UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended October 31, 2004
Commission File Number 000-21535
ProsoftTraining
(Exact name of Registrant as specified in its charter)
| NEVADA | 87-0448639 | |
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
410 N. 44th Street, Suite 600, Phoenix, AZ 85008
(Address of principal executive offices)
(602) 794-4199
(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 of 1934 during the preceding twelve (12) months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. YES x NO ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares of the registrant’s common stock, $.001 par value, outstanding as of December 13, 2004 was 24,793,137 shares.
TABLE OF CONTENTS
| Page | ||||
| PART I | ||||
| Item 1. | Financial Statements | |||
| 3 | ||||
| Consolidated Balance Sheets at October 31, 2004 (Unaudited) and July 31, 2004 |
4 | |||
| 5 | ||||
| 6 | ||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 9 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 14 | ||
| Item 4. | Controls and Procedures | 14 | ||
| PART II | ||||
| Item 1. | Legal Proceedings | 15 | ||
| Item 6. | Exhibits | 15 | ||
| Signatures | 16 | |||
PROSOFTTRAINING AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
| Three Months Ended October 31, |
||||||||
| 2004 |
2003 |
|||||||
| Revenues: |
||||||||
| Content |
$ | 1,480 | $ | 1,728 | ||||
| Certification |
377 | 603 | ||||||
| Total revenues |
1,857 | 2,331 | ||||||
| Costs and expenses: |
||||||||
| Costs of revenues |
547 | 796 | ||||||
| Content development |
180 | 152 | ||||||
| Sales and marketing |
552 | 620 | ||||||
| General and administrative |
741 | 668 | ||||||
| Depreciation and amortization |
106 | 128 | ||||||
| Total costs and expenses |
2,126 | 2,364 | ||||||
| Loss from operations |
(269 | ) | (33 | ) | ||||
| Gain on the settlement of liability |
95 | — | ||||||
| Interest income |
1 | — | ||||||
| Interest expense |
(166 | ) | (77 | ) | ||||
| Net loss |
$ | (339 | ) | $ | (110 | ) | ||
| Net loss per share: |
||||||||
| Basic and diluted |
$ | (0.01 | ) | $ | (0.00 | ) | ||
| Weighted average shares outstanding: |
||||||||
| Basic and diluted |
24,309,505 | 24,209,414 | ||||||
The accompanying notes are an integral part of these consolidated statements.
3
PROSOFTTRAINING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| October 31, 2004 |
July 31, 2004 |
|||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 1,276 | $ | 502 | ||||
| Accounts receivable, less allowances of $149 and $148 |
630 | 644 | ||||||
| Prepaid expenses and other current assets |
306 | 132 | ||||||
| Total current assets |
2,212 | 1,278 | ||||||
| Property and equipment, net of accumulated depreciation of $3,310 and $3,252 |
243 | 283 | ||||||
| Goodwill, net |
6,745 | 6,745 | ||||||
| Licenses, net |
165 | 229 | ||||||
| Other, net |
163 | 87 | ||||||
| Total assets |
$ | 9,528 | $ | 8,622 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Accounts payable, trade |
$ | 511 | $ | 591 | ||||
| Accrued expenses |
680 | 768 | ||||||
| Current portion of capital lease obligations |
— | 98 | ||||||
| Other |
61 | 64 | ||||||
| Total current liabilities |
1,252 | 1,521 | ||||||
| Long-term debt |
4,185 | 3,264 | ||||||
| Total liabilities |
5,437 | 4,785 | ||||||
| Stockholders’ equity: |
||||||||
| Common shares, par value $.001 per share; authorized shares: 75,000,000; issued: 24,321,536 and 24,321,326 |
24 | 24 | ||||||
| Additional paid-in capital |
104,993 | 104,436 | ||||||
| Accumulated deficit |
(101,066 | ) | (100,727 | ) | ||||
| Accumulated other comprehensive income |
215 | 179 | ||||||
| Less common stock in treasury, at cost: 11,912 shares |
(75 | ) | (75 | ) | ||||
| Total stockholders’ equity |
4,091 | 3,837 | ||||||
| Total liabilities and stockholders’ equity |
$ | 9,528 | $ | 8,622 | ||||
The accompanying notes are an integral part of these consolidated statements.
4
PROSOFTTRAINING AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three Months Ended October 31, |
||||||||
| 2004 |
2003 |
|||||||
| Operating activities: |
||||||||
| Net loss |
$ | (339 | ) | $ | (110 | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities: |
||||||||
| Depreciation and amortization |
106 | 128 | ||||||
| Gain on settlement of liability |
(95 | ) | — | |||||
| Non-cash interest |
166 | 70 | ||||||
| Loss on the disposal of fixed assets |
— | 1 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable, net |
14 | 324 | ||||||
| Prepaid expenses and other assets |
(93 | ) | (102 | ) | ||||
| Accounts payable |
(80 | ) | (163 | ) | ||||
| Accrued expenses |
(88 | ) | (195 | ) | ||||
| Net cash used in operating activities |
(409 | ) | (47 | ) | ||||
| Investing activities: |
||||||||
| Purchase of property and equipment |
— | (16 | ) | |||||
| Net cash used in investing activities |
— | (16 | ) | |||||
| Financing activities: |
||||||||
| Issuance of long term debt |
1,350 | — | ||||||
| Long-term debt issuance costs |
(175 | ) | — | |||||
| Principal payments on capital leases |
(3 | ) | (16 | ) | ||||
| Net cash provided by (used in) financing activities |
1,172 | (16 | ) | |||||
| Effects of exchange rate changes on cash |
11 | 10 | ||||||
| Net increase (decrease) in cash and cash equivalents |
774 | (69 | ) | |||||
| Cash and cash equivalents at the beginning of period |
502 | 1,567 | ||||||
| Cash and cash equivalents at the end of period |
$ | 1,276 | $ | 1,498 | ||||
| Supplementary disclosure of cash paid during the period for: |
||||||||
| Interest |
$ | — | $ | 3 | ||||
| Income taxes |
$ | — | $ | — | ||||
The accompanying notes are an integral part of these consolidated statements.
5
PROSOFTTRAINING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(unaudited)
| 1. | General |
These interim consolidated financial statements do not include certain footnotes and financial information normally presented annually under accounting principles generally accepted in the United States of America and, therefore, should be read in conjunction with the Consolidated Financial Statements and the Notes thereto contained in the Company’s 2004 Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC. The results of operations for the three-month period ended October 31, 2004, are not necessarily indicative of results that can be expected for the fiscal year ending July 31, 2005. The interim consolidated financial statements are unaudited but contain all adjustments, consisting of normal recurring adjustments management considers necessary to present fairly its consolidated financial position, results of operations, and cash flows as of and for the interim periods. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
The report on the Company’s consolidated financial statements as of and for the year ended July 31, 2004, issued by the Company’s independent registered public accounting firm and dated September 24, 2004, contained a qualification regarding matters related to the substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements for the year ended July 31, 2004, the Company is party to certain note agreements that provide creditors with the ability to demand accelerated repayment of amounts owed to those creditors if the Company is unable to comply with the terms of those note agreements. Should the Company fail to comply with the terms of those agreements the creditors could demand accelerated repayment of the amounts owed. The Company’s ability to comply with the terms of the agreements is uncertain and raises substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Certain reclassifications have been made in the prior-period consolidated financial statements to conform to the current-period presentation.
| 2. | Comprehensive Income |
The components of comprehensive income for the three months ended October 31, 2004 and 2003 are as follows:
| Three months ended October 31, |
||||||||
| 2004 |
2003 |
|||||||
| Net loss |
$ | (339 | ) | $ | (110 | ) | ||
| Other comprehensive income: |
||||||||
| Foreign currency translation adjustments |
36 | 15 | ||||||
| Comprehensive loss |
$ | (303 | ) | $ | (95 | ) | ||
| 3. | Debt |
On August 30, 2004, the Company issued $1.35 million of Secured 8% Convertible Notes due August 30, 2006, to institutional investors. The Notes are secured by all of the assets of the Company, subject to an intercreditor agreement with the Company’s existing secured creditor, and require interest payments semi-annually, in cash or, at the Company option, in shares of its Common Stock or in the form of additional one-year notes accruing interest at the rate of 10% per annum. The Notes are convertible into common stock of the Company at $0.28 per share. In connection with this financing, the Company also issued to the investors (i) warrants to purchase up to 1,205,358 shares of the Company’s Common Stock, exercisable at $0.38 per share and expiring in March 2010, and (ii) warrants to purchase up to 3,857,143 shares, exercisable at $0.35 per share and generally expiring in February 2006. The portion of the proceeds allocated to the warrants issued in connection with the debt totaled $0.56 million.
6
4. Earnings (Loss) Per Share of Common Stock
Basic earnings (loss) per share, or basic EPS, of common stock was calculated by dividing net loss by the weighted-average number of common shares outstanding during the period. Since the Company recorded losses for the three-month periods ended October 31, 2004 and 2003, the diluted EPS of common stock is the same as the basic EPS, as any potentially dilutive securities would be anti-dilutive.
The reconciliation of the amounts used to calculate the basic EPS and diluted EPS is as follows:
| Three Months Ended October 31, |
||||||||||||||||
| 2004 |
2003 |
|||||||||||||||
| Basic |
Diluted |
Basic |
Diluted |
|||||||||||||
| Weighted average shares outstanding |
24,309,505 | 24,309,505 | 24,209,414 | 24,209,414 | ||||||||||||
| Dilutive effect of stock option grants |
— | — | — | — | ||||||||||||
| Dilutive effect of warrants |
— | — | — | — | ||||||||||||
| Shares for EPS |
24,309,505 | 24,309,505 | 24,209,414 | 24,209,414 | ||||||||||||
| Net loss |
$ | (339 | ) | $ | (339 | ) | $ | (110 | ) | $ | (110 | ) | ||||
| Net loss per share |
$ | (0.01 | ) | $ | (0.01 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
| 5. | Goodwill and License Agreements |
License agreements are those rights acquired from others through business combinations to produce and distribute courseware and other publications. License agreements are amortized on a straight-line basis over a period of seven years, subject to impairment based on the carrying value exceeding fair value. Goodwill is not amortized, but tested for impairment at least annually in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and Other Intangible Assets. The Company adopted SFAS No. 142 on August 1, 2002 and identified one reporting unit and discontinued goodwill amortization at that time.
Intangible assets consist of the following:
| October 31, 2004 |
July 31, 2004 | |||||||||||