UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)
ý	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2004.
OR
o	Transaction report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                        to                       .

 

 

Commission File Number 0-21421

 

 

VCAMPUS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware		54-1290319
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1850 Centennial Park Drive Suite 200,		20191
		(Zip Code)
Reston, Virginia (Address of principal executive offices)

 

703-893-7800

(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   ý    No    o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes    o    No   ý

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock, $0.01 par value		7,882,216
(Class)		(Outstanding at November 10, 2004)

 

 

PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

VCAMPUS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2003			2004			2003			2004
Revenues:
Online tuition revenues		$	1,337,103		$	839,968		$	4,191,006		$	3,645,124
Development and other revenues		41,667			77,667			411,956			183,617
Other service revenues		26,931			—			88,297			47,890
Net revenues		1,405,701			917,635			4,691,259			3,876,631
Costs and expenses:
Cost of revenues		380,049			304,900			1,409,464			1,031,513
Sales and marketing		496,616			474,774			1,691,014			1,424,106
Product development and operations		534,348			692,851			1,897,228			2,077,885
General and administrative		432,566			404,731			1,332,786			1,302,596
Depreciation and amortization		218,221			316,529			713,641			903,128
Reorganization & other non-recurring costs		—			—			172,729			—
Stock-based compensation		28,750			45,498			95,564			107,474
Total costs and expenses		2,090,550			2,239,283			7,312,426			6,846,702
Loss from operations		(684,849		)	(1,321,648		)	(2,621,167		)	(2,970,071		)
Other income		—			—			207,138			173,899
Interest expense and amortization of debt discount and debt offering costs, net		(33,325		)	(446,839		)	(85,105		)	(2,059,381		)
Net loss		$	(718,174	)	$	(1,768,487	)	$	(2,499,134	)	$	(4,855,553	)
Dividends to preferred stockholders		—			—			(2,419,032		)	—
Net loss attributable to common stockholders		$	(718,174	)	$	(1,768,487	)	$	(4,918,166	)	$	(4,855,553	)
Net loss per share, basic		$	(0.16	)	$	(0.24	)	$	(1.72	)	$	(0.72	)
Net loss per share—assuming dilution		$	(0.16	)	$	(0.24	)	$	(1.72	)	$	(0.72	)

 

 

See accompanying notes.

 

2

 

VCAMPUS CORPORATION
CONSOLIDATED BALANCE SHEETS

 

		December 31, 2003			September 30, 2004
					(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	534,984		$	3,135,242
Accounts receivable, less allowance of $5,000 at December 31, 2003 and September 30, 2004		290,530			391,551
Loans receivable from related party		83,745			58,355
Loans receivable—current		40,526			41,977
Prepaid expenses and other current assets		691,781			856,025
Total current assets		1,641,566			4,483,150
Property and equipment, net		509,662			521,821
Capitalized software costs and courseware development costs, net		1,653,295			1,848,365
Loans receivable—less current portion		33,726			8,621
Other assets		127,598			483,404
Other intangible assets, net		569,494			435,250
Goodwill		328,317			328,317
Total assets		$	4,863,658		$	8,108,928
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,222,987		$	1,189,905
Accrued expenses		369,763			388,098
Notes payable		225,000			25,556
Deferred revenues		1,010,563			1,254,414
Total current liabilities		2,828,313			2,857,973
Long-term liabilities:
Notes payable—less discount and current portion		—			383,326
Total liabilities		2,828,313			3,241,299
Commitments and contingencies:		—			—
Stockholders’ equity:
Common Stock, $0.01 par value per share; 36,000,000 shares authorized; 5,167,000 and 7,398,333 shares issued and outstanding at December 31, 2003 and September 30, 2004, respectively		51,670			73,983
Additional paid-in capital		92,376,579			100,042,102
Accumulated deficit		(90,392,904		)	(95,248,456		)
Total stockholders’ equity		2,035,345			4,867,629
Total liabilities and stockholders’ equity		$	4,863,658		$	8,108,928

 

 

See accompanying notes.

 

3

 

VCAMPUS CORPORATION

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine Months Ended September 30,
		2003			2004
Operating activities
Net loss		$	(2,499,134	)	$	(4,855,553	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		218,310			212,253
Amortization		495,331			690,875
Debt discount amortization		63,631			1,883,405
Stock option and warrant compensation		95,564			107,474
Decrease in allowance for doubtful accounts		(28,019		)	—
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable		96,041			(101,021		)
Increase in prepaid expenses and other current assets		(392,372		)	(66,740		)
Decrease in other assets		24,956			67,977
Increase in accounts payable and accrued expenses		709,995			28,534
Increase in deferred revenues		691,963			243,851
Net cash used in operating activities		(523,734		)	(1,788,945		)
Investing activities
Purchases of property and equipment		(346,713		)	(225,736		)
Proceeds from the sale of property and equipment		—			1,323
Capitalized software and courseware development costs		(695,089		)	(751,701		)
Proceeds from loans receivable		26,250			26,250
Advances under loans (interest) receivable		(3,965		)	(2,595		)
Proceeds from loans receivable from related parties		27,000			27,000
Advances under loans receivable from related parties		(2,344		)	(1,610		)
Net cash used in investing activities		(994,861		)	(927,069		)
Financing activities
Proceeds from issuance of common stock		735,330			2,157,106
Proceeds from the issuance of Series G convertible Preferred Stock		874,937			—
Proceeds from the issuance of Series H convertible Preferred Stock		1,740,240			—
Proceeds from notes payable		—			3,384,166
Repayments of notes payable		—			(225,000		)
Payments on capital lease obligations		(23,529		)	—
Net cash provided by financing activities		3,326,978			5,316,272
Net increase in cash and cash equivalents		1,808,383			2,600,258
Cash and cash equivalents at the beginning of the period		727,466			534,984
Cash and cash equivalents at the end of the period		$	2,535,849		$	3,135,242
Supplemental cash flow information
Interest paid		$	—		$	43,530
Significant noncash financing activities
Conversion of debt and accrued interest to common stock		$	—		$	1,293,387

 

 

See accompanying notes.

 

 

4

VCAMPUS CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note A — Basis of Presentation

 

The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim periods are not necessarily indicative of the results that may be expected for any future period, including the year ending December 31, 2004. For further information, refer to the audited financial statements and footnotes thereto included in the VCampus Corporation (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2003.

 

Note B — Stock Based Compensation Expense

 

In December 2002, the FASB issued Statement No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions in SFAS No. 123 and APB Opinion No. 28, “Interim Financial Reporting,” to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim consolidated financial statements. The adoption of the disclosure only requirements of SFAS No. 148 did not have a significant impact on the Company’s consolidated financial statements.

 

The Company uses the intrinsic value method for stock option grants to individuals defined as employees under which no compensation is recognized for options granted at or above the fair market value of the underlying stock on the grant date.  The Company uses the fair value method for stock options granted for services rendered by non-employees in accordance with the SFAS No. 123 “Accounting for Stock Based Compensation.”

 

The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123 to stock-based employee compensation.

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2003			2004			2003			2004
Pro forma net loss:
As reported		$	(718,174)		$	(1,768,487	)	$	(4,918,166)		$	(4,855,553	)
Add: Noncash stock compensation included in reported net loss attributable to common stockholders		28,750			45,498			95,564			107,474
Deduct: Total employee noncash stock compensation expense determined under fair value based method for all awards		(1,344,195)			(754,258		)	(4,032,586)			(2,262,776		)
Pro forma net loss		$	(2,033,619)		$	(2,477,247	)	$	(8,855,188)		$	(7,010,855	)
Net loss per common share:
Basic and diluted—as reported		$	(0.16)		$	(0.24	)	$	(1.72)		$	(0.72	)
Basic and diluted—pro forma		$	(0.44)		$	(0.34	)	$	(3.09)		$	(1.04	)

 

Note C — Equity Transactions

 

In March 2004, the Company raised $5,000,000 through the private placement of 20 units, at a purchase price of $200,000 per unit, and $1,000,000 in principal amount of Series B senior secured convertible notes. Each unit consisted of 50,000 shares of common stock (initially priced at $1.63 per share), a Series A senior secured convertible note in the original principal amount of $118,500 and a five-year warrant to purchase 61,350 shares of common stock with an initial exercise price of $2.386 (subject to adjustment) per share (“Units”). The Company issued an additional $250,000 of Series B senior secured notes in exchange for cancellation of existing short-term indebtedness in that amount. The Company issued to the Series B noteholders five-year warrants to purchase an aggregate of

 

6

 

383,439 shares of common stock with an initial exercise price of $2.386 (subsequently adjusted to $1.63) per share. An additional one quarter unit was issued to the lead investor’s counsel as payment for legal services in connection with the private placement.

 

Upon approval of the private placement by the Company’s stockholders at its annual meeting on May 18, 2004, $18,500 of principal of each of the Series A notes automatically converted into common stock at $1.63 per share and $100,000, or 50%, in principal of each of the Series B notes automatically converted into common stock at $1.63 per share. The total principal amount for both Series of notes converted upon approval by the stockholders was $999,625. The Series A and Series B notes mature on April 1, 2009 and bear interest at the rate of 8% per annum, payable quarterly in cash or stock (valued at the conversion price) at the Company’s option for the first year. Principal and interest on the notes are payable in cash over the following four years in quarterly installments. The initial exercise price for the warrants is equal to the average closing price of the Company’s common stock for the five trading days prior to the date of the private placement. Upon stockholder approval of the private placement, the exercise price of the warrants was adjusted to $1.63 per share.  The warrants first became exercisable on May 18, 2004, the date on which the Company’s stockholders approved the private placement.

 

The terms of the financing included a provision that in the event that the Company did not achieve a certain business milestone by September 30, 2004, the Company would adjust the purchase price for the units and the conversion price with respect to the notes and the warrant price with respect to the warrants would be reset to $1.38.  As disclosed on Form 8-K filed by the Company on September 30, 2004, the Company achieved the business milestone prior to September 30, 2004.  As a result, the potential additional issuance of shares described above did not occur.

 

The terms of the financing include antidilution provisions to the effect that if and whenever in the period commencing after the issuance date (March 23, 2004) and ending 24 months thereafter (March 22, 2006) (the “Antidilution Period”), the Company issues or sells, or is deemed to have issued or sold, any shares of common stock, with the exception of specific customary issuances which are excluded, for a consideration per share less than the conversion price or exercise price in effect immediately prior to such time for the relevant shares, then concurrent with such dilutive issuance, the conversion price or exercise price for the notes and warrants, as the case may be, then in effect shall be reduced to an amount equal to the new securities issuance price.

 

The Company allocated the proceeds from the issuance of the notes to the notes and to that subset of warrants allocated to the notes on a pro-rata basis based on their relative fair values using the Black-Scholes option pricing model. The amount allocated to the warrants ($1,462,538) was recorded as a debt discount and is being amortized to interest expense over the period the notes are expected to be outstanding using the effective interest rate method. Upon approval of the private placement by its stockholders, the Company recorded an additional $2,187,087 of debt discount for the instruments’ beneficial conversion feature which is also being amortized over the expected term of the notes.  The fair value of the warrants allocated to the common stock on a pro-rata basis has been accounted for as cost of capital.

 

During the second and third quarters of 2004, an additional $175,000 and $50,000, respectively, of Series A and Series B senior secured convertible note principal was converted into 107,363 and 30,675, shares of common stock, respectively, resulting in $1,224,625 of aggregate principal converted since the date of issuance of the notes.  The Company expensed as additional interest a proportional amount of unamortized debt discount and offering costs associated with the debt converted totaling $1,399,694 and $52,555 during the second and third quarters of 2004, respectively. The total outstanding principal remaining as of September 30, 2004 amounted to $2,425,000. The total unamortized debt discount as of September 30, 2004 amounted $2,016,118 resulting to a net balance on the notes of $408,882 of which $25,556 is classified as current.

 

During the second quarter of 2004, the Company issued 76,688 shares of common stock in full satisfaction of accrued financing costs incurred in conjunction with the March 2004 financing.

 

During the second quarter of 2004, the Company issued 300,483 shares of common stock upon the exercise of warrants and options.  Net cash proceeds to the Company from these exercises amounted to $595,521.

 

During the third quarter of 2004, the Company issued 42,177 shares of common stock valued at $1.63 per share as payment of interest due on the notes for the quarter ended June 30, 2004.

 

7

Note D — Net Loss Per Share

 

The following table sets forth the computation of basic and diluted net loss per share:

 

 

Note E — Intangible Assets

 

Other intangible assets were comprised of:

 

 

VCampus expects amortization expense for other intangible assets to be as follows:

 

2004 (remaining three months)		44,741
2005		133,490
2006		110,740
2007		66,078
2008		43,747
Thereafter		36,454
		$	435,250

 

Note F — Legal Proceedings

 

In 2002, the Virginia Department of Taxation completed an audit of the Company’s sales and use tax payments from August 1998 through October 2001. After some initial negotiations, adjustments were made to the initial draft assessment and the Company made a payment of $18,928, representing an uncontested portion of the assessment.  Thereafter, a formal assessment was issued by the Virginia Department of Taxation in July 2003 for $86,678, including interest of $17,278, primarily relating to assessment of use tax on the royalties paid by the Company to content providers for courses the Company delivered online. In October 2003, the Company appealed the assessment. In March 2004, the Company was notified that this appeal remains under review. The Company does not have a firm estimate of the probability of liability for this issue or the amount of anticipated legal costs, but has reason to believe that the potential liability will be reduced to the point where it will not be considered material. Accordingly, the Company cannot estimate at this time the amount of liability to be incurred, if any. No amounts have been accrued in the financial statements for this potential liability.

 

8

 

Note G —Segment Information

 

The Company views its operations and manages its business as one segment, the development and marketing of internet based learning solutions and related services.  Factors used to identify the Company’s single operating segment include the financial information available for evaluation by the chief operating decision maker in making decisions about how to allocate resources and assess performance.

 

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

 

Statements in this Form 10-Q that are not descriptions of historical facts are forward-looking statements that are subject to risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors, including those set forth herein and in our other SEC filings, and including, in particular, the availability of sufficient capital to finance our business plan on terms satisfactory to management, risks relating to uncertainties relating to dependence on strategic partners and third party relationships, implementation of our new Select Partner strategy, difficulties in maintaining compliance with Nasdaq listing requirements, dependence on online distribution, security risks, government regulations and competition.

 

During the nine months ended September 30, 2004, we entered into Select Partnership Agreements with the Kiplinger Washington Editors, Inc., the Association for Financial Professionals, PCI Global, Inc., the National Council of State Boards of Nursing, the National Contract Management Association, the American College of Forensic Examiners International and the New York Institute of Finance.  Under these agreements, we plan to develop and market online curricula for large targeted markets in financial management, certified treasury recertification, project management certification, continuing education in nursing, corporate and government contract management, forensic nursing specialty designation and financial research analysts’ requirements.  With the exception of courseware developed for Kiplinger, all of the curricula relate to either continuing education credits or preparation for a professional certification or licensure, which we anticipate will fuel significant demand for the courses.  Kiplinger’s courses relate to education of individuals in personal financial management. We believe that the demand for the Kiplinger courses, marketed to large employers, is being driven by the movement from defined benefit to defined contribution retirement plans and employers’ interest in educating their employees on proper retirement investing.

 

Critical Accounting Policies and Estimates

 

We consider the following accounting policies and estimates to be the most important to our financial position and results of operations, either because of the significance of the financial statement item or because they require the exercise of significant judgment and/or use of significant estimates. While we believe that the estimates we use are reasonable, actual results could differ from those estimates.

 

Capitalized Software and Courseware Development Costs

 

We capitalize the cost of software used for internal operations and courseware once technological feasibility of the software and courseware has been demonstrated.  We capitalize costs incurred during the development process, including payroll costs for employees who are directly associated with the development process and services performed by consultants. Amortization of such costs is based on the greater of (1) the ratio of current gross revenues to the sum of current and anticipated gross revenues, or (2) the straight-line method over the remaining economic life of the vcampus or courseware, typically two to three years. It is possible that those anticipated gross revenues, the remaining economic life of the products, or both, may be reduced as a result of future events.

 

Goodwill and other intangibles

 

Goodwill and other intangibles represent the unamortized excess of the cost of acquiring subsidiary companies over the fair values of such companies net tangible assets at the dates of acquisition.

 

We consider the Company to be a single reporting unit.  Accordingly, all of our goodwill is associated with the entire Company. We test the Company for impairment on an annual basis, coinciding with our fiscal year and on an interim basis if circumstances change that would more likely than not reduce the fair value of our reporting unit below its carrying amount.

 

Impairment of Long-Lived Assets

 

We account for long-lived assets in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

 

9

 

Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of by sale are reflected at the lower of their carrying amount or fair value less cost to sell.

 

Revenue Recognition

 

We currently derive our revenues from online tuition revenues and development and other revenues.

 

Online tuition revenues are generated primarily through three types of contracts: (i) contracts with higher education partners, (ii) corporate subscriptions, and (iii) corporate usage. For higher education partner contracts and corporate subscriptions, revenue is recognized ratably (on a straight-line basis) over the semester term and subscription period, respectively. For corporate usage contracts, revenue is recognized upon enrollment in a course. Once a student has enrolled in a course, he cannot cancel delivery of a course or receive a refund. Initial set-up fees related to all online tuition services are recognized ratably (on a straight-line basis) over the respective contract term.

 

Development and other revenues earned under courseware conversion contracts are recognized relative to our proportionate performance based on the ratio that total costs incurred to date bear to the total estimated costs of the contract. Provisions for losses on contracts are made in the period in which they are determined.

 

Prior to the third quarter of 2004, we had also been recognizing revenues for other services.  Revenues for other services were being recognized as the services were delivered.

 

We account for cash received from customers as prepayments for future services as deferred revenue. We recognize revenue associated with those cash receipts in accordance with the above policies.

 

Results of Operations

 

Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003

 

Summary

 

For the three months ended September 30, 2004, we incurred a net loss to common stockholders of $1,768,487 (or $0.24 per share), an increase of 146.2% as compared to a net loss to common stockholders of $718,174 (or $0.16 per share) for the three months ended September 30, 2003. The net loss for the three months ended September 30, 2004 includes $405,887 of noncash debt discount and debt offering costs amortization resulting from the March 2004 financing.

 

The following table sets forth selected financial data:

 

 

10

Net Revenues

 

 

Online tuition revenues decreased 37.2% to $839,968 in the third quarter of 2004, compared to $1,337,103 for the same period in 2003.  The decrease is primarily due to a decrease in revenue from higher education customers, and more specifically from Park University ($511,000) and corporate customers ($70,000), which was partially offset by an increase in revenue from government customers and Select Partners ($21,000 and $63,000, respectively).

 

Online development and other revenues increased 86.4% to $77,667 in the third quarter of 2004, compared to $41,667 for the third quarter of 2003.  The increase was primarily due to a large order from one of our largest corporate customers. As we move away from developing and hosting courses that are proprietary to our customers to the co-development of courses under our Select Partner strategy, for which we do not charge our Select Partners development fees, we expect development revenues to remain a relatively small component of our total revenues. However, we generally receive a relatively higher percentage of the revenue from the sale of Select Partner courses, in lieu of such foregone development fees.

 

Cost of Revenues

 

Cost of revenues decreased 19.8% to $304,900 in the third quarter of 2004 as compared to $380,049 for the third quarter of 2003.  The decrease was primarily due to the sale of a higher percentage of courses with relatively lower associated royalty costs.

 

Operating Expenses

 

Sales and Marketing. Sales and marketing expenses decreased 4.4% to $474,774 in the third quarter of 2004 as compared to $496,616 for the third quarter of 2003. Excluding the Park Development Fund contribution in the third quarter of 2003, which did not occur in the third quarter of 2004 following the termination of our contract with Park University in May 2004, sales and marketing expenses were $474,774 and $404,860 for the third quarter of 2004 and 2003, respectively, an increase of 17.3%.  The increase was primarily attributable to increased headcount and out-of-pocket costs in sales and marketing associated with the implementation and support for our Select Partner program in the third quarter of 2004.

 

Product Development and Operations. Product development and operations expenses increased 29.7% to $692,851 in the third quarter of 2004 as compared to $534,348 for the third quarter of 2003.  The increase was due to the fact that following the release of our new course management system in the first quarter of 2004, we did not capitalize any software development costs (due to their nature) in the third quarter of 2004, whereas in the third quarter of 2003, software development costs had been capitalized.

 

General and Administrative. General and administrative expenses decreased 6.4% to $404,731 in the third quarter of 2004 as compared to $432,566 for the third quarter of 2003.  The decrease was primarily due to the expiration of the employment agreement and related termination of employment of our Vice Chairman in December 2003, partially offset by small increases in miscellaneous general and administrative items.

 

Depreciation and Amortization. Depreciation and amortization increased 45.0% to $316,529 in the third quarter of 2004 as compared to $218,221 for the third quarter of 2003.  The increase was primarily due to the release of our new Course Management System in the first quarter of 2004, as a result of which we began amortizing costs we had capitalized for its development.

 

Stock-based Compensation.  Stock-based compensation expense for the three months ended September 30, 2004 and 2003 consists of the fair value of stock issued as customary payment to our non-employee directors for their participation in Board of Directors and Board Committee meetings and the fair market value of stock issued to consultants.

 

Interest Expense.  Interest expense for the three months ended September 30, 2003 primarily consists of amortization of debt discount and deferred debt offering costs related to the remaining balance of the $925,000 of convertible promissory notes issued in December 2001.  Interest expense for the three months ended September 30, 2004 primarily consists of amortization of debt discount and deferred debt offering costs and accrual of interest payable related to the $3,649,625 ($2,425,000 following mandatory and voluntary partial conversions in the second and third quarter of 2004) of convertible promissory notes issued in March 2004.

 

 

11

 

Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003

 

Summary

 

For the nine months ended September 30, 2004, we incurred a net loss to common stockholders of $4,855,553 (or $0.72 per share), a decrease of 1.3% as compared to a net loss to common stockholders of $4,918,166 (or $1.72 per share) for the nine months ended September 30, 2003. The net loss for the nine months ended September 30, 2004 includes $1,945,693 of primarily noncash amortization of debt discount and debt offering costs, and $173,899 of other income as a result of settlements with a customer and a vendor.  The net loss for the nine months ended September 30, 2003 includes $2,419,032 of noncash deemed dividends to preferred stockholders in connection with the issuance of the Series G and Series H Preferred Stock and the June 2003 conversion of all preferred stock into common stock, $172,729 of costs related to legal settlements and other income of $207,138 related to the write-off of royalty obligations to one of our former content providers following the expiration of the relevant statute of limitations for bringing any action to enforce the obligations.

 

The following table sets forth selected financial data:

 

		For the Nine Months Ended September 30,
		2003					2004
Revenues		$	4,691,259		100.0	%	$	3,876,631		100.0	%
Cost of revenues		1,409,464			30.0		1,031,513			26.6
Sales and marketing		1,691,014			36.0		1,424,106			36.7
Product development and operations		1,897,228			40.4		2,077,885			53.6
General and administrative		1,332,786			28.4		1,302,596			33.6
Depreciation and amortization		713,641			15.2		903,128			23.3
Reorganization and other non-recurring charges		172,729			3.7		—			0.0
Stock-based compensation		95,564			2.0		107,474			2.8
Loss from operations		(2,621,167		)	(55.9	)	(2,970,071		)	(76.6	)
Other income		207,138			4.4		173,899			4.5
Interest expense		(85,105		)	(1.8	)	(2,059,381		)	(53.2	)
Net loss		(2,499,134		)	(53.3	)	(4,855,553		)	(125.3	)
Dividends to preferred stockholders		(2,419,032		)	(51.5	)	—			0.0
Net loss to common stockholders		$	(4,918,166	)	(104.8	)%	$	(4,855,553	)	(125.3	)%

 

Net Revenues

 

 

Online tuition revenues decreased 13.0% to $3,645,124 for the nine months ended September 30, 2004, compared to $4,191,006 for the same period in 2003.  The decrease is primarily due to a decrease in revenue from higher education customers, and more specifically from Park University ($563,000) and corporate customers ($183,000), which was partially offset by an increase in revenue from government customers and Select Partners ($68,000 and $132,000, respectively).

 

Online development and other revenues decreased 55.4% to $183,617 for the nine months ended September 30, 2004 compared to $411,956 for the same period in 2003.  The decrease was primarily due to a decline in course development and professional services orders as we move away from developing and hosting courses that are proprietary to our customers to the co-development of courses under our Select Partner strategy.  While we do not charge our Select Partners development fees for these courses, we generally receive a relatively higher percentage of the revenue from their sale, in lieu of such foregone development fees.

 

Cost of Revenues

 

Cost of revenues decreased 26.8% to $1,031,513 for the nine months ended September 30, 2004 as compared to $1,409,464 for the same period in 2003.  The decrease was due to the sale of a higher percentage of courses with relatively lower associated royalty costs.

 

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Operating Expenses

 

Sales and Marketing. Sales and marketing expenses decreased 15.8% to $1,424,106 for the nine months ended September 30, 2004 as compared to $1,691,014 for the same period in 2003. Excluding the Park Development Fund contribution in the nine months ended September 30, 2003, which did not occur in the 2004 period following the termination of our contract with Park University in May 2004, sales and marketing expenses were $1,424,106 and $1,419,425 for the nine months ended September 2004 and 2003, respectively, an increase of less than 1%.

 

Product Development and Operations. Product development and operations expenses increased 9.5% to $2,077,885 for the nine months ended September 30, 2004 as compared to $1,897,228 for the same period in 2003.  The increase was due to the fact that following the release of our new course management system in the first quarter of 2004, we did not capitalize any software development costs (due to their nature) in the second and third quarter of 2004, whereas for the nine months ended September 30, 2003, software development costs had been capitalized.

 

General and Administrative. General and administrative expenses decreased 2.3% to $1,302,596 for the nine months ended September 30, 2004 as compared to $1,332,786 for the same period in 2003. The payment of incentive compensation amounts to employees in the second quarter of 2004 was offset by the elimination of expenses resulting from the expiration of the employment agreement and related termination of employment of our Vice Chairman in December 2003.

 

Depreciation and Amortization. Depreciation and amortization increased 26.6% to $903,128 for the nine months ended September 30, 2004 as compared to $713,641 for the same period in 2003.  The increase was primarily due to the release of our new Course Management System in the first quarter of 2004 as a result of which we began amortizing costs we had capitalized for its development.

 

Reorganization and Other Charges.  Reorganization and other charges of $172,729 for the nine months ended September 30, 2003 consist of amounts paid in excess of prior accruals to satisfy in full all liabilities in connection with the termination of the Rockville, Maryland facility lease and our recent legal settlements.

 

Stock-based Compensation.  Stock-based compensation expense for the nine months ended September 30, 2004 and 2003 consists of the fair value of stock issued as customary payment to our non-employee directors for their participation in Board of Directors and Board Committee meetings and the fair market value of stock issued to consultants.

 

Other Income.  Other income for the nine months ended September 30, 2003 consists of the write-off of royalty obligations to one of our former content providers following the expiration of the relevant statute of limitations for bringing any action to enforce the obligations.  Other income for the same period in 2004 consists of amounts recorded in connection with the settlements with Park University and one of our content providers which resulted in the write-off of royalty obligations.

 

Interest Expense.  Interest expense for the nine months ended September 30, 2003 primarily consists of amortization of debt discount and deferred debt offering costs related to the remaining balance of the $925,000 of convertible promissory notes issued in December 2001.  Interest expense for the nine months ended September 30, 2004 primarily consists of amortization of debt discount and deferred debt offering costs and accrual of interest payable related to the $3,649,625 ($2,425,000 following mandatory and voluntary partial conversions in the second and third quarter of 2004) of convertible promissory notes issued in March 2004.

 

 

Liquidity and Capital Resources

 

As of September 30, 2004, we had $3,135,242 in cash and cash equivalents, an increase of $2,600,258 from December 31, 2003, attributable primarily to cash raised in connection with our March 2004 private placement financing and a large customer prepayment ($5.3 million and $1.2 million, respectively), partially offset by operating losses ($3.0 million) and the paydown of liabilities during 2004 ($900,000). Net cash used in operating activities was $1,788,945 and $523,734 for the nine months ended September 30, 2004 and 2003, respectively.  The increase in cash used in operating activities was primarily due to the paydown of accounts payable following our March 2004 private placement.

 

Net cash used in investing activities was $927,069 and $994,861 for the nine months ended September 30, 2004 and 2003, respectively. The use of cash for investing activities in both periods was primarily attributable to courseware and software development costs that were capitalized and the purchase of computer equipment in furtherance of our plans to upgrade our technological infrastructure.

 

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Net cash provided by financing activities was $5,316,272 for the nine months ended September 30, 2004 and $3,326,978 for the nine months ended September 30, 2003.  In March 2004, we raised $5,000,000 in gross cash proceeds through the private placement of 20 units, at a purchase price of $200,000 per unit, and Series B senior secured convertible notes in the aggregate principal amount of $1,000,000. Each unit consisted of 50,000 shares of common stock (initially priced at $1.63 per share), a Series A senior secured convertible note in the original principal amount of $118,500 and a five-year warrant to purchase 61,350 shares of common stock. We issued an additional $250,000 of Series B senior secured notes in exchange for cancellation of existing short-term indebtedness in that amount. We issued to the Series B noteholders five-year warrants to purchase an aggregate of 383,439 shares of common stock. The exercise price for the warrants, as adjusted upon shareholder approval in May 2004, is now $1.63 per share.  During the second and third quarter of 2004, an additional $225,000 of Series A and Series B senior secured convertible note principal was converted into 138,038 shares of common stock, resulting in $1,224,625 of aggregate principal from this financing converted as of the end of the third quarter 2004.  During the second quarter of 2004, we issued 300,483 shares of common stock upon the exercise of warrants and options.  Net proceeds to us from these exercises amounted to $595,521.

 

Upon approval of the private placement by VCampus’ stockholders at our annual meeting on May 18, 2004, $18,500 of principal of each of the Series A notes was converted into common stock at $1.63 per share and $100,000, or 50%, in principal of each of the Series B notes was converted into common stock at $1.63 per share. The total principal amount for both Series converted upon approval of the stockholders was $999,625. Therefore, following stockholder approval, a total of $2,650,000 of the placement was recorded as equity and $2,650,000 as senior debt. The notes mature on April 1, 2009 and bear interest at the rate of 8% per annum payable quarterly in cash or stock (valued at the conversion price) at VCampus’ option for the first year. Principal and interest on the notes are payable in cash over the following four years in quarterly installments.  Interest due for the quarter ended June 30, 2004 in the aggregate of $68,762 was paid through the issuance of 42,177 shares of common stock valued at $1.63 per share on July 1, 2004.

 

We have sustained continuing operating losses in 2003 and for the nine months ended September 30, 2004 and had an accumulated deficit of $95.2 million as of September 30, 2004. We expect negative cash flow from operations to continue until the online revenue stream matures. We have historically funded our operating cash deficits through the sale of equity, and to a lesser extent, borrowings. We believe we have adequate capital from the March 2004 financing and access to adequate additional resources to fund operations until operations reach cash flow positive. However, in the event revenues do not meet anticipated levels or we are unable to raise additional funding to meet working capital requirements, we may need to further reduce operating expenses. If we are unable to raise additional funding to meet working capital requirements, we may be unable to maintain compliance with Nasdaq SmallCap Market listing requirements and we might not be able to achieve our business objectives. VCampus believes it has available capital on hand and sources for additional debt or equity capital in amounts necessary to meet its cash needs through 2004 and into 2005. However, such capital, if needed and available, may not have terms favorable to us or our current stockholders. Furthermore, the terms of the debt and equity financing conducted in March 2004, which includes antidilution protection, may significantly hinder our ability to raise further capital in the future. Our obligations with respect to the repayment of the debt may have a significant impact on our cash flow.

 

If we do not address our capital and funding needs, we will be materially adversely affected. Our future capital requirements will depend on many factors, including, but not limited to, acceptance of and demand for our products and services, including our new Select Partner Program, maintenance and renewal of customer contracts, customer demands for technology upgrades, the types of arrangements that we may enter into with customers and agents, and the extent to which we invest in new technology and research and development projects.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

In the normal course of business, we are exposed to a variety of risks including market risk associated with interest rate movements. Our exposure to market risk for changes in interest rates relates primarily to any investments we may hold at various times and also related to our outstanding convertible debt. When investing, our purchases consist of highly liquid investments with maturities at the date of purchase generally no greater than twelve months, thus, due to the short-term nature of such investments and our usual intention to hold these investments until maturity, the impact of interest rate changes would not have a material impact on our results of operations. In addition, essentially all of our debt obligations are at fixed interest rates. Given the fixed rate nature of the debt, the impact of interest rate changes also would not have a material impact on our results of operations.

 

Item 4.  Controls and Procedures.

 

(a) Disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed only to provide assurance that they will meet their objectives.  As of the end of the period covered by this report, VCampus carried out an evaluation, under the supervision and with the participation of VCampus’ management, including VCampus’ Chief Executive Officer and Chief Financial Officer, of the effectiveness of  VCampus’ disclosure controls and procedures (as defined in Rule 13a-15(e)) pursuant to Exchange

 

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Act Rule 13a-15.  Based upon that evaluation, the VCampus Chief Executive Officer and Chief Financial Officer have concluded that VCampus’ disclosure controls and procedures are effective to provide the reasonable assurance discussed above.

 

(b) No change in VCampus’ internal controls over financial reporting occurred during VCampus’ last fiscal quarter that has materially affected, or is reasonably likely to materially affect, VCampus’ internal control over financial reporting.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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PART II — OTHER INFORMATION

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

From July 1, 2004 to September 30, 2004, we issued the following unregistered securities:

 

2,824 shares of common stock at $3.01 per share to a consultant as payment for services.

 

The sales of the above securities were deemed to be exempt from registration under the Act in reliance upon section 4(2) of the Securities Act of 1933, as amended (the “Act”), or Regulation D promulgated thereunder as transactions by an issuer not involving a public offering. Recipients of the securities in each such transaction represented their intentions to acquire such securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the instruments issued in such transactions. All recipients had adequate access to information about VCampus.

 

Item 6. Exhibits

 

Exhibit No.		Description
31.1		Certification of Chief Executive Officer pursuant to Securities and Exchange Act of 1934 Rule 13a-14 as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Securities and Exchange Act of 1934 Rule 13a-14 as adopted
		pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted 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 each of the undersigned thereunto duly authorized.

 

 

	VCAMPUS CORPORATION
	By:	/s/ NARASIMHAN P. KANNAN
	Narasimhan P. Kannan
	Chief Executive Officer
	By:	/s/ CHRISTOPHER L. NELSON
	Christopher L. Nelson
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

 

 

Date: November 10, 2004

 

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EXHIBIT INDEX

 

Exhibit No.		Description
31.1		Certification of Chief Executive Officer pursuant to Securities and Exchange Act of 1934 Rule 13a-14 as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Securities and Exchange Act of 1934 Rule 13a-14 as adopted
		Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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