly changing nature of the e-Learning and Web conferencing markets makes
it difficult for us to predict future results. Our business strategy may be
unsuccessful and we may be unable to address the risks we face.
THE COMPANY FACES RISKS ENCOUNTERED BY EARLY-STAGE COMPANIES IN INTERNET-RELATED
BUSINESSES AND MAY BE UNSUCCESSFUL IN ADDRESSING THESE RISKS.
The Company faces risks frequently encountered by early-stage companies
in new and rapidly evolving markets. Specific risks the Company faces relate to
the demand for e-Learning products and services, and broad and timely acceptance
of the Company's e-Learning products and services. The Company may fail to
adequately address these risks and, as a consequence, its business may suffer.
To address these risks, the Company must:
23
o successfully introduce and attract new customers to its
e-Learning products;
o successfully implement its sales and marketing strategy to
generate sufficient revenues to sustain operations;
o foster existing relationships its customers to provide for
continued or recurring business; and
o successfully address and establish new products and
technologies.
THE COMPANY'S QUARTERLY OPERATING RESULTS ARE UNCERTAIN AND MAY FLUCTUATE
SIGNIFICANTLY.
The Company's operating results have varied significantly from quarter
to quarter and are likely to continue to fluctuate as a result of a variety of
factors, many of which the Company cannot control. Factors that may adversely
affect the Company's quarterly operating results include:
o the size and timing of product orders;
o the mix of revenue from custom services and software products;
o the market acceptance of the Company's products and services;
o the Company's ability to develop and market new products in a
timely manner and the market acceptance of these new products;
o the timing of revenues and expenses relating to the Company's
product sales; and,
o the timing of revenue recognition.
Expense levels are based, in part, on expectations as to future revenue
and to a large extent are fixed in the short term. To the extent the Company is
unable to predict future revenue accurately, the Company may be unable to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall.
WE HAVE SIGNIFICANT OPERATING LOSSES AND HAVE LIMITED FINANCIAL RESOURCES
We have incurred substantial operating losses and have limited
financial resources at our disposal. We have substantial current and long-term
obligations that we will not be able to satisfy without additional debt and/or
equity capital and ultimately generating profits and cash flows from our
e-Learning operations. As we transition from the management of dental practices,
from which we received substantial cash flows during the past two years, to
being a provider of e-Learning services, we will need to show growth and
financial improvement in our e-Learning operating segment. We may not be
successful in raising additional debt or equity capital and may not become
profitable in our e-Learning business. As a result, we may not have sufficient
financial resources to satisfy our obligations as they come due in the near
term.
OUR AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT AS TO OUR ABILITY TO CONTINUE AS A
GOING CONCERN
Our consolidated financial statements have been prepared on a basis
which assumes that we will continue as a going concern and which contemplates
the realization of our assets and the satisfaction of our liabilities and
commitments in the normal course of business. The Company has a significant
working capital deficiency, and has suffered substantial recurring losses and
negative cash flows from operations. Also, the Company's management service
agreements with the affiliated dental practices nearly all expired during fiscal
2003 and will continue to expire through December 31, 2003, which will reduce
revenues and cash flows from this source and accordingly will negatively affect
the Company's liquidity and operating results. These matters, among others, and
the limited operating history as an e-Learning company, caused our independent
accountants to express their substantial doubt about as to our ability to
continue as a going concern.
24
YOUR OWNERSHIP INTEREST IN THE COMPANY WILL BE DILUTED UPON ISSUANCE OF SHARES
WE HAVE RESERVED FOR FUTURE ISSUANCE
On June 30, 2003, 17,042,504 shares of our common stock were
outstanding, of which 1,244,713 were held in treasury, and 14,782,000 additional
shares of our common stock were reserved for issuance. The issuance of these
additional shares will reduce your percentage ownership in the Company.
The following shares were reserved for issuance as of June 30, 2003:
o Issued and outstanding stock options to purchase shares
totaling approximately 1,788,000;
o Issued and outstanding warrants to purchase shares totaling
approximately 6,648,000;
o A restricted stock grant to receive shares totaling
approximately 450,000;
o Shares issuable upon the conversion of convertible redeemable
subordinated notes totaling approximately 5,775,000; and
o Shares issuable upon the conversion of convertible Series A
subordinated notes totaling approximately 121,000.
The existence of these reserved shares coupled with other factors, such
as the relatively small public float, could adversely affect prevailing market
prices for our common stock and our ability to raise capital through an offering
of equity securities.
THE LOSS OF THE SERVICES OF THE COMPANY'S SENIOR EXECUTIVES AND KEY PERSONNEL
WOULD LIKELY CAUSE THE COMPANY'S BUSINESS TO SUFFER.
The Company's success depends to a significant degree on the
performance of the senior management team listed elsewhere in this Memorandum.
The loss of any of these individuals could harm the Company's business. The
Company does not maintain key person life insurance for any officers or key
employees other than James Powers. The Company's success also depends on its
ability to attract, integrate, motivate and retain additional highly skilled
technical, sales and marketing, and professional services personnel. To the
extent the Company is unable to attract and retain a sufficient number of
additional skilled personnel, the Company's business will suffer.
THE COMPANY'S INTELLECTUAL PROPERTY MAY BECOME SUBJECT TO LEGAL CHALLENGES,
UNAUTHORIZED USE OR INFRINGEMENT, ANY OF WHICH COULD DIMINISH THE VALUE OF ITS
PRODUCTS AND SERVICES.
The Company's success depends in large part on its proprietary
technology. If the Company fails to successfully enforce its intellectual
property rights, the value of these rights, and consequently the value of its
products and services to its customers, could diminish substantially. It may be
possible for third parties to copy or otherwise obtain and use its intellectual
property or trade secrets without the Company's authorization, and it may also
be possible for third parties to independently develop substantially equivalent
intellectual property. Currently, the Company does not have patent protection in
place related to its products and services. Litigation may be necessary in the
future to enforce the Company's intellectual property rights, to protect trade
secrets or to determine the validity and scope of the proprietary rights of
others. From time to time the Company has received, and may in the future
receive, notice of claims of infringement of other parties' proprietary rights.
Such claims could result in costly litigation and could divert management and
technical resources. These types of claims could also delay product shipment or
require the Company to develop non-infringing technology or enter into royalty
or licensing agreements, which agreements, if required, may not be available on
reasonable terms, or at all.
A DETERIORATION OF GENERAL ECONOMIC CONDITIONS MAY MATERIALLY AND ADVERSELY
AFFECT THE COMPANY'S BUSINESS.
The Company's revenues are subject to fluctuation as a result of
general economic conditions. The Company's customers may reduce their
expenditures for education and training during economic downturns. Therefore, a
continued economic downturn could adversely affect the Company's business.
25
WE OFFER OUR WEB COLLABORATION PRODUCTS ON AN ASP BASIS SO IF WE DO NOT INCREASE
THE CAPACITY OF OUR INFRASTRUCTURE IN EXCESS OF CUSTOMER DEMAND, CUSTOMERS MAY
EXPERIENCE SERVICE PROBLEMS.
We expect the demand on our ASP business to increase significantly.
Accordingly, we must increase our capacity to keep pace with that growth in
demand. To accommodate increased customer usage requires a significant increase
in the capacity of our infrastructure and may cause us to invest significant
resources or capital. If we fail to increase our capacity in a timely and
efficient manner, customers may experience service problems that could cause us
to lose customers and decrease our revenue.
COMPETITION IN THE WEB CONFERENCING SERVICES MARKET IS INTENSE AND WE MAY BE
UNABLE TO COMPETE SUCCESSFULLY, PARTICULARLY AS A RESULT OF RECENT ANNOUNCEMENTS
FROM LARGE SOFTWARE COMPANIES.
The market for web conferencing services is relatively new, rapidly
evolving and intensely competitive. Competition in our market will continue to
intensify and may force us to reduce our prices, or cause us to experience
reduced sales and margins, loss of market share and reduced acceptance of our
services. Many of our competitors have larger and more established customer
bases, longer operating histories, greater name recognition, broader service
offerings, more employees and significantly greater financial, technical,
marketing, public relations and distribution resources than we do. We expect
that we will face new competition as others enter our market to develop web
conferencing services. These current and future competitors may also offer or
develop products or services that perform better than ours. In addition,
acquisitions or strategic partnerships involving our current and potential
competitors could harm us in a number of ways.
FUTURE REGULATIONS COULD BE ENACTED THAT EITHER DIRECTLY RESTRICT OUR BUSINESS
OR INDIRECTLY IMPACT OUR BUSINESS BY LIMITING THE GROWTH OF INTERNET-BASED
BUSINESS AND SERVICES.
As commercial use of the Internet increases, federal, state and foreign
agencies could enact laws or adopt regulations covering issues such as user
privacy, content and taxation of products and services. If enacted, such laws or
regulations could limit the market for our products and services. Although they
might not apply to our business directly, we expect that laws or rules
regulating personal and consumer information could indirectly affect our
business. It is possible that such legislation or regulation could expose
companies involved in providing Internet-based services to liability, which
could limit the growth of Web use generally and thereby reduce demand for our
products and services. Such legislation or regulation could dampen the growth in
Web usage and decrease its acceptance as a medium of communications and
commerce.
WE DEPEND LARGELY ON ONE-TIME SALES TO GROW REVENUES.
A high percentage of our revenue is attributable to one-time purchases
by our customers rather than long term recurring contracts. As a result, our
inability to continue to obtain new agreements and sales may result in lower
than expected revenue, and therefore, harm our ability to sustain operations or
profitability on a consistent basis, which could also cause our stock price to
decline. Further, because we face competition from larger better-capitalized
companies, we could face increased downward pricing pressure that could cause a
decrease in our gross margins.
OUR OPERATING RESULTS MAY SUFFER IF WE FAIL TO DEVELOP AND FOSTER OR VALUE ADDED
RESELLER OR DISTRIBUTION RELATIONSHIPS.
We have an existing channel and distribution network that provides
growing revenues and contributes to our high margin software sales. These
distribution partners are not obligated to distribute our services at any
particular minimum level. As a result, we cannot accurately predict the amount
of revenue we will derive from our distribution partners in the future. Our
inability of our distribution partners to sell our products to their customers
and increase their distribution of our products could result in significant
reductions in our revenue, and therefore, harm our ability to sustain
profitability on a consistent basis.
26
THE GROWTH OF OUR BUSINESS SUBSTANTIALLY DEPENDS ON OUR ABILITY TO SUCCESSFULLY
DEVELOP AND INTRODUCE NEW SERVICES AND FEATURES IN A TIMELY MANNER.
We acquired our Web collaboration, Web conferencing and virtual
classroom software in November of 2002. With our focus upon that product suite
our growth depends on our ability to continue to develop new features, products
and services around that suite and line of products. We may not successfully
identify, develop and market new products and features in a timely and
cost-effective manner. If we fail to develop and maintain market acceptance of
our existing and new products to offset our continuing development costs, then
our net losses will increase and we may not be able to sustain profitability on
a consistent basis.
IF WE FAIL TO OFFER COMPETITIVE PRICING, WE MAY NOT BE ABLE TO ATTRACT AND
RETAIN CUSTOMERS.
Because the Web conferencing market is relatively new and still
evolving, the prices for these services are subject to rapid and frequent
changes. In many cases, businesses provide their services at significantly
reduced rates, for free or on a trial basis in order to win customers. Due to
competitive factors and the rapidly changing marketplace, we may be required to
significantly reduce our pricing structure, which would negatively affect our
revenue, margins and our ability to sustain profitability on a consistent basis.
We have an existing channel and distribution network that provides growing
revenues and contributes to our high margin software sales. These distribution
partners are not obligated to distribute our services at any particular minimum
level. As a result, we cannot accurately predict the amount of revenue we will
derive from our distribution partners in the future. Our inability of our
distribution partners to sell our products to their customers and increase their
distribution of our products could result in significant reductions in our
revenue, and therefore, harm our ability to sustain profitability on a
consistent basis.
OUR INTERNATIONAL DISTRIBUTOR NETWORK MAY CAUSE COSTS THAT ARE NOT ANTICIPATED.
We continue to expand internationally through our value added reseller
network and OEM partners. We have limited experience in international operations
and may not be able to compete effectively in international markets. We face
certain risks inherent in conducting business internationally, such as: our
inability to establishing and maintain effective distribution channels and
partners; the varying technology standards from country to country; our
inability to effectively protect our intellectual property rights or the code to
our software; our inexperience with inconsistent regulations and unexpected
changes in regulatory requirements in foreign jurisdictions; language and
cultural differences; fluctuations in currency exchange rates; our inability to
effectively collecting accounts receivable; or our inability to manage sales and
other taxes imposed by foreign jurisdictions.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. Market risk
generally represents the risk of loss that may result from the potential change
in the value of a financial instrument as a result of fluctuations in interest
rates and market prices. We have not traded or otherwise bought and sold
derivatives nor do we expect to in the future. We also do not invest in market
risk sensitive instruments for trading purposes.
The primary objective of the Company's investment activity is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, the Company maintains its portfolio
of cash equivalents in a variety of money market funds.
As of June 30, 2003, the carrying value of our outstanding convertible
redeemable subordinated notes was approximately $3.8 million at a fixed interest
rate of 12%. In certain circumstances, we may redeem this long-term debt. Our
other components of indebtness bear fixed interest rates of 6% to 9%. Because
the interest rates on these instruments are fixed, a hypothetical 10% change in
interest rates would not have a material impact on our financial condition,
revenues or operations. Increases in interest rates could, however, increase the
interest expense associated with future borrowings, if any. We do not hedge
against interest rate increases.
ITEM 4. CONTROLS AND PROCEDURES
We evaluated the design and operation of our disclosure controls and
procedures to determine whether they are effective in ensuring that we disclose
the required information in a timely manner and in accordance with the
Securities Exchange Act of 1934, as amended, or the Exchange Act, and the rules
and forms of the Securities and Exchange Commission. Management, including our
principal executive officer and principal financial officer, supervised and
participated in the evaluation. The evaluation was completed within the 90-day
period prior to the filing of this Form 10-Q. The principal executive officer
and principal financial officer concluded, based on their review, that our
disclosure controls and procedures, as defined by Exchange Act Rules 13a-14(c)
and 15d-14(c), are effective and ensure that we disclose the required
information in reports that we file under the Exchange Act and that the filings
are recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. No significant
changes were made to our internal controls or other factors that could
significantly affect these controls subsequent to the date of their evaluation.
A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Because of the inherent limitations in all control systems no
evaluation of controls can provide absolute assurance that all control issues if
any, within a company have been detected.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has pending lawsuits against three affiliated practices for
defaulting in the payment of the required service fees. The Company is seeking
damages equal to past due and remaining service fees, consequential damages
equal to the value of the intangible practice asset and attorney's fees. The
Company is also party to two other legal disputes arising from the ordinary
course of its e-Learning business.
On August 27, 2002 Computer Associates International Inc., filed in the
Superior Court of the State of Arizona in and for the County of Maricopa
claiming breach of software license/agreement and other fees for services in the
amount of $389,000. The Company thereafter filed an answer and counterclaim on
October 4, 2002 alleging damages in the amount of $389,000.
On November 4, 2002 two former employees of Quisic Corporation, filed in
the Superior Court of the State of California for the County of Los Angeles
Central District claiming damages in the amount of $6.4 million against the
Board of Directors of Quisic Corporation resulting from their employment
termination by Quisic alleging among other things breach of contract. The
Company is a third party defendant with a mere allegation of successor liability
28
to the extent the Quisic defendants are found liable and to the extent the
plaintiff proves successor liability by the Company. The Company only acquired
certain assets of Quisic Corporation in an asset purchase transaction and does
not believe it has any successor liability. The Company believes that it will
prevail in these matters.
While in the opinion of management, resolution of these matters is not
expected to have a material adverse effect on the Company's financial position,
results of operations or cash flows, the ultimate outcome of any litigation is
uncertain. Were an unfavorable outcome to occur, the impact could be material to
the Company.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS OF SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Additional Disclosures Concerning Mr. Brian L. Berry: Brian Berry has
served as EDT Learning's Vice President of Finance and principal financial
officer since August of 2002 and prior to that served as the Corporate
Controller for the Company since October of 1998. In 1999, the Securities and
Exchange Commission initiated a Rule 102(e) proceeding against Mr. Berry, among
others, in his role as manager for Coopers & Lybrand and their audit of the
fiscal 1994 financial statements of California Micro Devices, Inc. An
administrative hearing was held in 2000 and the Administrative Law Judge
dismissed the claim in 2001. Subsequently, the Division of Enforcement of the
SEC appealed that decision and on July 29, 2003, the SEC reversed the decision
of the Administrative Law Judge, finding that Mr. Berry, among others, violated
Generally Accepted Auditing Standards in connection with certain limited aspects
of the audit. It was undisputed that senior management of California Micro
Devices, in connection with the audit, intentionally misled Mr. Berry and the
Coopers & Lybrand audit team. The SEC has concluded that Mr. Berry should be
barred from practicing before it. Mr. Berry intends to appeal the decision of
the Commission and seek a stay of the order. Based on a motion filed by Mr.
Berry, the Commission has granted a 60 day stay of their own decision, in order
to allow him to seek similar relief from the Court of Appeals. Mr. Berry will be
seeking to overturn the Commission's ruling and to reinstate the dismissal of
the claim against him. The Company cannot predict at this time what, if any,
impact the Commission's decision will have on Mr. Berry's role with the Company.
29
ITEM 6. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
3.1(1) Restated Certificate of Incorporation of Pentegra Dental Group,
Inc.
3.2(1) Bylaws of Pentegra Dental Group, Inc.
3.3(7) Restated Certificate of Incorporation of Pentegra Dental Group,
Inc.
3.4(7) Amendment of Bylaws of Pentegra Dental Group, Inc.
3.5(8) Restated Certificate of Incorporation of e-dentist.com, Inc.
++3.6 Certificate of Designations of Series A Preferred Stock
4.1(1) Form of certificate evidencing ownership of Common Stock of
Pentegra Dental Group, Inc.
4.2(1) Form of Registration Rights Agreement for Owners of Founding
Affiliated Practices
4.3(1) Registration Rights Agreement dated September 30, 1997 between
Pentegra Dental Group, Inc. and the stockholders named therein
4.4(2) Form of Stockholders' Agreement for Owners of Affiliated
Practices
4.5(3) Form of Indenture from Pentegra Dental Group, Inc. to U.S. Trust
Company of Texas, N.A., as Trustee relating to the Convertible
Debt Securities
4.6(7) Form of certificate evidencing ownership of Common Stock of
e-dentist.com, Inc.
4.7(8) Form of Convertible Redeemable Subordinated Note
4.8(8) Form of Redeemable Warrant (2002 Private Placement Offering)
++4.9 Form of Redeemable Warrant (2003 Private Placement Offering)
+10.1(1) Pentegra Dental Group, Inc. 1997 Stock Compensation Plan
+10.2(1) Form of Service Agreement
10.3(4) Credit Agreement dated June 1, 1998 between Bank One, Texas, N.A.
and Pentegra Dental Group, Inc.
10.4(5) Modification to Credit Agreement between Pentegra Dental Group,
Inc. and Bank One, Texas, N.A. dated September 9, 1998
10.5(5) Agreement and Plan of Merger among Pentegra Dental Group, Inc.,
Liberty Dental Alliance, Inc., Liberty Acquisition Corporation,
James M. Powers, Jr., Sylvia H. McAlister and William Kelly dated
as of November 13, 1998
10.6(2) First Amendment to Credit Agreement by and among Pentegra Dental
Group, Inc. and Bank One, Texas, N.A. dated as of February 9,
1999
10.7(2) First Amendment to the Agreement and Plan of Merger by and among
Pentegra Dental Group, Inc., Liberty Dental Alliance, Inc.,
Liberty Acquisition Corporation, James M. Powers, Jr., Sylvia H.
McAlister and William Kelly dated as of January 29, 1999
10.8(6) Third Amendment to Credit Agreement
+10.9(7) Employment Agreement dated November 12, 2000 between
e-dentist.com and James M. Powers, Jr.
+10.10(7) Employment Agreement dated February 15, 2001 between
e-dentist.com and Charles Sanders
+10.11(7) Employment Agreement dated February 15, 2001 between
e-dentist.com and James Dunn, Jr.
10.12(7) Asset Purchase Agreement by and among e-dentist.com, Inc. and
Dexpo.com, Inc. 10.13(7) Fourth Amendment of Credit Agreement
10.14(9) Plan of Reorganization and Agreement of Merger by and among EDT
Learning, Inc., Edge Acquisition Subsidiary, Inc. and the
Stockholders of Learning-Edge, Inc.
10.15(10) Plan of Reorganization and Agreement of Merger by and among EDT
Learning, Inc., TW Acquisition Subsidiary, Inc., ThoughtWare
Technologies, Inc. and the Series B Preferred Stockholder of
ThoughtWare Technologies, Inc.
10.16(11) Asset Purchase Agreement by and among EDT Learning, Inc., and
Quisic Corporation. Common Stock Purchase Agreement by and
between EDT Learning, Inc., Investor Growth Capital Limited, A
Guernsey Corporation and Investor Group, L.P., A Guernsey Limited
Partnership and Leeds Equity Partners III, L.P.
10.16(12) Asset Purchase Agreement by and among EDT Learning, Inc., and
Mentergy, Inc. and its wholly-owned subsidiaries, LearnLinc Corp
and Gilat-Allen Communications, Inc.
++10.17 Subcontractor Agreement between EDT Learning, Inc. and
Interactive Alchemy, Inc.
6(13) Letter re Change in Certifying Accountant
++31.1 Chief Executive Officer Section 302 Certification
++31.2 Principal Financial Officer Section 302 Certification
++32.1 Chief Executive Officer Section 906 Certification
++32.2 Principal Financial Officer Section 906 Certification
30
- ----------
(1) Previously filed as an exhibit to EDT Learning's Registration Statement
on Form S-1 (No. 333-37633), and incorporated herein by reference.
(2) Previously filed as an exhibit to EDT Learning's Registration Statement
on Form S-4 (No. 333-78535), and incorporated herein by reference.
(3) Previously filed as an exhibit to EDT Learning's Registration Statement
on Form S-4 (No. 333-64665), and incorporated herein by reference.
(4) Previously filed as an exhibit to EDT Learning's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1998.
(5) Previously filed as an exhibit to EDT Learning's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1998.
(6) Previously filed as an exhibit to EDT Learning's Annual Report on Form
10-K for the year ended March 31, 2000.
(7) Previously filed as an exhibit to EDT Learning's Annual Report on Form
10-K for the year ended March 31, 2001.
(8) Previously filed as an exhibit to EDT Learning's Annual Report on Form
10-K for the year ended March 31, 2002.
(9) Previously filed as an exhibit to EDT Learning's Form 8-K filed October
16, 2001.
(10) Previously filed as an exhibit to EDT Learning's Form 8-K filed January
30, 2002
(11) Previously filed as an exhibit to EDT Learning's Form 8-K filed July 2,
2002.
(12) Previously filed as an exhibit to EDT Learning's Form 8-K filed December
20, 2002.
(13) Previously filed as an exhibit to EDT Learning's Form 8-K filed April 3,
2003.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to the requirements of Item 14(c) of Form
10-K.
++ Furnished herewith as an Exhibit
(B) REPORTS ON FORM 8-K.
A Report on Form 8-K was filed April 3, 2003 reporting the dismissal by EDT
Learning, Inc. of PricewaterhouseCoopers LLP as its independent accountants and
engagement of BDO Seidman, LLP. No financial statements were filed with this
report.
A Report on Form 8-K was filed July 1, 2003 furnishing under Item 12 our press
release announcing our operating results for the year ended March 31, 2003.
A Report on Form 8-K was filed August 13, 2003 furnishing under Item 12 our
press release announcing our operating results for the quarter ended June 30,
2003.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, EDT Learning, Inc., has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EDT LEARNING, INC.
Dated: August 14, 2003
By: /s/ James M. Powers, Jr.
-----------------------------
Chairman of the Board, President
and Chief Executive Officer
By: /s/ Brian L. Berry
-----------------------------
Vice President of Finance
(Principal Financial Officer)
32