UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR THE
TRANSITION PERIOD FROM _________ TO _____________.
COMMISSION FILE NUMBER: 0-27591
ENGLISH LANGUAGE LEARNING AND INSTRUCTION SYSTEM, INC.
_________________________________________________________________
(Exact name of small business issuer as specified in its charter)
DELAWARE 33-0836078
_______________________________ ________________________________
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
406 WEST 10600 SOUTH, SUITE 610, SALT LAKE CITY, UTAH 84095
(Address of principal executive offices)
(801) 858-0880
(Issuer's telephone number)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
As of August 4, 2004, the issuer had outstanding 15,439,746 shares of Common
Stock, par value $0.00001 per share, and 1,464,285 shares of Preferred Stock,
par value $0.00001 per share.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The unaudited financial statements of English Language Learning and
Instruction System, Inc., a Delaware corporation (the "Company"), as of June
30, 2004, were prepared by Management and commence on the following page. In
the opinion of Management, the financial statements fairly present the
financial condition of the Company.
2
CONSOLIDATED FINANCIAL INFORMATION OF
ENGLISH LANGUAGE LEARNING AND
INSTRUCTION SYSTEM, INC. AND
SUBSIDIARY
JUNE 30, 2004 (UNAUDITED) AND
DECEMBER 31, 2003 (AUDITED)
3
TABLE OF CONTENTS
Page
- -----------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets F - 1
Statements of Operations F - 2
Statements of Cash Flows F - 3
Notes to Financial Statements F - 4
4
ENGLISH LANGUAGE LEARNING AND INSTRUCTION SYSTEM, INC. AND SUBSIDIARY
BALANCE SHEETS
June 30, December 31,
2004 2003
- ------------------------------------------------------------------------------
(Unaudited) (Audited)
ASSETS
Current Assets:
Cash $ 331,277 $ 165,094
Accounts receivable - net of allowance 594,513 498,294
Employee receivable - 2,729
Inventories 121,011 106,979
Prepaid expenses 289,283 345,382
Deferred tax assets 16,614 33,075
------------- -------------
Total current assets 1,352,698 1,151,553
Fixed Assets:
Property and equipment 401,321 395,009
Accumulated depreciation (267,217) (225,636)
------------- -------------
Net fixed assets 134,104 169,373
Other Assets:
Note receivable 311,840 319,199
Deferred tax asset 925,868 921,722
Other assets 22,703 83,703
------------- -------------
Total other assets 1,260,411 1,324,624
------------- -------------
Total assets $ 2,747,213 $ 2,645,550
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 4,557 $ 8,934
Convertible note 100,945 -
Accounts payable 187,652 313,345
Income tax payable - 100
Accrued liabilities 268,849 203,039
------------- -------------
Total current liabilities 562,003 525,418
Stockholders' Equity:
Series A preferred stock, $0.00001 par value,
10,000,000 shares authorized, 750,000
issued and outstanding
Liquidation preference of $2,250,000 8 8
Series B preferred stock, $0.00001 par value,
10,000,000 shares authorized, 714,285
issued and outstanding
Liquidation preference of $2,142,855 7 7
Common stock, $0.00001 par value, 70,000,000
shares authorized, 15,439,746 shares
issued and outstanding 155 155
Additional paid-in capital 6,930,568 6,930,568
Other cumulative comprehensive loss (913) (913)
Retained deficit (4,744,615) (4,809,693)
------------- -------------
Total stockholders' equity 2,185,210 2,120,132
------------- -------------
Total liabilities and stockholders' equity $ 2,747,213 $ 2,645,550
============= =============
The accompanying notes are an integral part of these statements.
F-1
5
ENGLISH LANGUAGE LEARNING AND INSTRUCTION SYSTEM, INC. AND SUBSIDIARY
STATEMENTS OF OPERATIONS
Three Months Three Months Six Months Six Months
Ended June Ended June Ended June Ended June
30, 2004 30, 2003 30, 2004 30, 2003
- ------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<s> <c> <c> <c> <c>
Software Sales $ 870,081 $ 1,108,918 $ 1,457,613 $ 1,696,024
Non-Software Sales 20,760 126,906 39,527 173,744
------------- ------------- ------------- -------------
Total sales 890,841 1,235,824 1,497,140 1,869,768
Cost of Goods Sold:
Product 39,597 35,027 73,934 55,930
Sales commissions 20,852 55,960 25,862 86,476
------------- ------------- ------------- -------------
Total cost of goods sold 60,449 90,987 99,796 142,406
------------- ------------- ------------- -------------
Gross Profit 830,392 1,144,837 1,397,344 1,727,362
Operating Expenses:
Selling 43,060 134,402 147,533 242,848
Marketing 42,912 73,483 114,065 126,993
Development 49,888 158,840 220,256 316,555
Support services 113,061 85,065 205,732 171,353
General and administrative 292,756 341,772 642,085 745,855
------------- ------------- ------------- -------------
Total operating expenses 541,677 793,562 1,329,671 1,603,604
------------- ------------- ------------- -------------
Operating Income 288,715 351,275 67,673 123,758
Other Income (Expense):
Interest income 18,903 8,998 19,791 18,374
Gain (loss) on sale of
fixed assets (4,283) - (3,533) (42,875)
Other expense - (2,359) - (2,359)
Interest expense (1,860) - (6,538) -
------------- ------------- ------------- -------------
Total other income (expense) 12,760 6,639 9,720 (26,860)
------------- ------------- ------------- -------------
Income Before Income Taxes 301,475 357,914 77,393 96,898
Income Taxes:
Current - 100 - 100
Deferred 8,488 36,308 12,315 55,430
------------- ------------- ------------- -------------
Total income taxes 8,488 36,408 12,315 55,530
------------- ------------- ------------- -------------
Income From Continuing
Operations 292,987 321,506 65,078 41,368
Loss from Operations of
Discontinued Subsidiary - (16,773) - (85,949)
------------- ------------- ------------- -------------
Net Income (Loss) $ 292,987 $ 304,733 $ 65,078 $ (44,581)
============= ============= ============= =============
Income (Loss) Per Share - Basic
Income from continuing
operations $ 0.02 $ 0.02 $ - $ -
Loss from discontinued
operations - - - (0.01)
------------- ------------- ------------- -------------
Net income (loss) $ 0.02 $ 0.02 $ - $ (0.01)
============= ============= ============= =============
Income (Loss) Per Share - Fully Diluted
Income from continuing
operations $ 0.02 $ 0.02 $ - $ -
Loss from discontinued
operations - - - (0.01)
------------- ------------- ------------- -------------
Net income (loss) $ 0.02 $ 0.02 $ - $ (0.01)
============= ============= ============= =============
Weighted Average Shares Outstanding:
Basic 15,439,736 15,467,083 15,439,736 15,324,069
Fully Diluted 15,441,746 15,874,198 15,441,746 15,532,823
The accompanying notes are an integral part of these statements.
F-2
6
ENGLISH LANGUAGE LEARNING AND INSTRUCTION SYSTEM, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
Six Months Six Months
Ended June Ended June
30, 2004 30, 2003
- ------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Cash Flows from Operating Activities:
Net income (loss) $ 65,078 $ (44,581)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation 43,247 46,333
Deferred taxes 12,315 55,430
(Gain) loss on sale of fixed assets 3,533 42,875
Provision for bad debt (29,255) 10,000
Accrued interest 945 -
(Increase) decrease in operating assets:
Accounts receivable (66,964) (384,886)
Income taxes receivable - 39,952
Employee receivable 2,729 639
Inventories (14,032) (6,453)
Prepaid expenses 56,099 18,186
Other assets 61,000 (47,508)
Increase (decrease) in operating liabilities:
Accounts payable (125,693) 31,437
Income taxes payable (100) -
Accrued liabilities 65,810 150,950
------------- -------------
Total adjustments 9,634 (43,045)
------------- -------------
Net cash provided (used) by operating activities 74,712 (87,626)
Cash Flows from Investing Activities:
Proceeds from sale of fixed assets 2,800 6,135
Purchase of equipment (14,311) (32,576)
Repayment of note receivable 7,359 22,880
------------- -------------
Net cash used by investing activities (4,152) (3,561)
Cash Flows from Financing Activities:
Proceeds from convertible note 100,000 -
Net repayment on line of credit (4,377) -
------------- -------------
Net cash provided by financing activities 95,623 -
------------- -------------
Net Change in Cash 166,183 (91,187)
Beginning Cash 165,094 628,004
------------- -------------
Ending Cash $ 331,277 $ 536,817
============= =============
Supplemental Information:
The Company paid $5,593 and $0 in interest during the six months ended June
30, 2004 and 2003, respectively.
The Company paid $100 and $0 in income taxes during the six months ended June
30, 2004 and 2003.
The accompanying notes are an integral part of these statements.
F-3
7
ENGLISH LANGUAGE LEARNING AND INSTRUCTION SYSTEM, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 1. Accounting Policies
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted. However, in the opinion of management, all
adjustments (which include only normal recurring accruals) necessary to
present fairly the financial position and results of operations for the
periods presented have been made. These financial statements should be read
in conjunction with the accompanying notes and with the historical financial
information of the Company. The interim results are not necessarily
indicative of the operating results expected for the full fiscal year ending
December 31, 2004.
Note 2. Income (Loss) per Share
The computation of basic earnings per share is based on the weighted average
number of common shares outstanding during each period.
The computation of fully-diluted earnings per share is based on the weighted
average number of common shares outstanding during each period plus the common
stock equivalents which would arise from the exercise of stock options and
warrants outstanding using the treasury stock method and the average market
price per share during each period.
Note 3. Allowance for Doubtful Accounts
The allowance for doubtful accounts at June 30, 2004 and December 31, 2003 is
$29,086 and $58,341, respectively.
Note 4. Convertible Note
The Company borrowed $100,000 from its primary stockholder during the three
months ended June 30, 2004. This note bears interest at five percent and is
due October 31, 2004 with no periodic installments required. There are no
prepayment penalties.
This note is convertible to common stock in the event that the Company issues
equity securities in a qualified offering resulting in aggregate gross
proceeds of at least $500,000. Should such a qualified offering take place,
the note could be converted (principal and accrued interest) to the number of
common shares at the price per share received in the qualified offering.
The note balance at June 30, 2004, including accrued interest, is $100,945.
F-4
8
ENGLISH LANGUAGE LEARNING AND INSTRUCTION SYSTEM, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 5. Stock Option Plan
The Company adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123 "Accounting of Stock-Based Compensation"
as amended by SFAS No. 148. Accordingly, no compensation expense has been
recognized for stock options granted to employees. Had compensation expense
been determined based on fair value at the grant date consistent with the
provisions of SFAS 123, the Company's results of operations would have been
reduced to the pro forma amounts indicated below:
June 30, June 30,
2004 2003
------------- -------------
Net income (loss), as reported $ 65,078 $ (44,581)
Total stock-based employee compensation expense
determined by fair value-based method of awards (1,750) (9,023)
------------- -------------
Net income (loss), pro forma $ 63,328 $ (53,604)
============= =============
Basic income (loss) per share, as reported $ - $ (0.01)
Basic income (loss) per share, pro forma $ - $ (0.01)
The pro forma effect on net loss may not be representative of the pro forma
effect on net income for future years due to among other things: (i) the
vesting period of future stock options and the (ii) fair value of additional
stock options in future years. The fair value of the options granted is
estimated at the date of grant using the Black-Scholes option-pricing model
with the following assumptions:
Expected dividend yield - -
Expected stock price volatility 90% 90%
Risk-free interest rate 4.25% 5.00%
Expected life of options 7 years 7 years
The weighted-average fair value of options granted during the six months ended
June 30, 2004 and 2003 was $0.17 and $0.18, respectively.
F-5
9
Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis of the Company's financial
condition as of June 30, 2004 and the Company's results of operations for the
three month periods ended June 30, 2004 and June 30, 2003 should be read in
conjunction with the Company's financial statements and notes thereto included
elsewhere in this Form 10-QSB. All information contained in this Item 2
reflects only the Company's continuing operations.
Results of Operations
Comparison of the Three-Month Periods Ended June 30, 2004 and June 30, 2003
Revenues. Revenues for the three-month period ended June 30, 2004 were
$890,841, compared to $1,235,824 for the three-month period ended June 30,
2003. This decrease was due to sales from government appropriations in the
second quarter of 2003 of $284,100. The Company expects additional sales from
government appropriations in the third quarter of 2004.
Cost of Sales. Cost of sales for the three-month period ended June 30,
2004 were $60,449, compared to $90,987 for the three-month period ended June
30, 2003. This decrease is the result of the decreased revenues in the second
quarter of 2004 compared to the second quarter of 2003 as discussed above.
Operating Expenses. Operating expenses for the three-month period ended
June 30, 2004 were $541,677, compared to $793,562 for the three-month period
ended June 30, 2003. Selling and marketing expenses decreased from $207,885
during these three months in 2003 to $85,972 for the same three months in 2004
due to reduced sales staff and decreased marketing expenses. The Company's
international sales manager resigned in March of 2004 and was not replaced
until July of 2004, so elimination of his wages, overhead and travel expenses
were part of this reduction. Development expenses decreased from $158,840
during the second quarter of 2003 to $49,888 during the same period in 2004
due to reductions in staff and limiting outsourced development projects.
Support Services increased from $85,065 in the second quarter of 2003 to
$113,061 in the same three months in 2004 due to the increase in the support
needs of the Company's new 3.0 Academic product release. General and
Administrative expenses decreased from $341,772 in the second quarter of 2003
to $292,756 in the second quarter of 2004. This decrease was due to the
reduction in administrative staff and tighter controls over administrative
expenses.
Depreciation and Amortization. Depreciation and amortization are
included in General and Administrative expenses. For the three-month period
ended June 30, 2004, these costs were $21,044, compared to $22,815 for the
three-month period ended June 30, 2003. This decrease was due to the smaller
asset base used to support the decreased size of the Company.
Comparison of the Six-Month Periods Ended June 30, 2004 and June 30, 2003
Revenues. Revenues for the six-month period ended June 30, 2004 were
$1,497,140, compared to $1,869,768 for the same period ended June 30, 2003.
The decrease in revenues in 2004 was due to the delay in releasing the
Company's new 3.0 version of its Academic product and by a decrease in
revenue associated with domestic grants and appropriations.
10
Cost of Sales. Cost of sales for the six-month period ended June 30,
2004 were $99,796, compared to $142,406 for the six-month period ended June
30, 2003. This decrease is the result of lower revenues in 2004 as
discussed above.
Operating Expenses. Operating expenses for the six-month period ended
June 30, 2004 were $1,329,671, compared to $1,603,604 for the six-month period
ended June 30, 2003. Selling and marketing expenses decreased from $369,841
during these six months in 2003 to $261,598 for the same six months in 2004
due to a decrease in the size of our direct sales and marketing force both
domestically and internationally. Development expenses decreased from
$316,555 during the six-month period of 2003 to $220,256 during the same
period of 2004 due to reductions in staff and limiting outsourced development
projects. Support Services increased from $171,353 in the six-month period of
2003 to $205,732 in the same six-month period in 2004 due to the increase in
the support needs of the Company's new 3.0 release of its Academic product.
General and Administrative expenses decreased from $745,855 in the first six
months of 2003 to $642,085 in the first six months of 2004. This decrease was
due to the reduction in administrative staff and tighter controls over
administrative expenses.
Depreciation and Amortization. Depreciation and amortization are
included in General and Administrative expenses. For the six-month period
ended June 30, 2004, these costs were $43,247, compared to $46,333 for the
six-month period ended June 30, 2003. This decrease was due to the smaller
asset base used to support the decreased size of the Company.
Liquidity and Capital Resources
The Company has funded its cash requirements for the six-month period
ended June 30, 2004 entirely through its operating activities. The same
period a year ago was also funded through its operating activities.
The Company is currently incurring cash expenses in the amount of
approximately $200,000 per month for all operations, of which fixed costs
account for approximately $190,000. The Company anticipates capital
expenditures will be approximately $30,000 for the current fiscal year. The
Company believes that its current liquidity and capital resources are
sufficient to support the Company's ongoing business operations.
Item 3 - Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company
maintains controls and procedures designed to ensure that information required
to be disclosed in the reports that the Company files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon the evaluation of those
controls and procedures performed within 90 days of the filing date of this
report, the Chief Executive Officer and acting Chief Financial Officer of the
Company, Rohit Patel and Dennis R. Hanks, concluded that the Company's
disclosure controls and procedures were adequate.
(b) Internal controls. The Company made no significant changes in its
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation of those controls by the
Chief Executive Officer and acting Chief Financial Officer, Rohit Patel and
Dennis Hanks.
11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Change in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securities Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit
Number Description
- ---------- --------------
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed during the quarter ended June
30, 2004.
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: August 4, 2004 ENGLISH LANGUAGE LEARNING AND INSTRUCTION SYSTEM, INC.
/S/ ROHIT PATEL
By:_____________________________________________
ROHIT PATEL
Chief Executive Officer and Director
/S/ DENNIS R. HANKS
By:__________________________________
DENNIS R. HANKS
Chief Financial Officer
13