UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 AND 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending October 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________________ to _______________
Commission File Number 000-21535
_______________
ProsoftTraining.com
(Exact Name of Registrant as Specified in its Charter)
NEVADA 87-0448639
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3001 Bee Caves Road, Suite 100, Austin, Texas 78746
(Address of Principal Executive Offices) (Zip Code)
(512) 328-6140
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 the registrant's common stock, $.001 par value,
outstanding as of November 11, 1999, was 14,410,239 shares.
ProsoftTraining.com and Subsidiaries
Consolidated Balance Sheets
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
October 31, 1999 July 31, 1999
---------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 999,914 $ 1,152,715
Accounts receivable, less allowances of $199,362 at October 31 and July 31, 1999.... 2,399,128 1,993,827
Notes receivable.................................................................... 29,300 29,900
Prepaid expenses and other current assets........................................... 168,406 319,943
------------ ------------
Total current assets......................................................... 3,596,748 3,496,385
Property and equipment, net............................................................ 327,033 334,001
Goodwill, net of accumulated amortization of $646,049 and $548,638 at October 31 and
July 31, 1999, respectively......................................................... 2,079,043 2,176,453
License agreements, net of accumulated amortization of $348,059 and $283,891 at
October 31 and July 31, 1999, respectively.......................................... 1,448,651 1,512,819
Other assets........................................................................... 108,100 114,718
------------ ------------
Total assets................................................................. $ 7,559,575 $ 7,634,376
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 1,913,392 $ 1,415,331
Accrued payroll and related expenses................................................ 379,588 565,322
Current portion of capital lease obligations........................................ 925,859 918,680
Accrued restructuring costs......................................................... 875,572 1,230,025
------------ ------------
Total current liabilities.................................................... 4,094,411 4,129,358
Obligations under capital leases, net of current portion............................... 640,054 847,978
Convertible debentures................................................................. 2,006,451 1,992,080
Other.................................................................................. 134,000 136,040
------------ ------------
Total liabilities............................................................ 6,874,916 7,105,456
------------ ------------
Common stock subject to redemption..................................................... 56,649 56,649
Stockholders' equity:
Common shares, par value $.001 per share: shares authorized 50,000,000;
Outstanding 14,382,213 and 14,297,133 at October 31 and July 31, 1999
respectively...................................................................... 14,383 14,297
Additional paid-in capital............................................................. 52,474,823 52,380,454
Accumulated deficit.................................................................... (51,796,988) (51,857,454)
Accumulated other comprehensive income................................................. 10,540 9,722
Less common stock in treasury, at cost: 11,912 shares.................................. (74,748) (74,748)
------------ ------------
Total stockholders' equity.................................................. 628,010 472,271
------------ ------------
Total liabilities and stockholders' equity................................... $ 7,559,575 $ 7,634,376
============ ============
See Accompanying Notes
ProsoftTraining.com and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended October 31,
1999 1998
---- ----
Revenue:
Training............................................ $ 2,656,657 $ 1,696,014
Courseware.......................................... 804,399 313,015
Certification....................................... 319,872 0
----------- -----------
Total revenue............................... 3,780,928 2,009,029
----------- -----------
Costs and expenses:
Costs of services................................... 2,203,777 2,626,509
Sales and marketing................................. 336,249 726,990
General and administrative.......................... 1,011,190 1,606,940
----------- -----------
Total costs and expenses.................... 3,551,216 4,960,439
----------- -----------
Income (loss) from operations......................... 229,712 (2,951,410)
Interest income (expense), net........................ (169,246) (10,281)
----------- -----------
Net income (loss)..................................... $ 60,466 $(2,961,691)
=========== ===========
Net income (loss) per share basic and diluted......... $ 0.00 $ (0.25)
=========== ===========
Weighted average shares outstanding................... 14,329,687 11,626,160
=========== ===========
See Accompanying Notes
ProsoftTraining.com and Subsidiaries
Consolidated Statements of Cash Flow
(Unaudited)
Three Months Ended October 31,
--------------------------------
1999 1998
---- ----
Operating activities:
Net income (loss)....................................................................... $ 60,466 $(2,961,691)
Adjustments to reconcile net income (loss) to cash used in operating activities:
Depreciation and amortization...................................................... 192,934 951,945
Accretion of debt discount......................................................... 64,371 0
Restructuring credit-non cash...................................................... (150,000) 0
Changes in operating assets and liabilities:
Accounts receivable........................................................... (405,301) 140,036
Prepaid expenses and other current assets..................................... 158,155 (253)
Accounts payable and payable to underwriter................................... 498,061 (249,373)
Accrued liabilities........................................................... (185,734) (8,120)
Deferred revenue.............................................................. 0 (1,890)
Accrued restructuring costs................................................... (204,453) 0
---------- -----------
Net cash provided by (used in) operating activities...................... 28,499 (2,129,346)
Investing activities:
Purchase of property and equipment................................................. (24,388) (1,440)
Decrease in notes receivable....................................................... 600 20,000
---------- -----------
Net cash provided by (used in) investing activities..................................... (23,788) 18,560
Financing activities:
Issuance of common stock........................................................... 94,455 43,504
Principal payments on debt and capital leases...................................... (250,745) (311,221)
Other.............................................................................. (2,040) 0
---------- -----------
Net cash used in financing activities.................................... (158,330) (267,717)
---------- -----------
Effects of exchange rate changes on cash................................................ 818 0
---------- -----------
Net decrease in cash and cash equivalents............................................... (152,801) (2,378,503)
Cash and cash equivalents at the beginning of period.................................... 1,152,715 3,311,014
---------- -----------
Cash and cash equivalents at the end of period.......................................... $ 999,914 $ 932,511
========== ===========
See Accompanying Notes
ProsoftTraining.com and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. General
The consolidated financial statements do not include footnotes and certain
financial information normally presented annually under generally accepted
accounting principles and, therefore, should be read in conjunction with the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission. The results of operations for the three month period ended October
31, 1999, are not necessarily indicative of results that can be expected for the
fiscal year ending July 31, 2000. The consolidated financial statements included
herein are unaudited; however, they contain all adjustments (consisting of
normal recurring accruals) which, in the opinion of the Company, are necessary
to present fairly its consolidated financial position, results of operations,
and cash flows as of October 31, 1999 and for the three month periods ended
October 31, 1999 and 1998.
2. Comprehensive income
For the three months ended October 31, 1999 and 1998, the components of
comprehensive income (loss) are as follows:
1999 1998
---- ----
Net Income (loss) $60,466 $(2,961,691)
Other comprehensive income:
Foreign currency translation adjustments 818 0
------- -----------
Comprehensive income (loss) $61,284 $(2,961,691)
======= ===========
3. Restructuring
In the quarter ended April 30, 1999, the Company recorded a $3,723,148 charge
for restructure and other unusual items associated with the Company's decision
to exit the retail training business. The restructuring charge included $258,621
for the Dallas leased facility. In the quarter ended October 31, 1999, the
Company negotiated a lease termination agreement with the Dallas landlord that
resulted in a restructuring credit of $150,000, that was included in costs of
services.
Accrued restructuring costs at October 31, 1999 primarily represents leased
facilities, equipment and other termination costs.
The unsettled amounts may change when final payments are made. The Company
anticipates that the remaining restructuring actions will be substantially
completed by the end of fiscal 2000.
4. Supplemental disclosure of cash flow information
Cash paid in the three-month periods ended October 31, 1999 and 1998 for
interest and income taxes was as follows:
1999 1998
---- ----
Interest $76,910 $46,004
Income taxes 0 0
5. Property and equipment
Property and equipment consist of the following:
October 31, 1999 July 31, 1999
---------------- -------------
Computer equipment and software $ 769,764 $ 748,089
Office equipment, furniture and fixtures 513,364 510,651
---------- ----------
1,283,128 1,258,740
Less accumulated depreciation 956,095 924,739
---------- ----------
Property and equipment, net $ 327,033 $ 334,001
========== ==========
6. Subsequent event
On November 22, 1999, the Company received gross proceeds of $3,000,000 from the
sale to an institutional investor of 1,142,857 shares of Common Stock and
warrants to purchase up to an additional 350,000 shares at $.01 per share,
subject to certain vesting conditions over a three year period. In addition,
250,000 of the warrants will only vest if the Company fails to meet certain
performance targets. Net proceeds from that placement, after payment of fees,
was $2,740,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects" and similar expressions are
intended to identify forward-looking statements. In addition, forward looking
statements include, but are not limited to, statements regarding future
financing needs, changes in business strategy, future profitability, and factors
affecting liquidity. A number of important factors could cause the Company's
actual results to differ materially from those indicated by such forward-looking
statements. These forward-looking statements represent the Company's judgment as
of the date of the filing of this Form 10-Q. The Company disclaims any intent or
obligation to update these forward-looking statements.
OVERVIEW
ProsoftTraining.com, formerly Prosoft I-Net Solutions, Inc., was founded in 1995
as a proprietorship that delivered training in vocational and advanced technical
subjects. After completing a private placement of stock in March 1997, the
Company embarked on a strategy to build a nationwide network of training centers
to teach technical skills for the emerging Internet market. Overhead costs
associated with the "bricks and mortar" network significantly outpaced revenues.
In fiscal year 1999, the Company closed the training center network and focused
exclusively on selling its educational programs and instructional services to
the technology training industry.
RESULTS OF OPERATIONS
Three Months Ended October 31, 1999 Compared to the Three Months Ended
October 31, 1998
Revenue
Training revenue for the three months ended October 31, 1999, was
$2,656,657, compared to $1,696,014 in the three months ended October 31, 1998,
an increase of $960,643 or 57%. This increase reflects a higher level of
participation by our training partners, a result of our change in distribution
strategy from a retail to a wholesale model. Training revenue for the first
quarter of fiscal year 2000 primarily came as a result of instructor rental to
other training companies. Training revenue for the first quarter of fiscal year
1999 primarily came from student fees.
Courseware sales increased to $804,399 in the three months ended October
31, 1999, compared to $313,015 in the three months ended October 31, 1998, an
increase of $491,384 or 157%. Courseware sales in both periods came from
courseware licensing and textbook sales.
Certification revenue increased to $319,872 in the three months ended
October 31, 1999, compared to $0 in the three months ended October 31, 1998.
Certification revenue is derived from the new PCTC program and certification
testing.
Costs Of Services
The Company's costs of services include the cost of instructors, courseware
content development employees and materials, classroom equipment and facilities.
Cost of services for the three months ended October 31, 1999, were
$2,203,777, compared to $2,626,509 for the three months ended October 31, 1998,
a decrease of $422,732 or 16%. The reduction in costs was primarily related to
the absence of instructors, classroom equipment and facilities cost in the three
months ended October 31, 1999, a result of our change in distribution strategy
from a retail to a wholesale model. Instructor headcount at October 31, 1999 was
26, compared to 35 at October 31, 1998.
Sales And Marketing
Sales and marketing expenses are composed of:
Three Months Ended October 31,
------------------------------
1999 1998
---- ----
Advertising and trade shows............. $120,734 $ 16,470
Salaries and wages...................... 172,088 627,572
Travel and entertainment................ 43,427 82,948
-------- --------
Total................................. $336,249 $726,990
======== ========
Sales and marketing expenses for the three months ended October 31, 1999,
amounted to $336,249, compared to $726,990 for the three months ended October
31, 1998, a decrease of $390,741 or 54%. This decrease reflects the elimination
of the Company's public class schedule and direct mail and telemarketing staff
associated with that distribution method.
General And Administrative
General and administrative expenses for the three months ended October
31, 1999, were $1,011,190, compared to $1,606,940 for the three months ended
October 31, 1998, a decrease of $595,750 or 37%. The decrease is primarily due
to savings from headcount reductions and other cost control initiatives.
Net Interest Income (Expense)
Net interest expense was $169,246 for the three months ended October 31,
1999, compared to net interest expense of $10,281 for the three months ended
October 31, 1998, an increase of $158,965. Interest expense, which consists
principally of interest on the Company's convertible debentures and capital
leases, is offset by interest earned on cash balances. The increase in net
interest expense was a result of smaller cash balances and the convertible
debenture issued in the second quarter of fiscal year 1999. Only half of the
convertible debenture interest must be paid in cash.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations and capital expenditures
primarily through private placement of common stock, the sale of convertible
debentures and, to a lesser extent, from revenues generated from operations. At
October 31, 1999, we had approximately $1 million in cash and cash equivalents.
Cash provided by operating activities for the three months ended October
31, 1999 was $28,499, compared with cash used in operating activities of
$2,129,346 for the three months ended October 31, 1998. This increase in cash
was primarily attributed to the net profit for the three months ended
October 31, 1999.
Cash used in investing activities was $23,788 for the three months ended
October 31, 1999, compared to cash provided by investing activities of $18,560
for the three months ended October 31, 1998. Cash used in investing activities
resulted primarily from the purchases of property and equipment.
Cash used in financing activities for the three months ended October 31,
1999 was $158,330 compared with $267,717 for the three months ended October 31,
1998. The decrease in cash used in financing activities resulted primarily from
a decrease in both debt and capital lease payments and greater sales of the
Company's common stock.
In November of 1998, the Company entered into an Accounts Receivable Line
of Credit agreement with the Silicon Valley Bank, whereby up to 80% of the
accounts receivable can be advanced up to $3,500,000. As of October 31, 1999,
there have been no borrowings on this line of credit.
In November 1999, the Company received gross proceeds of $3,000,000 from
the sale to an institutional investor of 1,142,857 shares of Common Stock and
warrants to purchase up to an additional 350,000 shares at $.01 per share,
subject to certain vesting conditions. Net proceeds from that placement, after
payment of fees, was $2,740,000.
We currently expect that cash on hand and funds from operations, together
with our line of credit with the Silicon Valley Bank for a maximum of $3,500,000
and the $3,000,000 investment in the Company's common stock in November 1999,
will be sufficient to cover our reasonably foreseeable working capital, capital
expenditure and debt service requirements for the next 12 months. We cannot be
certain that assumed levels of revenues and expenses will prove to be accurate.
We may seek additional funding through public or private financing or other
arrangements prior to such time. If funding is insufficient at any time in the
future, we may be unable to develop or enhance our products or services, take
advantage of business opportunities or respond to competitive pressures, any of
which could have a negative impact on our business, operating results and
financial condition.
YEAR 2000 ISSUE RISKS
Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can process data related to the year 2000. We rely on our systems,
applications and devices, including financial systems, registration systems,
embedded computer chips, networks and telecommunications equipment.
We have completed our Year 2000 assessment and determined our financial
system needed to be updated at a cost of less than $3,000. This update was
completed in fiscal 1999. We have received assurances from our other software
vendors that their systems are Year 2000 compliant. In addition, we have
conducted an inventory, review and assessment of our personal computers,
networks and servers and desktop software applications to determine whether they
support Year 2000 date codes and we believe that all are Year 2000 compliant. In
the event of an unexpected failure in one of our systems, our employees would be
able to continue operations on a manual basis until such systems have been
restored to full operating capacity. We estimate that the total cost of our Year
2000 compliance will not be significant.
We have contacted our key vendors and service suppliers to determine the
extent to which we are vulnerable to their failure to address the Year 2000
problem. We have received verbal assurances from these key suppliers that their
systems are Year 2000
compliant. Although we do not believe our operations will be significantly
disrupted even if third parties with whom we have relationships are not Year
2000 compliant, we cannot guarantee that any Year 2000 compliance problems of
our suppliers will not negatively affect our financial performance. If our key
suppliers are unable to provide us sufficient quantities of materials or goods
as a result of their failure to be Year 2000 compliant, we believe that we can
obtain adequate supplies of materials and goods at comparable prices from other
sources. Because uncertainty exists concerning the potential costs and effects
associated with any Year 2000 compliance, we intend to continue to make efforts
to ensure that third parties with whom we have relationships are Year 2000
compliant.
The Year 2000 problem could also have an effect on our customers. If
customers delay or forego purchasing our products based upon Year 2000 related
issues, it could affect our operating results. However, we cannot control the
Year 2000 readiness of third parties and such a risk is possible.
ADDITIONAL FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS OR THE COMPANY
The discussions in this Form 10-Q concerning future financing needs,
changes in business strategy, future profitability, and factors affecting
liquidity contain forward-looking statements. Although management believes that
these statements are reasonable in view of the facts available to it, no
assurance can be given that all of these statements will prove to be accurate.
Numerous factors could have a material effect upon whether these projections
could be realized or whether these trends will continue. Among these factors are
those set forth in the following section, as well as those discussed elsewhere
herein. For purposes of this Form 10-Q, "we" and "our" refer to the Company.
POSSIBILITY OF CONTINUING LOSSES
We have a limited operating history, particularly with the new distribution
strategy, which makes it difficult to predict our future operating results. We
have incurred net losses of approximately $52 million from our inception in
December 5, 1995, through October 31, 1999. For the three months ended October
31, 1999, we reported net income of $60,466. Our ability to continue to
generate revenue growth in the future is subject to uncertainty. In order to
maintain profitability, we must continue to increase our revenues. We cannot
assure you that we will be able to increase revenues or achieve profitability.
UNCERTAINTY OF FUTURE CAPITAL REQUIREMENTS
Since our inception, we have been dependent on outside financing to fund
our operations and growth. We have raised approximately $47 million from
private placements and incurred losses of approximately $52 million since our
inception through October 31, 1999. We experienced revenue growth in the last
two quarters of the fiscal year ended July 31, 1999 and the first quarter of
fiscal year ended July 31, 2000 as a result of the implementation of the new
business strategy. This shift in our business strategy has resulted in a
reduction in overhead expenses and, if revenues continue to grow as demonstrated
in the last three-quarters, we hope to maintain profitability for the balance of
fiscal 2000. We currently expect that cash on hand and funds from operations,
together with our line of credit with the Silicon Valley Bank for a maximum of
$3.5 million and the $3 million investment in the Company's common stock
announced on November 23, 1999, will be sufficient to cover our minimum
foreseeable working capital, capital expenditure and debt service requirements
for the next 12 months. However, if we do not maintain profitability and
generate positive cash flow as anticipated, our ability to continue as a going
concern will be jeopardized unless additional outside financing can be obtained.
UNCERTAINTY OF FUTURE FUNDING
If we do not maintain profitability and generate positive cash flow as
anticipated, we may need additional outside financing. Even if we do maintain
profitability and positive cash flow, we may need outside financing to fund
further growth of our business. We do not know at this time when we may need
additional funds, and we cannot be certain that if we do need additional funds
in the future we will be able to obtain them on terms satisfactory to us, if at
all. If we are unable to raise additional funds when necessary, we may have to
reduce planned capital expenditures, scale back our operations or growth, or
enter into financing arrangements on terms which we would not otherwise accept.
INTENSE COMPETITION IN TRAINING MARKET
We face substantial competition in the training market. Competition in the
Internet/intranet training market is intense, rapidly changing and affected by
the rapidly evolving nature of the Internet/intranet industry. A number of
other companies offer products and services similar to ours, and additional new
competitors may emerge in the future. Many of our existing competitors
have substantially greater capital resources, technical expertise, marketing
experience, research and development status, established customers and
facilities than we do. As a result, there is a risk that we will not be able to
successfully compete with existing and future competitors, which would adversely
affect our financial performance.
NEED TO RESPOND TO RAPID TECHNOLOGICAL CHANGES
In our industry, technology advances rapidly and industry standards change
frequently. To remain competitive and achieve profitability, we must
continually enhance our existing products and services and promptly introduce
new products, services, and technologies to meet the changing demands of our
customers. Our failure to respond to technological changes quickly will
adversely affect our financial performance.
EFFECT OF MARKET OVERHANG ON STOCK PRICE
Future sales of our Common Stock could depress the market price of our
Common Stock. In addition, the perception that such sales will occur could also
adversely affect the price. As long as certain registration statements which
have been filed with the SEC remain effective, the selling stockholders under
those registration statements may sell approximately 8,000,000 shares (or
approximately 47% of the shares of Common Stock currently outstanding on a
fully-diluted basis). These shares were privately issued and are otherwise
subject to restrictions on resale under securities laws. Any such sales, or
even the market perception that such sales could be made, may depress the price
of the Common Stock. The majority of the shares registered are already saleable
under rule 144.
VOLATILITY OF STOCK PRICE
Our Common Stock has experienced substantial price volatility and such
volatility may continue to occur in the future. Additionally, the stock market
from time to time experiences significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. These broad
market fluctuations may also adversely affect the market price of our Common
Stock. In addition to such broad market fluctuations, factors such as the
following may have a significant effect on the market price of our Common Stock:
. fluctuations in our operating results
. the perception by others of our ability to obtain any necessary new
financing
. limited trading market for our Common Stock
. announcements of new ventures or products and services by us or our
competitors
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATES
The Company's credit arrangements bear interest at fixed rates and do not
expose it to fluctuations in interest rates. Based upon the interest rates and
borrowings at October 31, 1999, a 10% increase in interest rates would not
materially effect the Company's financial position, results of operations or
cash flows.
PART II - OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
a) Exhibits
10.1 Securities Purchase Agreement dated as of November 22, 1999 among
ProsoftTraining.com and Hunt Capital Growth Fund, II L.P.
10.2 Registration Rights Agreement dated as of November 22, 1999 among
ProsoftTraining.com and Hunt Capital Growth Fund, II L.P.
10.3 Warrant Agreement dated as of November 22, 1999 among
ProsoftTraining.com and Hunt Capital Growth Fund, II L.P.
Financial Data Schedule.
b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended October
31, 1999.
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.
ProsoftTraining.com
Dated: December 15, 1999
/s/ JERRELL M. BAIRD
--------------------------------
Jerrell M. Baird
Chief Executive Officer
and Chairman of the Board
(Duly Authorized Officer)
Dated: December 15, 1999
/s/ WILLIAM J. WERONICK
--------------------------------
William J. Weronick
Vice President, Finance
(Principal Financial Officer)