AMERICAN LEARNING 10-Q 2011 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

or

o 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: 0-14807

AMERICAN LEARNING CORPORATION

(Exact name of registrant as specified in its charter)

New York	11-2601199
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
One Jericho Plaza, Jericho, New York	11753
(Address of principal executive offices)	(Zip Code)

(516) 938-8000

(Registrant’s telephone number, including area code)

Former name, former address and former fiscal year, if changed since last report

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 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. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o 
Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

The number of shares outstanding of the Registrant’s common stock as of November 15, 2010 was 4,754,900.

AMERICAN LEARNING CORPORATION AND SUBSIDIARIES

INDEX

	Page No.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2010 (unaudited) and March 31, 2010		3
Condensed Consolidated Statements of Operations for the Three and Six Months ended September 30, 2010 and 2009 (unaudited)		4
Condensed Consolidated Statements of Cash Flows for the Six Months ended September 30, 2010 and 2009 (unaudited)		5
Notes to Condensed Consolidated Financial Statements (unaudited)		6 - 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		9 - 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk		10
Item 4. Controls and Procedures		10 - 11
PART II — OTHER INFORMATION
Item 6. Exhibits		12
SIGNATURES		13
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

AMERICAN LEARNING CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

	Sept. 30, 2010			Mar. 31, 2010
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	2,837,850		$	3,440,493
Accounts receivable, net		1,108,842			1,237,540
Prepaid expenses and other current assets		155,679			105,781
Total current assets		4,102,371			4,783,814
Goodwill		145,000			145,000
Intangible assets, net		513,125			535,625
Property and equipment, net		147,440			171,780
Other assets		19,787			19,787
Total assets	$	4,927,723		$	5,656,006
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	188,517		$	244,495
Accrued compensation and related taxes		413,748			672,131
Capital leases payable — current portion		17,213			19,744
Total current liabilities		619,478			936,370
Long-term liabilities:
Capital leases payable — net of current portion		—			7,801
Commitments
Stockholders’ equity:
Common stock, $.01 par value; authorized 20,000,000 shares; issued 5,050,000 shares; outstanding 4,754,900 shares		50,500			50,500
Additional paid-in capital		4,964,799			4,952,799
(Accumulated deficit) Retained earnings		(239,781	)		175,809
		4,775,518			5,179,108
Treasury stock, at cost		(467,273	)		(467,273	)
Total stockholders’ equity		4,308,245			4,711,835
Total liabilities and stockholders’ equity	$	4,927,723		$	5,656,006

See accompanying notes to condensed consolidated financial statements.

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AMERICAN LEARNING CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

	Three months ended						Six months ended
	Sept. 30,			Sept. 30,			Sept. 30,			Sept. 30,
	2010			2009			2010			2009
Revenues	$	1,502,806		$	1,317,905		$	3,768,896		$	3,224,996
Cost of services		1,132,709			964,137			2,695,621			2,240,686
Gross margin		370,097			353,768			1,073,275			984,310
Selling, general and administrative expenses		737,880			708,745			1,491,346			1,383,424
Operating loss		(367,783	)		(354,977	)		(418,071	)		(399,114	)
Other income (expense):
Other income		1,226			—			1,226			—
Interest income		1,384			2,390			2,374			7,808
Interest expense		(447	)		(921	)		(1,119	)		(1,972	)
Net loss	$	(365,620	)	$	(353,508	)	$	(415,590	)	$	(393,278	)
Loss per share:
basic and diluted	$	(0.08	)	$	(0.07	)	$	(0.09	)	$	(0.08	)
Weighted average shares —
basic and diluted		4,754,900			4,754,900			4,754,900			4,754,900

See accompanying notes to condensed consolidated financial statements.

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AMERICAN LEARNING CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Six months ended
	Sept. 30,			Sept. 30,
	2010			2009
Cash flows from operating activities:
Net loss	$	(415,590	)	$	(393,278	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		69,285			102,307
Stock-based compensation expense		12,000			—
Changes in assets and liabilities:
Accounts receivable		128,698			32,579
Prepaid expenses and other current assets		(49,898	)		29,362
Accounts payable and accrued expenses		(55,978	)		(60,743	)
Accrued compensation and related taxes		(258,383	)		(107,061	)
		(154,276	)		(3,556	)
Net cash used in operating activities		(569,866	)		(396,834	)
Cash flows from investing activities:
Capital expenditures		(22,445	)		(23,004	)
Acquisition escrow refund		—			30,583
Proceeds from acquisition purchase price adjustment		—			170,715
Net cash (used in) provided by investing activities		(22,445	)		178,294
Cash flows from financing activities:
Payment of capital leases payable		(10,332	)		(8,823	)
Net cash used in financing activities		(10,332	)		(8,823	)
Net decrease in cash and cash equivalents		(602,643	)		(227,363	)
Cash and cash equivalents — beginning of period		3,440,493			4,143,445
Cash and cash equivalents — end of period	$	2,837,850		$	3,916,082
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	1,119		$	1,972

See accompanying notes to condensed consolidated financial statements.

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AMERICAN LEARNING CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2010
(Unaudited)

Overview

American Learning Corporation (together with its subsidiaries, “we,” “our,” “us,” or the “Company”) provides a comprehensive range of services to children with developmental delays and disabilities in New York State and has developed a reputation for providing well-rounded therapeutic solutions through our wholly owned subsidiaries, Interactive Therapy Group Consultants, Inc. (“ITG”) and Signature Learning Resources, Inc.

Basis of Presentation

The accompanying unaudited consolidated financial statements and footnotes have been condensed and therefore do not contain all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). In our opinion, these financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to make the consolidated financial position, results of operations and cash flows for the interim periods presented not misleading. Results for interim periods are not necessarily indicative of results which may be achieved for a full year.

Accordingly, these condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010 (the “Annual Report”), as filed with the Securities and Exchange Commission (“SEC”).

Use of Estimates

The preparation of financial statements in conformity with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Revenue Recognition

We recognize revenue for services rendered when there is evidence of billable time expended. Deferred revenue is recorded for amounts attributable to special education programs when invoiced and recognized over the applicable program periods.

Credit Risk

Service revenue is concentrated within a limited number of clients throughout New York State; municipalities within New York State provide substantial and significant revenue to us. This concentration of customers may impact our overall exposure to credit risk, either positively or negatively, in that our customers may be similarly affected by changes in economic or other conditions in New York State. Over the past year, we have experienced delays in payments received from these municipalities as a result of the challenging economic climate and delays in funding to the municipalities from New York State. Although the accounts receivable for our services are deemed collectible, we will continue to actively monitor this issue when evaluating the adequacy of our allowance for doubtful accounts.

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Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is tested for impairment at least annually for possible impairment. We perform our tests as of March 31, the last day of our fourth fiscal quarter, unless an event occurs that would cause us to believe the value is impaired at an interim date.

The following table presents certain information regarding our intangible assets at September 30, 2010. Intangible assets are being amortized on a straight-line basis over their estimated useful lives.

	Estimated	Carrying		Accumulated
	Useful Lives	Value		Amortization			Net
Customer contracts	15 years	$	570,000	$	(77,583	)	$	492,417
Non-compete convenant	5 years		35,000		(14,292	)		20,708
		$	605,000	$	(91,875	)	$	513,125

For the six months ended September 30, 2010, amortization expense was $22,500. Assuming no changes in our intangible assets, estimated amortization expense for the remainder of the current fiscal year ending March 31, 2011 and each of the four succeeding fiscal years is $22,500, $45,000, $45,000, $41,208 and $38,000, respectively.

We assess the recoverability of the carrying value of the identifiable intangible assets with finite useful lives, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

Seasonality

Our business is moderately seasonal in nature based on the school year. Accordingly, our second fiscal quarter (the three month period ending September 30), which includes two full months during which schools are not in session (July and August), is the quarter in which we achieve our lowest volume of revenues.

Net Earnings (Loss) Per Share

Basic earnings (loss) per share is based on the weighted average number of common shares outstanding. Diluted earnings (loss) per share reflects the maximum dilution from potential common shares issuable pursuant to the exercise of stock options, if dilutive, outstanding during each period. Our net loss and weighted average shares outstanding used for computing diluted loss per share for continuing operations were the same as those used for computing basic loss per share for the three and six months ended September 30, 2010 and 2009 because the inclusion of common stock equivalents in the calculation of diluted loss per share for continuing operations would be anti-dilutive. Potentially dilutive securities consisting of employee and director stock options to purchase 1,271,000 and 1,221,000 shares of the Company’s common stock as of September 30, 2010 and 2009, respectively, were not included in the diluted net loss per share calculations because their effect would have been anti-dilutive.

Stock Option Plans

We account for stock-based compensation by recording stock options at their fair value on the measurement date, which is typically the date the services are performed (generally the vesting period of the grant). Stock-based compensation totaling $900 and $12,000 was recognized during the three and six months ended September 30, 2010, respectively, based on the fair value of the stock options granted. There were no stock options granted during the six month period ended September 30, 2009.

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We estimate the fair value of stock options granted using the Black-Scholes option pricing model. Under this method, the average fair value of stock options granted by the Company during the six months ended September 30, 2010 was $0.34 per share. In addition to the exercise price of the awards, certain weighted average assumptions were used to estimate the fair value of stock option grants as follows: expected volatility of 83.9%, expected dividend yield of 0%, risk-free interest rate of 2.09% and an expected option term of 5 years.

At September 30, 2010, outstanding options to purchase 1,251,000 shares of the Company’s common stock are fully vested. In addition, certain option grants contain disposition restrictions which prohibit the sale of 50% of the shares acquired by exercising the awarded options until the first anniversary of the grant date and the remaining 50% of the shares acquired by exercising the awarded options until the second anniversary of the grant date. As of September 30, 2010, the fair value of unamortized stock-based compensation expense related to unvested stock options was approximately $8,400 which is expected to be recognized over a remaining vesting period of three years.

The following table summarizes information about stock option activity for the six months ended September 30, 2010:

					Weighted
			Weighted		Average
			Average		Remaining		Aggregate
			Exercise		Contractual		Intrinsic
	Shares		Price		Term		Value
Outstanding at March 31, 2010		1,241,000	$	2.09	4.5 years
Granted		30,000	$	2.50	10 years
Expired		—	$	—		—
Outstanding at September 30, 2010		1,271,000	$	2.10	4.1 years		$	—
Exercisable at September 30, 2010		1,251,000	$	2.12	4.1 years		$	—

There were no options outstanding with an exercise price less than the closing price of our shares of $0.77 as of September 30, 2010. Accordingly, there was no intrinsic value associated with the Company’s outstanding options at such date.

Regulatory Matters

We are currently exploring alternatives to ITG’s corporate structure concerning non-compliance issues regarding the practice of certain licensed professions in the State of New York. If a change in professional practice structure is deemed necessary, we will take all appropriate measures to assure compliance on a timely basis. Revenues derived from services performed by these licensed professionals approximate 22.4% and 22.0% of total revenues for the three and six months ended September 30, 2010, respectively.

We received a letter of inquiry from Vocational and Educational Services for Individuals with Disabilities (“VESID”), an office of the New York State Education Department, dated February 3, 2010, requesting details of the Company’s purchase of ITG. The Company has responded to VESID’s inquiry and has not received any additional correspondence.

Subsequent Events

We have completed an evaluation of the impact of any subsequent events through the date these financial statements were issued and determined that there were no subsequent events requiring disclosure in or adjustment to these financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

Except for the historical information contained herein, the matters discussed in this Report on Form 10-Q may contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, general economic and market conditions and our ability to successfully identify and thereafter consummate one or more acquisitions.

Critical Accounting Policies

Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in our Annual Report. A discussion of our critical accounting policies and estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) in our Annual Report. There have been no material changes to the critical accounting policies or estimates reported in the MD&A section of our Annual Report.

Results of Operations — Three and Six Months ended September 30, 2010 and 2009

Revenues for the quarterly period ended September 30, 2010 were $1,502,806, an increase of 14.0% over the $1,317,905 reported for the three month period ended September 30, 2009. This increase was largely the result of an increase in services provided to preschool programs under contracts in the New York City region. In recent quarters, we have achieved additional growth in our top line revenues as a result of increases in our school staffing services. However, the current quarter ended September 30 includes two months during which schools are not in session which limits the opportunity for growth in these services during this quarter. Revenues for the six months ended September 30, 2010 were $3,768,896, an increase of 16.9% over the $3,224,996 reported for the six months ended September 30, 2009.

Cost of services as a percentage of revenues for the three and six month periods ended September 30, 2010 were approximately 75.4% and 71.5%, respectively. During the three and six months ended September 30, 2009, cost of services as a percentage of revenues were 73.2% and 69.5%, respectively. The cost of services as a percentage of revenues in the current quarterly period increased, in part, as a result of an increase in workers compensation premiums. During the quarter, our clinicians were re-categorized into classifications that are associated with higher premium costs. The Company is challenging this action in an attempt to reverse this reclassification. There are no assurances that the we will be successful in our efforts.

Selling, general and administrative expenses for the quarterly periods ended September 30, 2010 and 2009 were $737,880 and $708,745, respectively. The increase in selling, general and administrative expenses in the current quarter versus the prior year’s comparable period is due to increases in legal and administrative fees related to the Company’s request for an extension of time, as permitted under the Listing Rules of The Nasdaq Stock Market, to comply with the $1.00 per share minimum bid price requirement for continued listing. In addition, we incurred certain non-recurring expenses related to the temporary relocation of our New York City regional office due to mold issues present in the building we occupied. Selling, general and administrative expenses in the six months ended September 30, 2010 also increased over the prior year’s comparable period due to increases in administrative payroll costs in the Company’s New York City and Poughkeepsie regional offices. Due to poor performance, we elected to close the Poughkeepsie office effective September 30, 2010.

Interest income for the three and six month periods ended September 30, 2010 was $1,384 and $2,374, respectively. Interest income for the three and six months ended September 30, 2009 was $2,390 and

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$7,808, respectively. The decrease in interest income was a result of declines in prevailing interest rates compounded by a reduction in cash balances available for investment.

Liquidity and Capital Resources

At September 30, 2010, we had working capital of $3,482,893 as compared to working capital of $3,847,444 at March 31, 2010. We believe that we have sufficient cash resources and working capital to meet our present cash requirements.

During the six months ended September 30, 2010, net cash used in operating activities was $569,866, primarily attributable to a decrease in accrued compensation and related taxes of $258,383 coupled with the operating loss of $415,590, offset by a decrease in accounts receivable of $128,698.

Future minimum lease payments under non-cancelable capital and operating leases and subleases, exclusive of future escalation charges, for the remainder of the fiscal year ending March 31, 2011 and fiscal years ending thereafter are as follows:

	Capital			Operating
	Leases			Leases
2011	$	18,076		$	113,000
2012		—			196,000
2013		—			163,000
2014		—			28,000
Total minimum lease payments		18,076		$	500,000
Less: Amounts representing interest		(863	)
Present value of minimum lease payments		17,213
Less: Current portion		—
Long-term portion of capital leases	$	17,213

While we have not experienced any significant impact on our net revenues and profitability from the general slowdown of the economy or current global credit crisis, the continuing economic deterioration could have a negative impact in future periods.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are subject to interest rate risks that arise from normal business operations. Most of our cash and cash equivalents are invested at variable rates of interest and decreases in market interest rates have caused a related significant reduction in our interest income over prior periods.

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure the reliability of the financial statements and other disclosures included in this Report. As of the end of the fiscal quarter ended September 30, 2010, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer

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and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings.

(b) Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

We are aware that there is a lack of segregation of duties due to the small number of employees dealing with general administrative and financial reporting matters. However, we have decided that considering the employees involved and the control procedures in place, risks associated with such lack of segregation are mitigated by active management involvement and the potential benefits of adding employees to clearly segregate duties do not justify the expenses associated with such increases.

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PART II — OTHER INFORMATION

Item 6. Exhibits.

Exhibit 31.1	Section 302 Principal Executive Officer Certification
Exhibit 31.2	Section 302 Principal Financial Officer Certification
Exhibit 32.1	Section 1350 Certification
Exhibit 32.2	Section 1350 Certification

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AMERICAN LEARNING CORPORATION
Date: November 15, 2010	By:	/s/ Gary Gelman
		Gary Gelman
		Chairman of the Board, President and Chief Executive Officer
Date: November 15, 2010	By:	/s/ Gary J. Knauer
		Gary J. Knauer
		Chief Financial Officer, Treasurer and Secretary

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