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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2008
Commission File Number 0-20842
PLATO LEARNING, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 36-3660532 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
10801 Nesbitt Avenue South, Bloomington, MN 55437
(Address of principal executive offices)
(Address of principal executive offices)
(952) 832-1000
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
(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 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. Yesþ 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 definition of “ accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero | Accelerated filerþ | Non-accelerated filer o | Smaller Reporting Companyo |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date. 23,841,424 shares of common stock, $.01 par value, outstanding as of February 29, 2008.
PLATO LEARNING, INC.
Form 10-Q
Quarterly Period Ended January 31, 2008
Form 10-Q
Quarterly Period Ended January 31, 2008
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PART I. FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
PLATO Learning, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)
(In thousands, except per share amounts)
Three Months Ended | ||||||||
January 31, | ||||||||
2008 | 2007 | |||||||
REVENUES | ||||||||
Subscriptions | $ | 7,969 | $ | 5,153 | ||||
License fees | 2,251 | 4,642 | ||||||
Services | 5,915 | 7,231 | ||||||
Total revenues | 16,135 | 17,026 | ||||||
COST OF REVENUES | ||||||||
Subscriptions | 4,649 | 3,198 | ||||||
License fees | 1,423 | 2,282 | ||||||
Services | 2,595 | 3,182 | ||||||
Total cost of revenues | 8,667 | 8,662 | ||||||
GROSS PROFIT | 7,468 | 8,364 | ||||||
OPERATING EXPENSES | ||||||||
Sales and marketing | 7,005 | 7,721 | ||||||
General and administrative | 2,950 | 3,214 | ||||||
Product maintenance and development | 1,076 | 1,768 | ||||||
Amortization of intangibles | 388 | 457 | ||||||
Total operating expenses | 11,419 | 13,160 | ||||||
OPERATING LOSS | (3,951 | ) | (4,796 | ) | ||||
Other income, net | 192 | 420 | ||||||
LOSS BEFORE INCOME TAXES | (3,759 | ) | (4,376 | ) | ||||
Income tax expense | 152 | 150 | ||||||
NET LOSS | $ | (3,911 | ) | $ | (4,526 | ) | ||
NET LOSS PER SHARE | ||||||||
Basic and diluted | $ | (0.16 | ) | $ | (0.19 | ) | ||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | ||||||||
Basic and diluted | 23,790 | 23,729 | ||||||
See Notes to Condensed Consolidated Financial Statements.
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PLATO Learning, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except per share amounts)
(In thousands, except per share amounts)
January 31, | October 31, | |||||||
2008 | 2007 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 19,093 | $ | 24,297 | ||||
Accounts receivable, net | 9,292 | 14,479 | ||||||
Other current assets | 7,385 | 7,759 | ||||||
Total current assets | 35,770 | 46,535 | ||||||
Equipment and leasehold improvements, net | 5,191 | 5,615 | ||||||
Product development costs, net | 30,344 | 30,266 | ||||||
Goodwill | 71,865 | 71,865 | ||||||
Identified intangible assets, net | 7,391 | 7,983 | ||||||
Other long-term assets | 5,450 | 5,039 | ||||||
Total assets | $ | 156,011 | $ | 167,303 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 4,201 | $ | 4,608 | ||||
Accrued compensation | 3,601 | 5,453 | ||||||
Other accrued liabilities | 3,790 | 4,245 | ||||||
Deferred revenue | 34,443 | 38,821 | ||||||
Total current liabilities | 46,035 | 53,127 | ||||||
Long-term deferred revenue | 9,939 | 10,302 | ||||||
Deferred income taxes | 3,291 | 3,139 | ||||||
Total liabilities | 59,265 | 66,568 | ||||||
Stockholders’ equity: | ||||||||
Common stock, $.01 par value, 50,000 shares authorized; 23,861 shares issued and 23,841 shares outstanding at at January 31, 2008; 23,824 shares issued and 23,804 shares outstanding at October 31, 2007 | 238 | 238 | ||||||
Additional paid-in capital | 169,818 | 169,927 | ||||||
Treasury stock at cost | (205 | ) | (205 | ) | ||||
Accumulated deficit | (71,804 | ) | (67,893 | ) | ||||
Accumulated other comprehensive loss | (1,301 | ) | (1,332 | ) | ||||
Total stockholders’ equity | 96,746 | 100,735 | ||||||
Total liabilities and stockholders’ equity | $ | 156,011 | $ | 167,303 | ||||
See Notes to Condensed Consolidated Financial Statements.
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PLATO Learning, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
(In thousands)
Three Months Ended | ||||||||
January 31, | ||||||||
2008 | 2007 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (3,911 | ) | $ | (4,526 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Deferred income taxes | 152 | 150 | ||||||
Depreciation and amortization | 4,360 | 3,803 | ||||||
Stock-based compensation | (162 | ) | 102 | |||||
Loss on disposal of equipment | 3 | 7 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 4,636 | 5,924 | ||||||
Other current and long-term assets | 386 | 1,057 | ||||||
Accounts payable | (407 | ) | (2,803 | ) | ||||
Other current and long-term liabilities | (2,301 | ) | (3,492 | ) | ||||
Deferred revenue | (4,741 | ) | (4,065 | ) | ||||
Total adjustments | 1,926 | 683 | ||||||
Net cash used in operating activities | (1,985 | ) | (3,843 | ) | ||||
INVESTING ACTIVITIES: | ||||||||
Capitalized internal product development costs | (3,170 | ) | (3,925 | ) | ||||
Purchases of equipment and leasehold improvements | (127 | ) | (688 | ) | ||||
Net cash used in investing activities | (3,297 | ) | (4,613 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Net proceeds from issuance of common stock | 59 | 66 | ||||||
Repayments of capital lease obligations | (11 | ) | (10 | ) | ||||
Net cash provided by financing activities | 48 | 56 | ||||||
EFFECT OF CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | 30 | (57 | ) | |||||
Net decrease in cash and cash equivalents | (5,204 | ) | (8,457 | ) | ||||
Cash and cash equivalents at beginning of period | 24,297 | 33,094 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 19,093 | $ | 24,637 | ||||
See Notes to Condensed Consolidated Financial Statements.
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PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. General
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The October 31, 2007 condensed consolidated balance sheet data was derived from our audited financial statements at that date. Accordingly, these financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America. We have included all normal recurring and other adjustments considered necessary to give a fair statement of our operating results for the interim periods shown. Operating results for these interim periods are not necessarily indicative of the results to be expected for the full fiscal year. For further information, refer to the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2007.
Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of PLATO Learning, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Fiscal Periods
Our fiscal year is from November 1 to October 31. Unless otherwise stated, references herein to our first quarter relate to the three month period ended January 31.
Note 2. Summary of Significant Accounting Policies
General
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. We continually evaluate our critical accounting policies and estimates, and have identified the policies relating to the following areas as those that are significant to our financial statement presentation, and require difficult, subjective, or complex judgments:
• | Revenue recognition | ||
• | Capitalized product development costs | ||
• | Valuation of our deferred income taxes | ||
• | Valuation and impairment analysis of goodwill and identified intangible assets |
There have been no significant changes to our accounting policies during the first quarter of 2008. For a more complete discussion of these policies refer to Note 2 to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended October 31, 2007.
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Loss per Share
Basic and diluted net loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the periods as follows (in thousands):
As of January 31, | ||||||||
2008 | 2007 | |||||||
Net loss | $ | (3,911 | ) | $ | (4,526 | ) | ||
Basic and diluted weighted average common shares outstanding | 23,790 | 23,729 | ||||||
Basic and diluted loss per share | $ | (0.16 | ) | $ | (0.19 | ) | ||
Potential common shares, which consist of stock options and warrants and restricted stock, are anti-dilutive in a net loss situation and are therefore not included in the calculation of diluted net loss per share. Accordingly, the calculation of diluted net loss per share for the periods presented for 2008 and 2007 exclude the effect of approximately 2,449,000 and 3,024,000 potential common shares, respectively, from the conversion of outstanding options and warrants and restricted common shares.
New Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”).FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109, “Accounting for Income Taxes.”FIN 48 became effective for us in the first quarter of fiscal year 2008 and did not have a material effect on our consolidated financial statements.
For a more complete listing of new accounting pronouncements refer to Note 2 to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended October 31, 2007.
Note 3. Stock-Based Compensation
We account for stock-based compensation under the provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS 123(R)”), using the modified prospective transition application method. Under this method, compensation expense is recognized for employee awards granted, modified, or settled subsequent to October 31, 2005, and the unvested portion of awards granted to employees prior to November 1, 2005. We use the straight-line method to recognize compensation expense over the requisite service period of the award.
There were no stock option awards in the first quarter of 2008.
Total stock-based compensation (benefit) expense recorded for the first quarters ended January 31, 2008 and 2007 was ($162,000) and $102,000, respectively. Stock option forfeitures reduced stock- based compensation expense for the first quarter of 2008 and 2007 by approximately $495,000 and $225,000, respectively.
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Note 4. Accounts Receivable
The components of accounts receivable were as follows (in thousands):
January 31, | October 31, | |||||||
2008 | 2007 | |||||||
Total trade accounts receivable | $ | 11,946 | $ | 16,594 | ||||
Long-term installment accounts receivable | (2,347 | ) | (1,796 | ) | ||||
Allowance for doubtful accounts | (307 | ) | (319 | ) | ||||
$ | 9,292 | $ | 14,479 | |||||
Long-term installment accounts receivable represent amounts to be billed more than one year after the balance sheet date under non-cancellable customer contracts and are included in other long-term assets and long-term deferred revenue on the consolidated balance sheets.
A reconciliation of the allowance for doubtful accounts from the beginning of the fiscal year through the end of the first quarter is as follows (in thousands):
2008 | 2007 | |||||||
Balance, October 31 | $ | 319 | $ | 928 | ||||
Provision for doubtful accounts, net of other reserve adjustments | — | — | ||||||
Write-offs, net of recoveries | (12 | ) | (54 | ) | ||||
Balance, January 31 | $ | 307 | $ | 874 | ||||
The provision for doubtful accounts is included in general and administrative expense on the consolidated statements of operations.
Note 5. Deferred Commissions
Commissions to employees on the sale of our products and services are earned at the time of invoicing and paid monthly. The related expense is deferred and amortized over the non-cancelable terms of the related customer contracts on the basis that the commission charges are so closely related to the revenue from such contracts that they should be recorded as an asset and charged to expense over the same period that the revenue is recognized. Total deferred commissions at January 31, 2008 and October 31, 2007 were $3,982,000 and $4,157,000, of which $892,000 and $874,000, respectively, were recorded as long-term deferred commissions and included in other long-term assets on our balance sheet.
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Note 6. Product Development Costs
A reconciliation of capitalized product development costs is as follows (in thousands):
Gross Carrying | Accumulated | Net Carrying | ||||||||||
Value | Amortization | Value | ||||||||||
Balance, October 31, 2007 | $ | 51,376 | $ | (21,110 | ) | $ | 30,266 | |||||
Capitalized internal product development costs | 3,170 | — | 3,170 | |||||||||
Amortization | (3,092 | ) | (3,092 | ) | ||||||||
Write-off of fully amortized costs | (1,068 | ) | 1,068 | |||||||||
Balance, January 31, 2008 | $ | 53,478 | $ | (23,134 | ) | $ | 30,344 | |||||
In the first quarter of 2008, we wrote off approximately $1,068,000 of fully amortized product development costs and related accumulated amortization which, as of November 1, 2007 was fully amortized and no longer considered substantially in use in products currently being sold.
Note 7. Goodwill and Identified Intangible Assets
There were no changes in goodwill during the three month period ended January 31, 2008.
Identified intangible assets subject to amortization were as follows (in thousands):
January 31, 2008 | October 31, 2007 | |||||||||||||||||||||||
Gross | Gross | |||||||||||||||||||||||
Carrying | Accumulated | Net Carrying | Carrying | Accumulated | Net Carrying | |||||||||||||||||||
Value | Amortzation | Value | Value | Amortzation | Value | |||||||||||||||||||
Acquired technology | $ | 13,563 | $ | (10,500 | ) | $ | 3,063 | $ | 13,563 | $ | (10,295 | ) | $ | 3,268 | ||||||||||
Trademarks and tradenames | 1,380 | (1,380 | ) | — | 1,380 | (1,380 | ) | — | ||||||||||||||||
Customer relationships and lists | 19,800 | (15,472 | ) | 4,328 | 20,200 | (15,485 | ) | 4,715 | ||||||||||||||||
$ | 34,743 | $ | (27,352 | ) | $ | 7,391 | $ | 35,143 | $ | (27,160 | ) | $ | 7,983 | |||||||||||
Amortization expense for the identified intangible assets presented above was as follows (in thousands):
Three Months Ended | ||||||||
January 31, | ||||||||
2008 | 2007 | |||||||
Amortization of intangible assets included in: | ||||||||
Cost of revenues | $ | 205 | $ | 205 | ||||
Operating expenses | 387 | 458 | ||||||
$ | 592 | $ | 663 | |||||
In the first quarter of 2008, we wrote off approximately $400,000 of identified intangible assets and related accumulated amortization which as of November 1, 2007 was fully amortized and no longer considered substantially in use in products currently being sold.
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Estimated future annual amortization expense for identified intangible assets is as follows (in thousands):
Cost of | Operating | |||||||||||
Revenues | Expense | Total | ||||||||||
Remainder of 2008 | $ | 616 | $ | 1,163 | $ | 1,779 | ||||||
2009 | 749 | 1,550 | 2,299 | |||||||||
2010 | 647 | 1,550 | 2,197 | |||||||||
2011 | 526 | 65 | 591 | |||||||||
2012 | 485 | — | 485 | |||||||||
Thereafter | 40 | — | 40 | |||||||||
$ | 3,063 | $ | 4,328 | $ | 7,391 | |||||||
The future annual amortization amounts presented above are estimates. Actual amortization expense may be different due to the acquisition, impairment, or accelerated amortization of identified intangible assets.
Note 8. Deferred Revenue
The components of deferred revenue were as follows (in thousands):
January 31, | October 31, | |||||||
2008 | 2007 | |||||||
Subscriptions | $ | 30,661 | $ | 32,938 | ||||
License fees | 600 | 622 | ||||||
Services | 13,121 | 15,563 | ||||||
Total | 44,382 | 49,123 | ||||||
Less: long-term portion | (9,939 | ) | (10,302 | ) | ||||
Current portion | $ | 34,443 | $ | 38,821 | ||||
The long-term portion of deferred revenue represents amounts we expect to recognize as revenue in periods beyond one year from the balance sheet date. The deferred revenue balance includes unbilled commitments under non-cancellable agreements of $4,591,000.
Note 9. Restructuring and Other Charges
At various times over the past several years, the Company has accrued restructuring costs related to severance and facility closings in the U.S. and U.K. The restructuring reserve activity (included in other accrued liabilities) from October 31, 2007 through January 31, 2008 was as follows (in thousands):
Severance | ||||||||||||
and related | Facility | |||||||||||
costs | closings | Total | ||||||||||
Reserve balance at October 31, 2007 | $ | 424 | $ | 616 | $ | 1,040 | ||||||
Cash payments | (295 | ) | (9 | ) | (304 | ) | ||||||
Translation adjustment | — | (26 | ) | (26 | ) | |||||||
Reserve balance at January 31, 2008 | $ | 129 | $ | 581 | $ | 710 | ||||||
There were no restructuring charges during the first quarter of 2008.
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Note 10. Comprehensive Loss
Total comprehensive loss was as follows (in thousands):
Three Months Ended | ||||||||
January 31, | ||||||||
2008 | 2007 | |||||||
Net loss | $ | (3,911 | ) | $ | (4,526 | ) | ||
Foreign currency translation adjustments | 30 | (57 | ) | |||||
Total comprehensive loss | $ | (3,881 | ) | $ | (4,583 | ) | ||
Income tax effects for the components of other comprehensive loss were not significant because our deferred tax assets are fully reserved. Accumulated other comprehensive loss was $1,301,000 and $1,332,000 at January 31, 2008 and October 31, 2007, respectively.
Note 11. Income Taxes
In the first quarter of 2008, we adopted the provisions of FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”).The adoption of FIN 48 did not have a material impact on our financial position or results of operations.
We have not expensed, and do not maintain any accrual balances related to, interest and penalties related to unrecognized tax benefits. For future periods in which we may incur unrecognized tax benefits or uncertainties, we would classify any associated interest and penalties as a component of the income tax provision.
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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Description
PLATO Learning, Inc., a Delaware corporation incorporated in 1989, is a leading provider of computer-based and e-learning instruction, curriculum planning and management, assessment, and related professional development services to K-12 schools and other educational institutions across the country. Our products are used by our customers principally to provide alternative instruction to students performing below their grade level. Our courseware and web-based accountability and assessment software are designed to help educators meet the demands of No Child Left Behind (“NCLB”) and other federal legislation, as well as U.S. Department of Education initiatives on mathematics and science, special education, and ensuring teacher quality. We also offer online and onsite staff professional development services to ensure optimal classroom integration of our products and to help schools meet their accountability requirements and school improvement plans.
Our research-based courseware library includes thousands of hours of mastery-based instruction covering discrete learning objectives in the subject areas of reading, writing, language arts, mathematics, science, and social studies. Our web-based assessment and alignment tools ensure that instruction is differentiated and targeted and that curriculum is aligned to local, state, and national standards. Educators are able to identify each student’s instructional needs and prescribe an individual learning program using PLATO Learning courseware and assessments, educational web sites, and the school’s own textbooks and other core and supplemental instructional materials. A variety of reports are available to help educators identify gaps in student understanding and ensure that standards are being addressed. The web-based accountability and assessment products involve parents, students, teachers, and administrators in the learning process.
We operate our principal business in one industry segment, which is the development and marketing of educational software and related services.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. We continually evaluate our critical accounting policies and estimates, and have identified the policies relating to the following areas as those that are significant to our financial statement presentation, and require difficult, subjective, or complex judgments:
• | Revenue recognition | ||
• | Capitalized product development costs | ||
• | Valuation of our deferred income taxes | ||
• | Valuation and impairment analysis of goodwill and identified intangible assets |
There have been no significant changes to our accounting policies in these areas during the first quarter of 2008. For a complete discussion of these policies refer to Note 2 to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended October 31, 2007.
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General Factors Affecting our Financial Results
There are a number of general factors that affect our results from period to period. These factors are discussed below.
Revenue. We are transitioning our business model from one that emphasized the sale of one-time perpetual licenses to our software, for which revenue is generally recognized up-front upon delivery, to one that emphasizes the sale of subscription-based products, for which revenue is recognized over the subscription period. As a result, this transition will affect the comparability of our revenues from period to period until it is complete. The transition became most evident in 2006 when we introduced many of our new subscription-based products. As subscription revenues grow as a percentage of total revenues, we expect our period to period revenues to become more comparable and predictable.
Until our transition to subscription-based products is closer to completion, a consequential portion of our revenues will continue to be derived from perpetual licenses to our software products. These revenues are reported as license fees in our consolidated statement of operations. Changes in the quantity and size of individual license fee transactions can have a significant impact on revenues in a period. Our business is also seasonal, with the largest portion of our license fees typically coming in the third and fourth quarters of our fiscal year, and professional service fees being the greatest during periods in which schools are in session. While this seasonality does not generally impact the comparability of our annual results, it can significantly impact our results from quarter to quarter.
Gross Profit. Our gross profit during a period is dependent on a number of factors. License fee revenues historically have had high gross profit due to the low direct cost of delivering these products. As a result, the mix of license fee revenues to total revenues in a given period significantly influences reported total gross profit. In addition, a large portion of our costs of revenue are fixed in nature. These costs include amortization of capitalized software development and purchased technology, depreciation and other infrastructure costs to support our hosted subscription services, customer support operations, and full-time professional services personnel who deliver our training services. Accordingly, increases in revenues allow us to leverage these costs resulting in higher gross profit, while decreases in revenues have the opposite effect.
Operating Expenses. Incentive compensation is a significant variable component of our sales and marketing expenses, approximating 8% to 10% of total revenues in any given period. Sales and marketing expenses also include costs such as travel, tradeshows, and conferences that can vary with revenue activity or individual events that occur during the period.
General and administrative expenses are substantially fixed in nature. However, certain components such as our provision for bad debts, professional fees, and other expenses can vary based on business results, individual events, or initiatives we may be pursuing at various times throughout the year.
Product maintenance and development expense in our consolidated statement of operations does not reflect our total level of product related spending. Costs to enhance or maintain existing products, or to develop products prior to achieving technological feasibility, are charged to product maintenance and development expense as incurred. Costs incurred to develop new products after technological feasibility is achieved, which represent the majority of our product related spending, are capitalized and amortized to cost of revenues. Accordingly, product maintenance and development expense in our consolidated statement of operations can fluctuate from period to period, in terms of both total dollars and as a percentage of revenue, based on the nature and timing of activities occurring during the period.
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Amortization of intangibles represents the amortization of certain identified intangible assets acquired through various acquisitions. While these expenses are generally predictable from period to period because they are fixed over the course of their individual useful lives, they can be affected by events and other factors that result in impairment of these assets and a corresponding reduction in future amortization.
Cash Balances and Cash Flow.As previously mentioned, our business is seasonal, with the largest portion of orders coming in our third and fourth fiscal quarters. These periods are when our customer’s budget spending typically peaks as they end their current budget period, begin a new budget period, and begin to plan their needs for the upcoming school year. In addition, our costs are largely fixed, and with some exceptions, do not vary significantly with the level of order activity. As a result, cash balances generally decline during the first half of the fiscal year, and increase from those levels as order activity increases in the third and fourth quarter.
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Results of Operations
Revenues
The following tables summarize certain key information to aid in the understanding of our discussion and analysis of revenues:
Sales Order Information (in thousands)
January 31, | ||||||||||||
Percent | ||||||||||||
Increase | ||||||||||||
2008 | 2007* | (Decrease) | ||||||||||
Order Value: | ||||||||||||
Subscriptions | ||||||||||||
Courseware | $ | 5,043 | $ | 3,639 | 38.6 | % | ||||||
Assessment and other | 596 | 637 | (6.4 | %) | ||||||||
Total subscriptions | 5,639 | 4,276 | 31.9 | % | ||||||||
License fees | 1,483 | 4,239 | (65.0 | %) | ||||||||
Services | 3,480 | 4,282 | (18.7 | %) | ||||||||
$ | 10,602 | $ | 12,797 | (17.2 | %) | |||||||
Percent of Total Order Value: | ||||||||||||
Subscriptions | ||||||||||||
Courseware | 47.6 | % | 28.4 | % | ||||||||
Assessment and other | 5.6 | % | 5.0 | % | ||||||||
Total subscriptions | 53.2 | % | 33.4 | % | ||||||||
License fees | 14.0 | % | 33.1 | % | ||||||||
Services | 32.8 | % | 33.5 | % | ||||||||
100.0 | % | 100.0 | % | |||||||||
* | Certain 2007 amounts previously reported as assessment orders have been reclassified to courseware orders to conform to the current period presentation. |
Orders Greater Than $100,000
Three Months Ended | ||||||||||||
January 31, | ||||||||||||
2008 | 2007 | % Change | ||||||||||
Number | 12 | 17 | (29.4 | %) | ||||||||
Value ($000) | $ | 1,952 | $ | 3,008 | (35.1 | %) | ||||||
Average Value ($000) | $ | 163 | $ | 177 | (7.9 | %) |
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Revenue by Category (in thousands):
Three Months Ended | ||||||||||||
January 31, | ||||||||||||
2008 | 2007 | % Change | ||||||||||
Subscriptions | $ | 7,969 | $ | 5,153 | 54.6 | % | ||||||
License fees | 2,251 | 4,642 | (51.5 | %) | ||||||||
Services | 5,915 | 7,231 | (18.2 | %) | ||||||||
$ | 16,135 | $ | 17,026 | (5.2 | %) | |||||||
Total revenues for the first quarter of 2008 declined 5.2% to $16.1 million, from $17.0 million for the same period in 2007. Subscription revenues grew $2.8 million, or 54.6%, exceeding a $2.4 million decline in license fees on perpetual products. Services revenues declined $1.3 million on lower professional services and software maintenance revenues.
The increase in subscription revenue reflects our growing base of subscription customers. Revenue from services decreased 18.2% to $5.9 million in the first quarter of 2008, from $7.2 million for the same period in 2007. Professional services revenues accounted for the majority of the decline, due to lower orders for these services during the fourth quarter of 2007 relative to same period in 2006. These services generally consist of product training sold in connection with product orders, and are generally delivered several or more months after the date of the related order. Technical service revenues and software maintenance revenues, which are tied to perpetual license orders, also contributed to the decline in service revenue.
Gross Margin
Revenue Mix — Percentage of Total Revenue
Three Months Ended | ||||||||
January 31, | ||||||||
Revenue Category | 2008 | 2007 | ||||||
Subscription | 49.4 | % | 30.3 | % | ||||
License fee | 13.9 | % | 27.3 | % | ||||
Services | 36.7 | % | 42.4 | % | ||||
Total | 100.0 | % | 100.0 | % | ||||
Gross Margin Percentage
Three Months Ended January 31, | ||||||||||||
Increase | ||||||||||||
Revenue Category | 2008 | 2007 | (Decrease) | |||||||||
Subscriptions | 41.7 | % | 37.9 | % | 3.8 | % | ||||||
License fees | 36.8 | % | 50.8 | % | (14.0 | %) | ||||||
Services | 56.1 | % | 56.0 | % | .1 | % | ||||||
Total | 46.3 | % | 49.1 | % | (2.8 | %) |
Total gross margin decreased to 46.3% for the first quarter of 2008, from 49.1% for the same period in 2007. The decline in license fees gross margin had the most significant effect on total gross margin. The decline reflects lower courseware revenues on a higher fixed cost base that includes product development amortization and warehouse and distribution costs.
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Subscription gross margin improved to 41.7% from 37.9% for the same period in 2007. This improvement reflects the $2.8 million growth in subscription revenues, which exceeded the $1.5 million increase in subscription costs. The increase in subscription cost of revenue reflects a $900,000 increase in amortization of capitalized subscription product development, and smaller increases in royalty costs on third-party products bundled in our subscription solutions, and additional customer support resources to serve our growing subscription customer base.
Services gross margin remained consistent at 56.0% in 2007, compared to 56.1% in 2008.
Operating Expenses
The following table summarizes the percentage of total revenue and percentage change in total spending from the previous year for certain operating expense line items. This information is provided as an aid to the understanding of our discussion and analysis of our operating expenses.
Percentage of | ||||||||||||
Total Revenue | Percent | |||||||||||
Three Months Ended | Increase | |||||||||||
January 31, | (Decrease) | |||||||||||
2008 | 2007 | in Amount | ||||||||||
Sales and marketing | 43.4 | % | 45.3 | % | (9.3 | %) | ||||||
General and administrative | 18.3 | % | 18.9 | % | (8.2 | %) | ||||||
Product maintenance and development | 6.7 | % | 10.4 | % | (39.1 | %) | ||||||
Amortization of intangibles | 2.4 | % | 2.7 | % | (15.1 | %) | ||||||
Total operating expenses | 70.8 | % | 77.3 | % | (13.2 | %) | ||||||
Total operating expenses were $11.4 million for the first quarter of 2008, an improvement of 13.2% from the $13.2 million reported for the same period in 2007. The improvement reflects reductions in spending across all areas of operating expenses as we continue to achieve the operating efficiencies of a subscription-based business model. These efficiencies included greater leverage of lower-cost inside sales resources, which contributed to a 9.3%, or $0.7 million decline in sales and marketing expenses, fewer delivery platforms and growing maturity of our PLE subscription platform, resulting in a 39.1%, or $0.7 million decline in product maintenance and development costs, and less complex business processes which contributed to an 8.2%, or $0.3 million decline in G&A expenses.
Other Income, Net
Other income consists primarily of interest income on our cash and cash equivalent balances. Other income declined $0.2 million for the first quarter of 2008 due to the decrease in our average cash and cash equivalents over the prior year as well as a slight decline in interest rates.
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Liquidity and Capital Resources
Cash and Cash Equivalents
At January 31, 2008, cash and cash equivalents were $19.1 million, a decrease of $5.2 million from October 31, 2007. This decrease primarily represents investments made in capitalized product development of $3.2 million in the first quarter of 2008, and net cash used in operations in 2008 of $2.0 million. As discussed above under “General Factors Affecting Our Financial Results”, cash flow from operations is typically lower in the first and second quarter of our fiscal year due to the seasonal nature of our business.
Working Capital and Liquidity
At January 31, 2008, our principal sources of liquidity included cash and cash equivalents of $19.1 million, and net accounts receivable of $9.3 million. We also have a three-year senior secured credit facility which provides us with a revolving line of credit up to the lesser of $20 million or one times our trailing twelve months subscription and maintenance revenues. Under this agreement we have the option of selecting an interest rate for any drawdown under the facility equal to the applicable Prime or Libor Rate plus a sliding margin that is based on the amount of borrowings outstanding. Borrowings under the agreement are secured by all of the assets of the Company. Financial covenants are limited to minimum quarterly thresholds of earnings before interest, taxes, depreciation and amortization (EBITDA) that are tested only when the unused portion of the line of credit plus our cash and cash equivalents on hand is less than $12.5 million.
Working capital, defined as current assets less current liabilities, was negative $10.3 million at January 31, 2008 and negative $6.6 million at October 31, 2007. The decrease in working capital was primarily due to the decrease in cash and cash equivalents of $5.2 million as discussed above, and the decrease in net accounts receivable of $5.2 million, offset by the decreases in accounts payable, accrued compensation, and other accrued liabilities of $2.7 million and the decrease in deferred revenue of $4.4 million. Accounts receivable decreased due to seasonally low order volume in the first quarter and the collection of amounts outstanding at October 31, 2007. Accounts payable and accrued compensation decreased due to payment of amounts accrued at October 31, 2007, including year-end commissions and bonuses. Deferred revenue, which is satisfied through delivery of products and services rather than the direct payment of cash, decreased as more of these products and services were delivered than were added through new business, due to the lower order volume mentioned earlier.
We believe our existing cash, cash equivalents, anticipated cash provided by operating activities, and availability under our line of credit will be sufficient to meet our working capital and capital expenditure needs over the next 12 months. Our future capital requirements will depend on many factors, including the timing and extent of product development expenditures, order volume, and the timing and collection of receivables.
Contractual Obligations and Commercial Commitments
Our contractual obligations and commercial commitments consist primarily of future minimum payments due under operating leases and royalty and software license agreements. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended October 31, 2007 for a table showing our contractual obligations. There were no significant changes to our contractual obligations during the three months ended January 31, 2008.
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At January 31, 2008, we had no significant commitments for capital expenditures.
Disclosures about Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as of January 31, 2008.
Forward-Looking Statements
In addition to historical information, this Form 10-Q contains forward-looking statements. These forward-looking statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (“the Act”). The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “should” and similar expressions are intended to identify “forward-looking statements” within the meaning of the Act. Forward-looking statements include, among others, statements about our future performance, the sufficiency of our sources of capital for future needs, and the expected impact of recently issued accounting pronouncements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Part II Item 1A of this Form 10-Q and Part I Item 1A of our Annual Report on Form 10-K for the fiscal year ended October 31, 2007. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements based on circumstances or events, which occur in the future. Readers should carefully review the risk factors described in this report on Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission.
Interest Rate Risk
Our borrowing capacity primarily consists of a revolving line of credit with interest rates that fluctuate based upon the Prime Rate and LIBOR market indexes. At January 31, 2008, we did not have any outstanding borrowings under this revolving credit facility. As a result, risk relating to interest fluctuation is considered minimal.
Foreign Currency Exchange Rate Risk
Our foreign operations are not a significant component of our business, and as a result, risks relating to foreign currency fluctuation are considered minimal.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the information set forth under the captions, “Interest Rate Risk” and “Foreign Currency Exchange Rate Risk” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q.
ITEM 4.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure
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controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the first three months of fiscal 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II.
ITEM 1A.RISK FACTORS
Our business is subject to a number of risks and uncertainties which we discussed in detail in Part I, Item 1A of our 2007 Annual Report on Form 10-K.
ITEM 6.EXHIBITS
Exhibit Number and Description
10.1 | Fiscal 2008 Executive Annual Cash Incentive Plan, as filed as exhibit 10.28 to our Current Report on Form 8-K (filed January 24, 2008) and incorporated herein by reference. | |
31.01 | Certification of Chief Executive Officer under Rule 13a-14(a) adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.02 | Certification of Chief Financial Officer under Rule 13a-14(a) adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.01 | Certification of Chief Executive Officer under 18 U.S.C. 1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.02 | Certification of Chief Financial Officer under 18 U.S.C. 1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PLATO LEARNING, INC. | By | /s/ MICHAEL A. MORACHE | ||||
March 11, 2008 | Michael A. Morache | |||||
President and Chief Executive Officer | ||||||
(principal executive officer) | ||||||
/s/ ROBERT J. RUECKL | ||||||
Robert J. Rueckl | ||||||
Vice President and Chief Financial Officer | ||||||
(principal financial officer) |
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