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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 DECEMBER 31, 2001 OR
[ ] TRANSACTION 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
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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)
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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 [ ]
The number of shares of Common Stock of the Registrant, par value $.001 per
share, outstanding at February 11, 2002, was 14,101,855.
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FORM 10-Q REPORT INDEX
10-Q PART AND ITEM NO.
PART I -- FINANCIAL INFORMATION PAGE
----
Item 1 -- Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of December 31, 2001 and
March 31, 2001............................................... 3
Consolidated Statements of Operations for the Three and Nine
Months Ended December 31, 2001 and December 31, 2000......... 4
Consolidated Statement of Changes in Shareholders'
Deficit for the nine months ended December 31, 2001.......... 5
Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 2001 and December 31, 2000......... 6
Notes to Consolidated Financial Statements................... 7
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 12
PART II -- OTHER INFORMATION
Item 1 -- Legal proceedings............................................ 18
Item 2 -- Change in securities and use of proceeds..................... 18
Item 3 -- Defaults of senior securities................................ 18
Item 4 -- Submission of matters to a vote of security holders.......... 18
Item 5 -- Other information............................................ 18
Item 6 -- Exhibits and Reports on Form 8-K............................. 18
Signature.............................................................. 19
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EDT LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, MARCH 31,
2001 2001
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................ $ 517 $ 1,051
Accounts receivable, net of allowance for doubtful for
doubtful accounts of $662 and $1,147, respectively ..................... 654 195
Prepaid and other current assets ......................................... 352 128
Notes receivable from Affiliated Practices--current, net ................. 345 261
-------- --------
Total current assets ................................................... 1,868 1,635
Property and equipment, net ................................................. 2,565 3,279
Intangible assets, net ...................................................... 6,020 3,107
Notes receivable from Affiliated Practices, net ............................. 741 1,059
Other assets ................................................................ 198 111
-------- --------
Total assets ........................................................... $ 11,392 $ 9,191
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long term debt ........................................ $ 9,739 $ 471
Accounts payable and accrued liabilities ................................. 1,005 959
Current portion of deferred revenue ...................................... 1,333 1,052
Accrued employment agreement ............................................. 75 248
Current portion of capital lease liabilities ............................. 342 345
-------- --------
Total current liabilities .............................................. 12,494 3,075
Long term debt, less current maturities ..................................... 2,409 11,461
Capital lease liabilities ................................................... 513 643
Deferred revenue ............................................................ 270 666
Commitments and contingencies (Note 6)
SHAREHOLDERS' DEFICIT
Common stock, $.001 par value 40,000,000 shares authorized,
13,731,485 and 11,721,664 issued ....................................... 14 12
Additional paid-in capital ............................................... 26,919 25,809
Accumulated deficit ...................................................... (30,086) (31,349)
Less: Treasury shares at cost: 1,179,630 and 1,149,116, respectively ..... (1,141) (1,126)
-------- --------
Total shareholders' deficit ............................................ (4,294) (6,654)
-------- --------
Total liabilities and shareholders' deficit ............................ $ 11,392 $ 9,191
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
3
EDT LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues
Learning ............................................... $ 1,396 $ -- $ 1,681 $ --
Dental contracts ....................................... 1,629 1,966 5,107 6,395
-------- -------- -------- --------
Total revenues ..................................... 3,025 1,966 6,788 6,395
Operating expenses
Research and development ............................... 942 -- 1,423 --
Sales and marketing .................................... 347 -- 772 --
General and administrative ............................. 1,006 966 1,923 6,071
Depreciation and amortization .......................... 517 513 1,591 1,780
Impairment of assets ................................... -- -- -- 23,000
-------- -------- -------- --------
Total operating expenses ........................... 2,812 1,479 5,709 30,851
Earnings (loss) from operations .......................... 213 487 1,079 (24,456)
Interest expense ....................................... 254 328 814 1,053
Interest income ........................................ (53) (107) (196) (241)
Other income ........................................... (525) -- (701) (53)
-------- -------- -------- --------
Income (loss) before income taxes and extraordinary item 537 266 1,162 (25,215)
Income taxes ........................................... -- -- -- --
-------- -------- -------- --------
Income (loss) before extraordinary item ................ 537 266 1,162 (25,215)
Extraordinary item - gain on debt forgiveness
(net of tax effect of $0) ............................ 101 -- 101 --
-------- -------- -------- --------
Net income (loss) ........................................ $ 638 $ 266 $ 1,263 $(25,215)
======== ======== ======== ========
Earnings (loss) per common share - basic and diluted:
Earnings (loss) before extraordinary item ............. $ 0.04 $ 0.03 $ 0.10 $ (2.47)
Extraordinary item ..................................... 0.01 -- 0.01 --
-------- -------- -------- --------
Net earnings (loss) .................................... $ 0.05 $ 0.03 $ 0.11 $ (2.47)
======== ======== ======== ========
Weighted average shares outstanding:
Basic .................................................. 12,502 10,463 11,205 10,202
Diluted ................................................ 13,111 10,463 11,408 10,202
The accompanying notes are an integral part of the
consolidated financial statements.
4
EDT LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
(UNAUDITED)
(IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN ACCUMULATED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT STOCK DEFICIT
-------- -------- -------- -------- -------- --------
Balances, April 1, 2001 ... 11,722 $ 12 $ 25,809 $(31,349) $ (1,126) $ (6,654)
Issuance of common stock .. 2,009 2 1,066 1,068
Issuance of warrants ...... 44 44
Shares repurchased ........ (15) (15)
Net income ................ 1,263 1,263
-------- -------- -------- -------- -------- --------
Balances, December 31, 2001 13,731 $ 14 $ 26,919 $(30,086) $ (1,141) $ (4,294)
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
5
EDT LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
DECEMBER 31,
--------------------
2001 2000
------- -------
Net cash (used in) provided by operating activities ............. $ (17) $ 1,146
Cash flows from investing activities:
Collection of notes receivable ............................... 576 264
Proceeds from the sale of property and equipment ............. 86 84
Acquisitions, net of cash acquired ........................... -- (31)
Issuance of notes receivable ................................. -- (24)
Capital expenditures ......................................... (17) (108)
------- -------
Net cash provided by investing activities .................. 645 185
------- -------
Cash flows from financing activities:
Repayment of long-term debt and capital lease liabilities .... (1,103) (830)
Financing costs .............................................. (59) --
------- -------
Net cash used in financing activities ...................... (1,162) (830)
------- -------
Net change in cash and cash equivalents ......................... (534) 501
Cash and cash equivalents, beginning of period .................. 1,057 553
------- -------
Cash and cash equivalents, end of period ........................ $ 517 $ 1,054
======= =======
Supplemental disclosures of cash flow information:
Issuance of common stock for acquisition ........................ $ 995 $ 291
Issuance of common stock to settle debt ......................... $ 72 $ --
Issuance of debt for acquisition ................................ $ 1,102 $ --
Warrants issued in connection with financing costs .............. $ 44 $ --
Convertible subordinated notes offset against receivables
from Affiliated Practices ..................................... $ -- $ 540
Conversion of receivables from Affiliated Practices
to notes receivables .......................................... $ 192 $ 1,927
Treasury stock acquired for payment of receivable from Affiliated
Practices and purchase of property and equipment .............. $ -- $ 975
Notes payable offset against future membership fees ............. $ -- $ 1,347
The accompanying notes are an integral part of the
consolidated financial statements.
6
EDT LEARNING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
EDT Learning, Inc., formerly e-dentist.com, Inc. (the "Company") provides a
comprehensive array of e-Learning content, handling and delivery services that
are customized to each client. The Company also provides practice management
services to dental practices throughout the United States.
The unaudited 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 consolidated financial statements reflect all elimination
entries and normal adjustments that are necessary for a fair statement of the
results for the interim periods ended December 31, 2001 and 2000.
Fiscal operating results for interim periods are not necessarily indicative
of the results for full years. It is suggested that these 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
for the year ended March 31, 2001, as filed with the SEC.
RECENT EVENTS, LIQUIDITY AND MANAGEMENT PLANS
A name change of the Company to "EDT Learning, Inc." was approved by the
Board of Directors in June 2001 and was approved by the shareholders at the
August 2, 2001 Annual Shareholders Meeting. The name change was done to more
accurately reflect the Company's current business model and expansion of its
business offering which focuses on providing e-Learning tools and systems to
corporate clients inside and outside the dental industry.
During fiscal 2001, the Company incurred a net loss of $24.9 million and
had an accumulated deficit of $31.3 million at March 31, 2001. In addition, the
Company had cash flow from operations of $1.4 million during the year ending
March 31, 2001. During the three and nine months ended December 31, 2001, the
Company had net income of $638,000 and $1.3 million, respectively and has an
accumulated deficit of $30.1 million at December 31, 2001. In addition, the
Company used cash flow in operations of $17,000 during the nine months ended
December 31, 2001.
As of December 31, 2001, the Company had outstanding total debt (secured
and unsecured promissory notes) of $12.1 million. Of that amount, the Company
owed Bank One $8.6 million (the "Bank One Indebtedness"). Other than the Bank
One Indebtedness, the balance of $3.5 million (the "Other Debt") is owed to
various parties with differing maturities as follows: $407,000 are unsecured
notes which arose as a part of the Company's initial public offering and are due
on March 31, 2003; $201,000 are unsecured promissory notes which were issued to
various former shareholders of Omega Orthodontics, Inc. as a part its
acquisition by the Company; $1.5 million are unsecured promissory notes which
were either issued to former shareholders of Learning-Edge, Inc. or assumed by
the Company as part of its acquisition of Learning-Edge, Inc.; $1.3 million are
unsecured convertible promissory notes which were issued to dentists who owned
dental practices with which the Company affiliated as part of its dental
practice management business and are due one half in November 2002 and one half
in November 2003.
On June 29, 2001, Bank One extended the due date of the credit facility to
July 2, 2002. In connection with the extension, the Company paid $61,000 to Bank
One and issued Bank One 393,182 warrants to acquire shares of the Company's
Common Stock at $0.42 per share. The warrants were valued at $32,000. Until the
credit facility is paid in full, Bank One will have the right to maintain a 3%
fully diluted interest in the Company through the issuance of additional
warrants. Terms of the extension include monthly principal payments of $25,000
and modification of the financial covenants. The Company has prepared financial
projections through the term of the extension and believes it will be in
compliance with the financial covenants. Based upon its current strategy, the
Company projects to have sufficient funds to meet its operating capital
requirements through fiscal 2002, however, there would not be sufficient cash
flow to pay the principal due on July 2, 2002 absent an extension of that due
date. Management believes it will be able to restructure the outstanding balance
of the credit facility with Bank One; however, there is no assurance that Bank
7
One and the Company will be able to agree on mutually acceptable terms and
conditions.
In October 2001, the Company issued $1.1 million of subordinated debt to
the shareholders of Learning-Edge, Inc. under the terms of the acquisition
agreement (the "Learning-Edge Notes"). The Learning-Edge Notes bear interest
rates ranging from at 7.5% to 9.0% and are due in two equal installments on
October 1, 2003 and on October 1, 2004, respectively. If the Company raises
additional capital equal to or in excess of $3 million, the payment schedule
accelerates as follows:
CAPITAL PRINCIPAL TO
RAISED BE REPAID
------ ---------
$3.0 million 25%
$3.0 to $3.5 million 40%
$3.5 million to $4.0 million 55%
$4.0 to $4.5 million 70%
$4.5 million to $5.0 million 85%
Greater than $5.0 million 100%
In order to increase its liquidity and reorganize its current debt
structure, the Company has developed a plan consisting of the following
strategies; (i) seek alternative financing arrangements which could include
various forms of debt issued to certain financial institutions or investors (ii)
implement its e-Learning based strategic business plan, and (iii) possibly
accelerate cash collections from affiliated dental practices by offering a
repurchase of the dental practices earlier than contractually required. In its
attempt to raise additional capital, the Company may issue convertible debt or
other equity instruments, which would have a dilutive effect on existing
shareholders. In addition, the Company's service agreements with affiliated
dental practices begin to expire on March 31, 2003 and will continue to expire
through December 31, 2003, which may reduce revenues and cash flow and
accordingly could negatively affect the value of an investment in the Company.
Acceleration of cash collections related to these service agreements would
accelerate the date at which the Company would 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 or that the affiliated dental practices will agree upon terms
acceptable to the Company.
There can be no assurance that these efforts to improve operating results
and cash flows will be sufficient to allow the Company to meet its obligations
in a timely manner, that the Company will be successful in obtaining alternative
financing or that the Company's creditors will agree with its plan. If the plan
is not successful, management believes it will be able to restructure the
outstanding balance of the credit facility with Bank One; however, there is no
assurance that Bank One and the Company will be able to agree on mutually
acceptable terms and conditions. Therefore, there is substantial doubt about the
Company's ability to continue as a going concern past the due date of the credit
facility. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of these financial statements 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. On an on-going basis, the Company evaluates its estimates,
including those related to customer contracts, bad debts, intangible assets,
income taxes, and contingencies and litigation. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which 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 differ from these
estimates under different assumptions or conditions.
8
EARNINGS PER SHARE
Earnings per share are computed based upon the weighted average number of
shares of Common Stock and Common Stock equivalents outstanding during each
period. Outstanding options and warrants to purchase approximately 1,767,080 and
1,616,167 shares of Common Stock at exercise prices above the market value of
Common Stock were excluded from the calculation of earnings per share for the
three and nine month periods ended December 31, 2001 and 2000, respectively,
because their effect would have been antidilutive.
NEW PRONOUNCEMENTS
In June 2001, the Financial Accounting Standard Board issued SFAS 141,
"Business Combinations" which requires that all business combinations be
accounted for using the purchase method. In addition, this Statement requires
that intangible assets be recognized as assets apart from goodwill if certain
criteria are met. Management will apply this Statement on all business
combinations initiated after June 30, 2001.
In June 2001, the Financial Accounting Standard Board issued SFAS 142,
"Goodwill and Other Intangible Assets" which established Standards for reporting
acquired goodwill and other intangible assets. This Statement accounts for
goodwill based on the reporting units of the combined entity into which an
acquired entity is integrated. In accordance with the statement, goodwill and
indefinite lived intangible assets will not be amortized but will be tested for
impairment at least annually at the reporting unit level and the amortization
period of intangible assets with finite lives will not be limited to forty
years. The provisions of this Statement are required to be applied starting with
fiscal years beginning after December 15, 2001 with early application permitted
for entities with fiscal years beginning after March 15, 2001. The Company has
$4.3 million of goodwill included in its balance sheet at December 31, 2001.
Goodwill amortization for the three and nine months ended December 31, 2001 was
$23,000 and $69,000, respectively and is currently expected to approximate
$92,000 for the year ended March 31, 2002 before the provisions of SFAS 142 are
applied. Implementation of SFAS 142 by the Company would result in elimination
of amortization of goodwill from acquisition under the purchase method of
accounting. The statement does not result in the elimination of amortization of
the Company's service agreements because under the scope of the statement only
goodwill resulting from acquisitions under the purchase method of accounting,
and not other identifiable intangible assets, is subject to being no longer
amortized.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which
establishes one accounting model to be used for long-lived assets to be disposed
of by sale and broadens the presentation of discontinued operations to include
more disposal transactions. SFAS No. 144 supercedes SFAS 121, "Accounting for
the Impairment of Long-Lived Assets to Be Disposed Of" and the accounting and
reporting provisions of APB Opinion No. 30. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. The company does not anticipate any
financial statement impact with the adoption of this statement.
3. SEGMENT INFORMATION
During the three and nine month periods ended December 31, 2001, the
Company had two reportable segments, learning and dental practice management.
The learning segment included revenues and operating expenses related to the
development and sale of the Company's 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. The Company does not review assets by
operating segment.
9
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues
Learning ................................ $ 1,396 $ -- $ 1,682 $ --
Dental practice management .............. 1,629 1,966 5,106 6,395
-------- -------- -------- --------
Total revenues ...................... 3,025 1,966 6,788 6,395
-------- -------- -------- --------
Operating expenses
Learning ................................ 1,289 -- 2,197 --
Dental practice management .............. 1,523 1,479 3,513 30,851
-------- -------- -------- --------
Total operating expenses ............ 2,812 1,479 5,710 30,851
-------- -------- -------- --------
Earnings (loss) from operations
Learning ................................ 107 -- (515) --
Dental practice management .............. 106 487 1,593 (24,456)
-------- -------- -------- --------
Total earnings (loss) from operations $ 213 $ 487 $ 1,078 $(24,456)
-------- -------- -------- --------
4. EXTRAORDINARY ITEM
In December 2001, a settlement agreement was reached regarding the amount
to be paid to the former Chief Dental Officer of the Company under the terms of
his amended employment agreement. The remaining balance due was $248,000 and was
payable on July 31, 2001. Under the terms of the settlement, the Company agreed
to pay this individual $75,000 and issue 53,571 shares valued at $72,000. The
remaining balance of $101,000 was forgiven by the individual and has been
reflected as extraordinary income.
5. COMMON STOCK
In December 2001, the Company issued its chief executive officer 450,000
restricted shares of the Company's common stock. 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. The vesting 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
6. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company has pending lawsuits against nine Affiliated Practices for
defaulting in the payment of the required Service Fees. In each of those cases,
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. Two Affiliated Practices have in response filed a counter-claim
alleging breach of contract, misrepresentation and securities violations. The
Company believes that those counter-claims are without merit and that the
Company will prevail in defense to the alleged counterclaims.
7. ACQUISITION OF LEARNING-EDGE, INC.
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
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 October 1, 2003 and on October
10
1, 2004, respectively. If the Company raises additional capital in excess of $3
million, the payment schedule accelerates (See Note 1). The Company also assumed
approximately $1.3 million of Learning-Edge debt as part of this acquisition.
The operating results of Learning-Edge are included with the Company's as of
October 1, 2001.
The purchase price has been calculated as follows:
(IN THOUSANDS)
Issuance of EDT Learning common stock valued at $0.51
per share............................................. $ 995
Issuance of EDT Learning debt............................ 1,102
Estimated acquisition costs.............................. 200
-------
Net purchase price, including acquisition costs....... $ 2,297
Assumed liabilities...................................... 3,221
-------
Total purchase price.................................. $ 5,518
=======
The total purchase price has been allocated to assets acquired and
liabilities assumed based upon their estimated fair values in accordance with
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations". The excess purchase price over the estimated fair value of the
tangible assets acquired and liabilities assumed has been assigned to goodwill
while EDT Learning completes its assessments of Learning-Edge's operations in
order to determine whether or not separately identifiable intangible assets
exist. At this time, no separately identifiable intangible assets have been
noted. EDT Learning expects to complete the assessment during March 2002.
The purchase price has been allocated as follows:
PURCHASE
PRICE
ALLOCATION
---------------
(IN THOUSANDS)
Current assets ......................................... $ 782
Property and equipment ................................. 274
Other long-term assets ................................. 4,161
Current liabilities .................................... (2,802)
Long-term obligations, excluding current maturities .... (1,420)
Common stock, net of treasury shares ................... (2)
Capital in excess of par value ......................... (993)
Accumulated deficit .................................... --
-------
$ --
=======
The following unaudited pro forma summary of financial information presents
the Company's combined results of operations as if the acquisition of
Learning-Edge had occurred at the beginning of the periods presented, after
including the impact of certain adjustments including: (i) the application of a
normal profit margin to contract in process at the date of acquisition and (ii)
increase in amortization of goodwill and decrease in depreciation of property
and equipment.
11
NINE MONTHS ENDED
DECEMBER 31,
----------------------
2001 2000
-------- --------
PROFORMA PROFORMA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues ................................. $ 7,318 $ 7,327
Loss from operations ..................... (127) (24,803)
Net loss before extraordinary items ...... (98) (25,563)
Loss per basic and diluted share ......... $ (0.01) $ (2.10)
Weighted average shares outstanding:
Basic .................................. 13,155 12,152
Diluted ................................ 13,358 12,152
The pro forma financial information presented does not purport to indicate
what the combined results of operations would have been had the merger occurred
at the beginning of the periods presented or the results of operations that may
be obtained in the future. Additionally, the pro forma financial information
presented does not reflect the anticipated cost savings resulting from the
integration of the Company's and Learning-Edge's operations.
8. SUBSEQUENT EVENT
In January 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 million of ThoughtWare debt as part of
this acquisition. The transaction will be recorded as of January 1, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THESE STATEMENTS ARE BASED ON CURRENT PLANS AND EXPECTATIONS OF THE
COMPANY AND INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL FUTURE
ACTIVITIES AND RESULTS OF OPERATIONS TO BE MATERIALLY DIFFERENT FROM THAT SET
FORTH IN THE FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER INCLUDE, AMONG OTHERS, RISKS ASSOCIATED WITH
AFFILIATIONS, FLUCTUATIONS IN OPERATING RESULTS BECAUSE OF AFFILIATIONS AND
VARIATIONS IN STOCK PRICE, CHANGES IN GOVERNMENT REGULATIONS, COMPETITION, RISKS
OF OPERATIONS AND GROWTH OF EXISTING AND NEW AFFILIATED DENTAL PRACTICES, AND
RISKS DETAILED IN THE COMPANY'S SEC FILINGS.
OVERVIEW
As an extension of its educational and training background, the Company has
broadened its reach to focus on the larger growing e-Learning and corporate
training market. With the launch of the Company's state of the art learning
management system and its e-Learning engine, the Company now provides a
comprehensive array of e-Learning content, hosting and delivery services to
corporations, inside and outside the dental and healthcare industries. The
Company's synchronous and asynchronous content delivery solutions provide an
array of e-Learning products that are customized to each corporate client. The
Company is positioning itself in the corporate training sector of the e-Learning
marketplace leveraging its existing infrastructure and using scale provided by
an integrated product.
The Company continues to provide services to its Affiliated Practices in
accordance with the modified Service Agreements. The actual terms of the various
Service Agreements vary slightly on a case-by-case basis, depending on
negotiations with the individual Affiliated Practices. Those Modified Agreements
require in general that the Company provide: access to online practice
enhancement services; access to online tools and payroll services; access to
certain on-site consulting and seminar programs; and the use of the tangible
assets owned by the Company located at each affiliated dental practice location.
The service fees payable to the Company under the modified Service Agreements
are guaranteed by the owner-dentists.
12
A name change of the Company to "EDT Learning, Inc." was approved by the
Board of Directors in June 2001 and was approved by the shareholders at the
August 2, 2001 Annual Shareholders Meeting. The name change was done to more
accurately reflect the Company's current business model and expansion of its
business offering which focuses on providing e-Learning tools and systems to
corporate clients inside and outside the dental industry.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based upon it's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
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. On an on-going basis, the Company evaluates
its estimates, including those related to customer contracts, bad debts,
intangible assets, income taxes, and contingencies and litigation. The Company
bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
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
differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.
The Company recognizes revenue and profit as work progresses on learning
contracts using the percentage-of-completion method, which relies on estimates
of total expected contract revenue and costs. The Company follows this method
since reasonably dependable estimates of the costs applicable to various stages
of a contract can be made. Recognized revenues and profit are subject to
revisions as the contract progresses to completion. Revisions in profit
estimates are charged to income in the period in which the facts that give rise
to the revision become known. Customers sometimes request modifications to
projects in progress which may result in significant revisions to cost estimates
and profit recognition, and the Company may not be successful in negotiating
additional payments related to the changes in scope of requested services. If
significant vendor obligations or customer acceptance clauses exist, revenues
are deferred until such obligations have been met or customer acceptance has
occurred. Provisions for any estimated losses on uncompleted contracts are made
in the period in which such losses become evident. There were no such losses at
December 31, 2001.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
The Company has made acquisitions of companies having operations or
technology in areas within its strategic focus and has recorded goodwill
associated with the acquisitions. Future adverse changes in market conditions or
poor operating results of the underlying acquired operations could result in
losses or an inability to recover the carrying value of the goodwill, thereby
possibly requiring an impairment charge in the future. As of December 31, 2001,
no such impairment has been identified by the Company.
The Company has recorded a full valuation allowance to reduce its net
deferred tax assets because it has concluded that it is not likely it will be
recognized due to the lack of operating history and implementation of its
learning business plan, modification of its management service agreements and
maturity of its line of credit. The Company has considered future taxable income
and ongoing prudent and feasible tax planning strategies in assessing the need
for the valuation allowance. In the event the Company were to determine that it
would be able to realize its deferred tax assets in the future in excess of its
net recorded amount, an adjustment to the deferred tax asset would increase
income in the period such determination was made.
REVENUES
Total revenues generated for the three months ended December 31, 2001 and
2000 were $3.0 million and $2.0 million respectively, an increase of $1.0
million. The Company recognized $1.4 million in learning revenues in the three
months ended December 31, 2001. There were no learning revenues in the three
months ended December 31, 2000. Revenue from dental contacts decreased by
$337,000 during the three months ended December 31, 2001 as compared to the
three months ended December 31, 2000 due to the modification and termination of
13
certain dental contracts. Dental contract revenue will continue to decline as
the contracts reach their expiration dates, generally over the next 15 to 24
months.
Total revenues generated for the nine months ended December 31, 2001 and
2000 were $6.8 million and $6.4 million respectively, a decrease of $400,000.
The Company recognized $1.7 million in learning revenues in the nine months
ended December 31, 2001. There were no learning revenues in the nine months
ended December 31, 2000. Revenue from dental contacts decreased by $1.3 million
during the nine months ended December 31, 2001 as compared to the nine months
ended December 31, 2000 due to the modification and termination of certain
dental contracts. Dental contract revenue will continue to decline as the
contracts reach their expiration dates, generally over the next 15 to 24 months.
OPERATING EXPENSES
The Company incurred operating expenses of $2.8 million and $1.5 million
for the three months ended December 31, 2001 and 2000, respectively. The Company
incurred operating expenses of $5.7 million and $30.9 million for the nine
months ended December 31, 2001 and 2000, respectively. Operating expenses
consist of research and development, sales and marketing, general and
administrative, depreciation and amortization expenses and impairment of assets.
Research and development expenses include expenses incurred in connection
with the provision of content creation services and other professional services,
development of new products and new product versions and consist primarily of
salaries and benefits, communication equipment and supplies. Research and
development expenses were $942,000 and $1.4 million for the three and nine
months ended December 31, 2001 and are a result of the Company's decision to
implement its eCommerce and e-learning strategy. There were no research and
development expenses during the three and nine months ended December 31, 2000.
Sales and marketing expenses consist primarily of sales and marketing
salaries and benefits, travel, advertising, and other marketing literature.
Sales and marketing expenses were $347,000 and $772,000 for the three and nine
months ended December 31, 2001 and are a result of the Company's decision to
implement its eCommerce and e-learning strategy. There were no sales and
marketing expenses during the three and nine months ended December 31, 2000.
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 expenses,
professional services, travel (primarily related to practice development),
office costs and other general corporate expenses.
For the three months ended December 31, 2001 and 2000, general and
administrative expenses were $1.0 million and $966,000 respectively, an decrease
of $40,000. General and administrative expenses increased primarily due to
increases in bad debt expenses of $165,000 and professional services of $56,000.
These increases were partially offset by decreases in salaries and wages of
$80,000; travel of $46,000; insurance of $27,000 and telephone of $18,000 during
the three months ended December 31, 2001 compared with three months ended
December 31, 2000.
For the nine months ended December 31, 2001 and 2000, general and
administrative expenses were $1.9 million and $6.1 million respectively, a
decrease of $4.2 million. General and administrative expenses decreased
primarily due to decreases in bad debt expenses of $2.1 million; salaries and
wages of $929,000; professional services of $730,000; insurance of $176,000 and
travel of $146,000 during the nine months ended December 31, 2001 compared with
nine months ended December 31, 2000.
The Company recorded impairment charges of $23 million for the nine months
ended December 31, 2000, respectively. There were no impairment charges during
the three or nine months ended December 31, 2001.
INCOME TAXES
For the three and nine months ended December 31, 2001, the Company recorded
no tax benefit because it concluded it was not likely it would be able to
recognize it's net deferred tax asset due to the lack of operating history and
implementation of its learning business plan, modification of its management
14
service agreements and maturity of its line of credit. At December 31, 2001, the
Company has a net deferred tax asset of $9.2 million with a corresponding
valuation allowance
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2001, the Company incurred a net loss of $24.9 million and
had an accumulated deficit of $31.3 million at March 31, 2001. In addition, the
Company had cash flow from operations of $1.4 million during the year ending
March 31, 2001. During the three and nine months ended December 31, 2001, the
Company had net income of $638,000 and $1.3 million, respectively and has an
accumulated deficit of $30.1 million at December 31, 2001. In addition, the
Company used cash flow in operations of $17,000 during the nine months ended
December 31, 2001.
As of December 31, 2001, the Company had outstanding total debt (secured
and unsecured promissory notes) of $12.1 million. Of that amount, the Company
owed Bank One $8.6 million (the "Bank One Indebtedness"). Other than the Bank
One Indebtedness, the balance of $3.5 million (the "Other Debt") is owed to
various parties with differing maturities as follows: $407,000 are unsecured
notes which arose as a part of the Company's initial public offering and are due
on March 31, 2003; $201,000 are unsecured promissory notes which were issued to
various former shareholders of Omega Orthodontics, Inc. as a part its
acquisition by the Company; $1.5 million are unsecured promissory notes which
were either issued to former shareholders of Learning-Edge, Inc. or assumed by
the Company as part of its acquisition of Learning-Edge, Inc.; $1.3 million are
unsecured convertible promissory notes which were issued to dentists who owned
dental practices with which the Company affiliated as part of its dental
practice management business and are due one half in November 2002 and one half
in November 2003.
The following schedule details all of the Company's indebtedness and the
required payments related to such obligations at December 31, 2001 (in
thousands):
DUE IN LESS DUE IN ONE TO DUE IN FOUR
TOTAL THAN ONE YEAR THREE YEARS TO FIVE YEARS
----- ------------- ----------- -------------
Long term debt ................. $12,148 $ 9,739 $ 2,409 $ --
Capital lease obligations ...... 855 342 492 21
Operating lease obligations .... 736 405 331 --
------- ------- ------- -------
Total commitments .............. $13,739 $10,486 $ 3,232 $ 21
======= ======= ======= =======
On June 29, 2001, Bank One extended the due date of the credit facility to
July 2, 2002. In connection with the extension, the Company paid $61,000 to Bank
One and issued Bank One 393,182 warrants to acquire shares of the Company's
Common Stock at $0.42 per share. The warrants were valued at $32,000. Until the
credit facility is paid in full, Bank One will have the right to maintain a 3%
fully diluted interest in the Company through the issuance of additional
warrants. Terms of the extension include monthly principal payments of $25,000
and modification of the financial covenants. The Company has prepared financial
projections through the term of the extension and believes it will be in
compliance with the financial covenants. Based upon its current strategy, the
Company projects to have sufficient funds to meet its operating capital
requirements through fiscal 2002, however, there would not be sufficient cash
flow to pay the principal due on July 2, 2002 absent an extension of that due
date. Management believes it will be able to restructure the outstanding balance
of the credit facility with Bank One; however, there is no assurance that Bank
One and the Company will be able to agree on mutually acceptable terms and
conditions.
In October 2001, the Company issued $1.1 million of subordinated debt to
the shareholders of Learning-Edge, Inc. under the terms of the acquisition
agreement (the "Learning-Edge Notes"). The Learning-Edge Notes bear interest
rates ranging from at 7.5% to 9.0% and are due in two equal installments on
October 1, 2003 and on October 1, 2004, respectively. If the Company raises
additional capital equal to or in excess of $3 million, the payment schedule
accelerates as follows:
15
CAPITAL PRINCIPAL TO
RAISED BE REPAID
------ ---------
$3.0 million 25%
$3.0 to $3.5 million 40%
$3.5 million to $4.0 million 55%
$4.0 to $4.5 million 70%
$4.5 million to $5.0 million 85%
Greater than $5.0 million 100%
In order to increase its liquidity and reorganize its current debt
structure, the Company has developed a plan consisting of the following
strategies; (i) seek alternative financing arrangements which could include
various forms of debt issued to certain financial institutions or investors (ii)
implement its e-Learning based strategic business plan, and (iii) possibly
accelerate cash collections from affiliated dental practices by offering a
repurchase of the dental practices earlier than contractually required. In its
attempt to raise additional capital, the Company may issue convertible debt or
other equity instruments, which would have a dilutive effect on existing
shareholders. In addition, the Company's service agreements with affiliated
dental practices begin to expire on March 31, 2003 and will continue to expire
through December 31, 2003, which may reduce revenues and cash flow and
accordingly could negatively affect the value of an investment in the Company.
Acceleration of cash collections related to these service agreements would
accelerate the date at which the Company would 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 or that the affiliated dental practices will agree upon terms
acceptable to the Company.
There can be no assurance that these efforts to improve operating results
and cash flows will be sufficient to allow the Company to meet its obligations
in a timely manner, that the Company will be successful in obtaining alternative
financing or that the Company's creditors will agree with its plan. If the plan
is not successful, management believes it will be able to restructure the
outstanding balance of the credit facility with Bank One; however, there is no
assurance that Bank One and the Company will be able to agree on mutually
acceptable terms and conditions. Therefore, there is substantial doubt about the
Company's ability to continue as a going concern past the due date of the credit
facility. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
Cash generated from investing activities for the nine months ended December
31, 2001 and 2000 resulted from the collection of notes receivable of $576,000
and $264,000, respectively. The Company also received $86,000 and $84,000 from
the disposition of property and equipment for the nine months ended December 31,
2001 and 2000, respectively. Cash used in investing activities was $17,000 and
$108,000 for the purchases of capital equipment for the nine months ended
December 31, 2001 and 2000, respectively. Uses of cash also include the issuance
of notes receivable to affiliated practices of $24,000 in the nine months ended
December 31, 2000.
Cash used in financing activities for the nine months ended December 31,
2001 and 2000 included payments on the Company's long-term debt and capital
leases of $1.1 million and $830,000, respectively.
NEW PRONOUNCEMENTS
In June 2001, the Financial Accounting Standard Board issued SFAS 141,
"Business Combinations" which requires that all business combinations be
accounted for using the purchase method. In addition, this Statement requires
that intangible assets be recognized as assets apart from goodwill if certain
criteria are met. Management will apply this Statement on all business
combinations initiated after June 30, 2001.
In June 2001, the Financial Accounting Standard Board issued SFAS 142,
"Goodwill and Other Intangible Assets" which established Standards for reporting
acquired goodwill and other intangible assets. This Statement accounts for
goodwill based on the reporting units of the combined entity into which an
acquired entity is integrated. In accordance with the statement, goodwill and
indefinite lived intangible assets will not be amortized but will be tested for
impairment at least annually at the reporting unit level and the amortization
period of intangible assets with finite lives will not be limited to forty
years. The provisions of this Statement are required to be applied starting with
fiscal years beginning after December 15, 2001 with early application permitted
for entities with fiscal years beginning after March 15, 2001. The Company has
$4.3 million of goodwill included in its balance sheet at December 31, 2001.
16
Goodwill amortization for the three and nine months ended December 31, 2001 was
$23,000 and $69,000, respectively and is currently expected to approximate
$92,000 for the year ended March 31, 2002 before the provisions of SFAS 142 are
applied. Implementation of SFAS 142 by the Company would result in elimination
of amortization of goodwill from acquisition under the purchase method of
accounting. The statement does not result in the elimination of amortization of
the Company's service agreements because under the scope of the statement only
goodwill resulting from acquisitions under the purchase method of accounting,
and not other identifiable intangible assets, is subject to being no longer
amortized.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which
establishes one accounting model to be used for long-lived assets to be disposed
of by sale and broadens the presentation of discontinued operations to include
more disposal transactions. SFAS No. 144 supercedes SFAS 121, "Accounting for
the Impairment of Long-Lived Assets to Be Disposed Of" and the accounting and
reporting provisions of APB Opinion No. 30. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. The company does not anticipate any
financial statement impact with the adoption of this statement.
17
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has pending lawsuits against nine Affiliated Practices for
defaulting in the payment of the required Service Fees. In each of those cases,
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. Two Affiliated Practices have in response filed a counter-claim
alleging breach of contract, misrepresentation and securities violations. The
Company believes that those counter-claims are without merit and that the
Company will prevail in defense to the alleged counter-claims.
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
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1) Current Report on Form 8-K dated October 1, 2001 was filed October 16,
2001 (Item 2. Acquisition or Disposition of Assets).
2) Current Report on Form 8-K/A dated October 1, 2001 was filed December
17, 2001 (Item 7. Financial statements and exhibits) which contained
the audited financial statements of Learning-Edge, Inc. for the year
ended December 31, 2000 and the unaudited financial statements of
Learning-Edge, Inc. for the nine months ended September 30, 2001.
3) Current Report on Form 8-K dated January 30, 2002 (Item 2. Acquisition
or Disposition of Assets).
18
SIGNATURE
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: February 14, 2002 By: /s/ Charles Sanders
-----------------------------------
Charles Sanders
Sr. Vice President-Chief
Financial Officer