<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
-----------------------------------------------
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 000-28393
----------------------------------------
eCollege.com
---------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1351729
----------------------------------- ------------------------------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
10200 A East Girard Avenue, Denver, Colorado 80231
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 873-7400
-----------------------------
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. [X] Yes [_] No
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, as of August 9, 2000 was 16,042,067.
<PAGE>
eCollege.com(SM)
TABLE OF CONTENTS
PART I CONDENSED FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Statements of Operations. . . . . . . . . . . . . . . . . . . . . . .4
Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . .5
Notes to Unaudited Condensed Financial Statements . . . . . . . . . .6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . .8
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . . . 13
PART II OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 1 LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS . . . . . . . . . . . . 13
ITEM 3 DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . . . 14
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . 14
ITEM 5 OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . 14
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
eCollege.com(SM)
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash
equivalents......................................................................... $13,187,182 $46,307,674
Available-for-sale securities........................................................... 26,090,743 -
Accounts receivable, net of allowances
of $144,363 and $44,800, respectively............................................... 2,828,701 1,509,453
Accrued revenue receivable.............................................................. 411,636 126,477
Notes receivable - related party........................................................ 416,000 -
Other current assets.................................................................... 1,345,856 639,360
----------- -----------
Total current assets.............................................................. 44,280,118 48,582,964
Property and equipment, net............................................................. 6,246,965 4,553,661
Other assets............................................................................ 1,325,145 630,100
----------- -----------
TOTAL ASSETS............................................................................ $51,852,228 $53,766,725
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................................................... $ 1,105,923 $ 2,619,365
Capital lease obligation.............................................................. 503,416 -
Accrued liabilities................................................................... 4,383,677 2,192,966
Deferred revenue...................................................................... 3,607,011 2,431,164
Contract loss reserve................................................................. 2,055,491 1,808,615
----------- -----------
Total current liabilities......................................................... 11,655,518 9,052,110
LONG TERM LIABILITIES:
Capital lease obligation.............................................................. 809,511 -
Other liabilities..................................................................... 10,380 22,785
Contract loss reserve................................................................. 145,158 679,440
----------- -----------
Total long term liabilities....................................................... 965,049 702,225
----------- -----------
Total Liabilities 12,620,567 9,754,335
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; 50,000,000
shares authorized; 16,033,393 and
14,711,893 shares, respectively, issued
and outstanding..................................................................... 160,334 147,119
Additional paid-in capital............................................................ 82,979,387 75,388,591
Warrants and options for common stock................................................. 3,059,829 4,252,376
Notes receivable...................................................................... - (593,593)
Deferred compensation................................................................. (2,222,070) (2,920,325)
Net unrealized loss on available-for-sale securities.................................. (11,318) -
Accumulated deficit................................................................... (44,734,501) (32,261,778)
----------- -----------
Total stockholders' equity............................................................ 39,231,661 44,012,390
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................................................................. $51,852,228 $53,766,725
=========== ===========
</TABLE>
The accompanying notes to the unaudited condensed financial statements are an
integral part of these balance sheets.
<PAGE>
eCollege.com(SM)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
-------------------------- ---------------------------
2000 1999 2000 1999
----------- ------------ ------------ -----------
(Unaudited) (Unaudited)
REVENUE:
<S> <C> <C> <C> <C>
Campus and course
development fees......................... $ 996,270 $ 333,473 $ 2,200,569 $ 658,483
Student fees.............................. 1,528,398 451,094 2,695,658 737,041
----------- ------------ ------------ -----------
Total revenue.......................... 2,524,668 784,567 4,896,227 1,395,524
COST OF REVENUE........................... 2,482,695 1,900,963 5,059,606 3,124,675
----------- ------------ ------------ -----------
Gross profit (loss).................... 41,973 (1,116,396) (163,379) (1,729,151)
----------- ------------ ------------ -----------
OPERATING EXPENSES:
Selling and
marketing.............................. 2,597,980 1,921,137 5,467,010 3,226,478
General and
administrative......................... 3,228,737 1,018,592 5,804,069 1,754,416
Product development....................... 1,016,851 364,960 2,302,436 958,228
----------- ------------ ------------ -----------
Total operating
expenses.............................. 6,843,568 3,304,689 13,573,515 5,939,122
----------- ------------ ------------ -----------
LOSS FROM OPERATIONS...................... (6,801,595) (4,421,085) (13,736,894) (7,668,273)
OTHER INCOME (EXPENSE):
Interest and other
income................................. 624,182 82,358 1,381,696 202,254
Interest expense......................... (57,956) - (117,525) -
----------- ------------ ------------ -----------
NET LOSS.................................. (6,235,369) (4,338,727) (12,472,723) (7,466,019)
Dividends on
mandatorily redeemable,
convertible preferred
stock.................................. - (550,028) - (1,080,298)
Accretion of
mandatorily redeemable,
convertible preferred
stock.................................. - (85,227) - (170,498)
----------- ------------ ------------ -----------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS...................... $(6,235,369) $ (4,973,982) $(12,472,723) $(8,716,815)
=========== ============ ============ ===========
BASIC AND DILUTED NET
LOSS PER SHARE............................ $ (0.40) $ (0.96) $ (0.81) $ (1.70)
=========== =========== ============ ===========
Weighted Average Shares Outstanding -
Basic and Diluted...................... 15,627,446 5,156,218 15,411,149 5,135,349
=========== ============ ============ ===========
PRO FORMA NET LOSS FROM CONTINUING
OPERATIONS PER SHARE:
Basic and diluted net loss per share... $ (0.47) $ (0.81)
============ ===========
Weighted average common shares
outstanding - basic and diluted..... 9,256,396 9,235,527
============ ===========
</TABLE>
The accompanying notes to the condensed financial statements are an integral
part of these statements.
<PAGE>
eCollege.com(SM)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
2000 1999
------------ -----------
(Unaudited)
<S> <C> <C>
NET CASH USED IN OPERATIONS...................... $(11,953,856) $(5,624,939)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............. (2,966,559) (1,096,394)
Purchases of marketable securities............. (29,255,055) -
Proceeds from sales of marketable securities... 3,152,994 -
Notes receivable to related parties............ (416,000) -
------------ -----------
Net cash used in investing activities........ (29,484,620) (1,096,394)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock......... 6,798,170 84,805
Proceeds from issuance of preferred stock...... - 2,250,000
Payment of stock issuance costs................ (386,706) (656,000)
Proceeds from lease line of credit............. 1,312,927 -
Proceeds from notes receivable................. 593,593 -
Deferred initial public offering costs......... - (300,550)
------------ -----------
Net cash provided by financing activities.... 8,317,984 1,378,255
------------ -----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS...................................... (33,120,492) (5,343,078)
CASH AND CASH EQUIVALENTS, beginning of period... 46,307,674 11,661,186
------------ -----------
CASH AND CASH EQUIVALENTS, end of period......... $ 13,187,182 $ 6,318,108
============ ===========
</TABLE>
The accompanying notes to the condensed financial statements are an
integral part of these statements.
<PAGE>
eCollege.com(SM)
NOTES TO UNAUDITED CONDENSED
FINANCIAL STATEMENTS
1. Organization and Nature of Business
The Company provides online campuses, online courses and online course
supplements, training and consulting services and hosting services to the
educational market for both face-to-face and distance education. The Company's
integrated platform of software and services allows colleges, universities, high
schools and corporations to outsource the creation, launch, management and
support of online campuses and courses. The Company's services include campus
and course design, development, hosting, maintenance and customer support
services.
In December 1999, the Company completed an initial public offering of
5,000,000 shares of common stock at $11.00 per share. Net proceeds to the
Company aggregated to $51,150,000. In January 2000, the Company received net
proceeds of $5,115,000 from the exercise of 500,000 shares of the underwriter's
over-allotment option. The amount received was net of the estimated underwriting
offering expenses.
2. Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
regulations. The unaudited condensed financial statements reflect all
adjustments and disclosures that are, in the opinion of management, necessary
for a fair presentation. All such adjustments are of a normal recurring nature.
Certain amounts in the 1999 financial statements have been reclassified to
conform to the 2000 presentation. Management does not believe the effects of
such reclassifications are material. The results of operations for the interim
period ended June 30, 2000, are not necessarily indicative of the results of the
full fiscal year. For further information, refer to the audited financial
statements and notes thereto included in the Company's Annual Report on Form 10-
K, for the year ended December 31, 1999 and other filings we have made with the
SEC.
3. Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements,"
which provides guidance related to revenue recognition. As originally issued,
SAB 101 was to be effective for the first fiscal quarter of fiscal years
beginning after December 15, 1999, and requires companies to report any changes
in previously reported revenue as a cumulative change in accounting principle at
the time of implementation in accordance with Accounting Principles Board
Opinion 20, "Accounting Changes." In March 2000, the SEC issued SAB 101A "First
Amendment: Revenue Recognition in Financial Statements," which delayed
implementation of SAB 101 until no later than the Company's second quarter of
2000. In June 2000, the SEC issued SAB 101B "Second Amendment: Revenue
Recognition in Financial Statements," which delays the implementation of SAB 101
until no later than the Company's fourth quarter of 2000.
In March 2000, the Emerging Issues Task Force reached a consensus on Issue
No. 00-3, Application of AICPA SOP 97-2, "Software Revenue Recognition to
Arrangements That Include the Right to Use Software Stored on Another Entity's
Hardware" ("EITF Issue No. 00-3"). The consensus identifies those software
arrangements under which entities can account for sales of software in
accordance with SOP 97-2, and those arrangements that do not qualify as a sale
of software.
The Company is currently evaluating SAB 101 in conjunction with EITF Issue
No. 00-3 and is in the process of determining the impact SAB 101 will have on
its financial position, revenues and results of operations for the quarter
and year ending December 31, 2000 and subsequent periods. The impact of
SAB 101 will be reported as a change in accounting principle, computed as of
January 1, 2000, in accordance with APB Opinion Number 20 and FASB Statement No.
3. This may result in a significant cumulative effect adjustment that would be
reflected in the Company's results of operations for the year ended December 31,
2000, previously reported interim information would reflect the retroactive
implementation of SAB 101.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB 25. This Interpretation clarifies (a) the definition of
employee for purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a non-compensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. This interpretation is effective July 1, 2000,
but certain conclusions in this Interpretation cover specific events that occur
after either December 15, 1998, or January 12, 2000. To the extent that this
Interpretation covers events occurring during the period after December 15,
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this Interpretation are recognized on a prospective basis
from July 1, 2000. The adoption of FIN 44 did not have a material impact on the
Company's financial statements.
<PAGE>
4. Net Loss Per Share
Net loss per share is calculated in accordance with SFAS No. 128, "Earnings
Per Share" ("SFAS 128"), and Securities and Exchange Commission Staff Accounting
Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS 128 and SAB 98, basic
net loss per share is computed by dividing net loss available to common
stockholders for the period by the weighted-average number of common shares
outstanding for the period. Diluted net loss per share is computed by dividing
the net loss for the period by the weighted average number of common and
potential common shares outstanding during the period if the effect of the
potential common shares is dilutive. As a result of the Company's net losses,
all potentially dilutive securities, as indicated in the table below, would be
anti-dilutive and are excluded from the computation of diluted loss per share.
June 30,
2000 1999
----------------------------
Stock options 2,131,866 1,260,878
Warrants 77,185 686,518
Series A Preferred Stock -- 616,000
Series B Preferred Stock -- 1,526,221
Series C Preferred Stock -- 2,009,187
========= =========
Total 2,209,051 6,098,804
The Common Stock equivalent of the number of shares excluded from the
earning per share calculation because they are anti-dilutive, using the treasury
stock method, were 81,516 and 62,754 for the three and six months ended June
30, 2000, respectively, and 5,162,508 and 5,118,715 for the three and six months
ended June 30, 1999, respectively.
5. Warrants
In connection with the sale of Series A in June 1997, the Company issued
warrants to purchase 616,000 shares of the Company's Common Stock at an exercise
price of approximately $1.62 per share. The warrants vested immediately and
were exercisable for a period of three years. Based on the fair market value of
the Common Stock at the date of issuance, the fair value of the warrants was
determined to be immaterial. On May 31, 2000, these warrants were converted into
530,181 shares of Common Stock. A portion of the warrants were exercised via
cashless exercise, whereby the holder receives a lesser number of shares in lieu
of payment of the exercise price.
6. Comprehensive Loss
Total comprehensive loss was $6,219,767 and $12,484,041 for the three and
six months ended June 30, 2000, respectively, and is the same as net loss for
the three months ended and six months ended June 30, 1999, respectively.
Adjustments to the Company's net loss to derive comprehensive loss are comprised
of net unrealized losses on the Company's available-for-sale securities.
<PAGE>
7. Capital Lease
In the second quarter of 2000, the Company entered into a leasing
arrangement with a third party. Under the lease agreement, the Company may lease
up to $2,500,000 of equipment for an initial term of 36 months. At the end of
the lease term, the Company will buy the equipment for 8.5% of the amount drawn.
The lease will be treated for accounting purposes as a capital lease. As of June
30, 2000, the Company leased $1,312,927 of equipment and has $1,187,073 of
additional financing available under the lease line. Accumulated Depreciation
was $72,940 on June 30, 2000.
The following is a schedule by year of future minimum capital lease payments,
together with the present value of the net minimum lease payments as of June
30, 2000:
Year Ending December 31:
------------------------
2000 $ 251,966
2001 502,903
2002 502,903
2003 363,050
----------
Total minimum lease payments $1,620,822
Less: Amount representing interest 307,895
----------
Present value of future minimum base payments $1,312,927
Current portion of capital lease obligation 503,416
----------
Long-term capital lease obligation $ 809,511
==========
8. Capitalized Software
On April 1, 2000, the Company began capitalizing costs related to
development of our CampusPortal(SM) product. As of June 30, 2000, the Company
capitalized $777,145 in development costs.
9. Related Party Transaction
On June 23, 2000 the Company issued secured promissory notes to two
employees, totaling $416,000. The notes are full recourse and are secured by the
Common Stock of the Company owned by the employees. These notes bear interest at
8% per year and are due on December 31, 2000.
10. Legal Matters
The Company is exposed to asserted and unasserted legal claims encountered
in the normal course of business. Management believes that the ultimate
resolution of any such matters will not have a material adverse effect on the
operating results or the financial position of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Section and elsewhere in this report are
forward-looking in nature and relate to trends and events that may affect the
Company's future financial position and operating results. Such statements are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The terms "expect," "anticipate," "intend," "project"
and similar words or expressions are intended to identify forward-looking
statements. These statements speak only as of the date of this report. The
statements are based on current expectations, are inherently uncertain, are
subject to risks, and should be viewed with caution. Actual results and
experience may differ materially from the forward-looking statements as a result
of many factors, including changes in economic conditions in the markets served
by the Company, increasing competition, and other unanticipated events and
conditions. It is not possible to foresee or identify all such factors. The
Company makes no commitment to update any forward-looking statement or to
disclose any facts, events or circumstances after the date hereof that may
affect the accuracy of any forward-looking statement.
Forward-looking statements made in this Form 10-Q include references to our
development of our CampusPortal(SM) product, and the expected impact of this
product on our financial results. The CampusPortal(SM) product development
contains certain risks including possible delays in development, cost overruns
and customer acceptance. This Form 10-Q also contains statements about our
expected increases in revenues and expected trends in our operating expenses.
These statements are forward-looking statements and should be read in
conjunction with certain risk factors in our Form S-1 dated December 14, 1999,
our Form 10-K dated March 30, 2000 and other filings we have made with the SEC.
<PAGE>
Overview
eCollege.com(SM) is a leading provider of technology and services that
enable colleges, universities, high schools and corporations to offer an online
environment for distance and on-campus learning. Our technology enables our
customers to reach a large number of additional students who wish to take online
courses at convenient times and locations. Our customers can also use our
technology to supplement their on-campus courses with an online learning
environment.
We were founded and began delivering our products and services to the
University of Colorado in 1996. In 1997, we grew our customer base and revenue
while developing our technology to support substantial growth. As of June 30,
2000, the Company had 180 contracts covering 263 individual campuses. Since our
inception, our customers have purchased or ordered more than 4,000 online
courses along with course building services. For the summer 2000 academic term,
we had 136 customers offering online courses to students, and our customers had
approximately 14,000 student enrollments in online courses provided by us. We
expect these numbers to increase slowly as the summer session comes to an end.
We have invested, and continue to invest, in expanding our service capabilities
by expanding our infrastructure and increasing our human resources. Our
expenditures have exceeded our revenues since our inception, and our losses have
increased as a result of our accelerated growth. We currently intend to continue
to increase our operating expenses to support anticipated growth, to fund
increased sales and marketing, and to enhance existing and develop new
technologies.
Business Strategy
Our objectives are to be the leading provider of technology to be used in
education and training, and for our services to be the highest standard in the
industry. Our strategy to achieve these objectives includes providing the
leading eTeaching platform for teaching and learning on-campus, for distance
education and for corporate training; providing key front-office transactions
between educators and their students; progress towards a self-service model
where customers can deploy our product without substantial involvement from our
service staff; and helping institutions create lifelong learning communities.
The Company is also developing technology that will allow eCollege.com(SM)
and its customers to include online advertising on their online campus portals
and to generate ecommerce revenue from the online communities of the customers
using the eCollege.com(SM) campus product. The new version of the
eCollege.com(SM) campus product (CampusPortal(SM)) will have options including
courses and course supplements, community or corporate information,
faculty/instructor development, customized personal homepages, and
administrative student or employee services, as well as advertising and
ecommerce, as approved by our customers. We are considering several pricing
strategies for this product and are therefore not yet able to estimate the
impact of the release of this product on our financial statements.
The Company is also evaluating other products and services to continue to
expand revenue opportunities from clients.
Revenue
We primarily generate revenue from three sources:
. an initial development and design services fee to build an online
campus;
. development and design services fees to build online courses; and
. enrollment fees for each student in an online course.
As we expand and diversify our product offerings, we will generate revenue
from additional sources. These additional sources include:
. maintenance fees to manage the online campus during the term of the
agreement;
. service fees, including online campus implementation, faculty training
and support and technical consulting services;
. fees for products that supplement traditional classroom courses
(eCompanion(SM) and eToolKit(SM)); and
. fees for advertising and ecommerce through our CampusPortal(SM) product.
In the second quarter of 2000, revenue from these additional sources was
insignificant. We intend to use some of these products as marketing tools. We
expect that adoption of some of these products will increase student enrollment
and generate revenue later this year and in the next year. Our fee arrangement
for some of these product offerings includes participation by our customers in
the revenue generated from these sources.
<PAGE>
We typically enter into contracts with colleges, universities and
corporations to provide our online learning products and services. The average
term of our contracts is three to five years. Each contract is based on our
standard form, customized for each college, university or corporation and
specifies the products and services we will provide. These contracts specify the
online campus purchased, the initial number of online courses purchased, as well
as the price for additional online courses and services. We recognize our
development fees on a percentage of completion basis as the online campus and
course development and design services are performed. Our use of this method
requires management to estimate the degree of completion of each contract. To
the extent the original estimate proves to be inaccurate, the revenues and gross
profit or loss reported for the periods during which work on the contract is
ongoing and may not accurately reflect the final results of the contract. Any
anticipated losses on contracts are charged to earnings when identified.
We charge our customers a student fee for each student enrolled in an
online course or on-campus class using online course supplements. These fees are
recognized ratably over the duration of the course.
Our business model is based upon a number of factors, including increasing
the acceptance of online learning among colleges, universities and
corporations, adding new customers, developing additional courses for our
existing customers, increasing student enrollment in online courses, and selling
new products and services to our clients. For the quarter ended June 30, 2000,
we received approximately thirty-nine percent (39%) of our revenue from
development and design services fees for building campuses and courses, and
approximately sixty-one percent (61%) from student fees. This mix is influenced
by our seasonality associated with academic terms. Since the majority of the
second quarter revenue represents the end of the spring academic term, much of
the course development work for the spring has been completed. For the six
months ended June 30, 2000, we received approximately forty-five percent (45%)
of our revenue from development and design services fees for building campuses
and courses, and approximately fifty-five percent (55%) of our revenue from
student fees. We expect that the development revenue stream will continue to
grow, but that the student fees will become a larger percentage of total revenue
as the number of online courses offered by our customers and the numbers of
students in those courses continue to increase. As our incremental cost to
service additional student enrollment declines due to increased student
enrollments, we will be able to offer discounts to our customers who guarantee
higher student volumes. Additionally, our supplemental online teaching solutions
are generally priced lower than our full-course solutions. As our pricing and
product mix change, we anticipate that student enrollment will increase and the
average student fee may decline.
In October 1998, we were awarded a grant of approximately $1,900,000 by the
National Institute of Standards and Technology, or NIST, a department of the
U.S. Department of Commerce. We are entitled to receive payments under the grant
as we perform research related to automated course content creation and
organization, and tutoring delivery systems. Maximum payments under the NIST
grant are $713,000 in 1999, $583,000 in 2000 and $583,000 in 2001. Pursuant to
the terms of the NIST grant, work must be performed at a prescribed format and
pace. We believe we will be able to perform under the terms of the NIST grant,
however, there is no assurance we will continue to receive payments under the
NIST grant or that we will receive the maximum payments under the NIST grant. We
recognized $100,814 and $0 of NIST revenue for the three months ended June 30,
2000 and 1999, respectively. We recognized $182,679 and $0 of NIST revenue for
the six months ended June 30, 2000 and 1999, respectively. This revenue is
included in campus and course development fees. We do not intend that revenue
from such grant will constitute a significant portion of our revenue in the
future. We may apply for other grants in the future, although we have no present
plans to do so.
<PAGE>
Grant Program
We implemented a Grant Program in late 1999 designed to assist new and
existing customers in increasing the number of online courses they offer using
our products and services and the number of students pursuing online degrees.
Seventy-Two Grants were awarded, at our discretion, to institutions based on
demonstrated commitment to a quality online degree program, the number of
current and potential students, the college or university's unique approach to
online learning and other factors. Pursuant to the Grant Program, we stopped
awarding additional grants in January 2000.
Funds granted consist of both marketing funds and educational support
funds. Marketing funds are reimbursed to our customers based on demonstration of
payment. These reimbursements are recorded as marketing expenses as incurred by
our customers. A portion of the grants are educational support funds and are
considered contract costs. If contract costs, including appropriate educational
support funds, are in excess of the revenue to build a customer's campus or
courses, such excess is expensed as a contract loss in the quarter in which the
loss is first identified. At December 31, 1999, the Company recognized a loss on
such contracts of $2,438,055. As we complete the development work under these
contracts, the loss reserve is reduced such that our gross margin related to
this revenue is zero. This reduction is included in Cost of Revenue and was
$28,867 and $287,406 for the three and six months ended June 30, 2000. The
remaining estimated contract loss reserve at June 30, 2000 is $2,150,649. The
determination of the contract loss requires management to make estimates and
assumptions regarding the total amount of costs to be incurred. These estimates
and assumptions may change and affect the reported amounts of the contingent
liability on the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. As contracts are completed,
actual results could impact reported amounts of revenue and expense in the
current reporting period.
We have granted $7,402,268, which consists of $1,698,941 in marketing funds
and $5,703,327 in educational support funds. Pursuant to the terms of the
grants, funds are paid to our customers after they have provided receipts for
reimbursement. For the three months and six months ended June 30, 2000, we made
disbursements under the grant program of $214,540 and $251,040, respectively. We
expense the marketing fund component as we expect our customers to incur them.
We have estimated that our customers have incurred $400,000 and $800,000 for the
three months and six months ended June 30, 2000, respectively. We expense
educational support funds as they are incurred which is generally as the courses
under the grant are developed. For the three months and six months ended June
30, 2000, we have expensed $82,644 and $481,552 of educational support funds,
respectively.
Results Of Continuing Operations
We have incurred significant losses since our inception, resulting in an
accumulated deficit of $44,734,502 as of June 30, 2000 compared to $17,751,696
as of June 30, 1999. We intend to continue to make investments in technology
which may involve the development, acquisition or licensing of technologies that
complement or augment our existing services, technologies and products. We also
intend to continue to invest in marketing activities. Accordingly, we expect to
incur operating losses for the foreseeable future.
Three Months and Six Months Ended June 30, 2000 and 1999
Revenue. Our total revenue increased to $2,524,668 and $4,896,227 for the
three months and six months ended June 30, 2000, respectively, from $784,567 and
$1,395,524 for the three months and six months ended June 30, 1999,
respectively. Increases in revenue are due to increased student enrollment in
online courses, as well as an increased number of online campuses and courses
developed. Revenue from the NIST grant was $100,814 and $182,679 for the three
months and six months ended June 30, 2000 and is included in development
revenue.
Cost of Revenue. Cost of revenue increased to $2,482,695 and $5,059,606 for
the three months and six months ended June 30, 2000, respectively, from
$1,900,963 and $3,124,675 for the three months and six months ended June 30,
1999, respectively. Our cost of revenue increased primarily due to additional
personnel costs to support our growth in revenue. Our operations and account
management personnel increased to 141 at June 30, 2000 from 94 at June 30, 1999.
In addition, cost of revenue increased as a result of grant expenses of
approximately $82,644 and $481,552 for the three months and six months ended
June 30, 2000, respectively.
Gross Margin. We experienced a positive gross margin of $41,973 and a
negative gross margin of $163,379 for the three months and six months ended June
30, 2000, respectively, as compared to a negative gross margin of $1,116,396 and
$1,729,151 for the three months and six months ended June 30, 1999,
respectively. The favorable increase in gross margin was primarily due to our
revenue mix being more heavily oriented toward student fees, which have a higher
contribution margin, closer alignment of sales commissions to revenue, and an
improved utilization of our professional services staff. We expect that our
future gross margin will be affected by an increase in grant costs related to
the development of courses in the third and fourth quarter of this year.
<PAGE>
Selling and Marketing. Selling and marketing expenses increased to
$2,597,980 and $5,467,010 for the three months and six months ended June 30,
2000, respectively, from $1,921,137 and $3,226,478 for the three months and six
months ended June 30, 1999, respectively. The increase was primarily due to
increases in the number of selling and marketing personnel, additional trade
show participation and other promotional activities, and increases in travel
expense. Our selling and marketing personnel increased to 64 at June 30, 2000
from 49 at June 30, 1999. The increase in selling and marketing expenses also
reflects an increase in marketing costs associated with the grant program of
approximately $400,000 and $800,000 for the three months and six months ended
June 30, 2000, respectively, from $0 and $0 for the three months and six months
ended June 30, 1999, respectively.
General and Administrative. General and administrative expenses increased
to $3,228,737 and $5,804,069 for the three months and six months ended June 30,
2000, respectively, from $1,018,592 and $1,754,416 for the three months and six
months ended June 30, 1999, respectively. The increase in expenditures is due to
additional salaries, consulting, professional fees, and travel expenses as we
build and develop our management team and operating infrastructure. General and
administrative expenses for the three and six months ended June 30, 2000, also
include severance pay of approximately $250,000 for the former Chief Executive
Officer. The number of general and administrative personnel increased to 60 at
June 30, 2000 from 33 at June 30, 1999. This includes staff in business
development and systems administration. We expect our general and administrative
expenses to increase next quarter as a result of the issuance of options to our
new Chief Executive Officer. We also expect our general and administrative
dollars to grow in absolute dollars. However, we expect the increase in cost to
be slower than the increase in revenue and therefore expect the general and
administrative expenses to decline as a percent of revenue.
Since inception, we incurred aggregate deferred compensation of $4,139,631
in connection with the grant of options to employees. We have recorded this
amount as a reduction of equity and are amortizing this amount to compensation
expense over the vesting period of such options, which ranges from two to three
years. During the three months and six months ended June 30, 2000, we
recognized compensation expense in the amount of $359,373 and $698,256,
respectively, compared with $183,000 and $290,000 for the three months and six
months ended June 30, 1999, respectively.
Product Development. Product development expenses increased to $1,016,851
and $2,302,436 for the three months and six months ended June 30, 2000,
respectively, from $364,960 and $958,228 for the three months and six months
ended June 30, 1999, respectively. The increase was primarily due to the
development of our CampusPortal(SM) product (up until March 31, 2000),
enhancements for our eTeaching Solutions(SM) and an investment in tools to
improve our efficiency in developing campuses and courses. On April 1, 2000, we
started to capitalize costs related to our CampusPortal(SM). As of June 30,
2000, we have capitalized approximately $780,000 in development costs. We expect
that product development costs will continue to increase as we focus our
spending on the development and enhancement of our products.
Other Income (Expense). Interest and other income, which consists primarily
of interest earnings on our cash and cash equivalents and short term
investments, increased to $624,182 and $1,381,696 for the three months and six
months ended June 30, 2000, respectively, from $82,358 and $202,254 for the
three months and six months ended June 30, 1999, respectively. This increase is
primarily due to an increase in cash as a result of the equity financing that
occurred in the fourth quarter of 1999 and the first quarter of 2000 of
$51,150,000 and $5,115,000, respectively. Interest expense resulting from
amortization of warrants and prepaid fees associated with establishing the line
of credit entered into in 1999 was $55,246 and $104,394 for the three months and
six months ended June 30, 2000, respectively.
Net loss. Our net loss applicable to common stockholders increased to
$6,235,369, or $0.40 per share, and $12,472,723, or $0.81 per share, for the
three months and six months ended June 30, 2000, respectively, from $4,973,982,
or $0.96 per share, and $8,716,815, or $1.70 per share, for the three months and
six months ended June 30, 1999, respectively. The net loss per share dropped
from $0.42 per share for the three months ended March 31, 2000 to $0.40 per
share for the three months ended June 30, 2000. The net loss applicable to
common stockholders in 1999 includes the impact of dividends and accretion
related to our mandatorily redeemable, convertible preferred stock.
<PAGE>
Liquidity and Capital Resources
The Company's cash, cash equivalents, and short term investments decreased
$7,029,749 from $46,307,674 at December 31, 1999 to $39,277,925 at June 30,
2000. Specifically, the Company had cash and cash equivalents of $13,187,182 and
available for sale securities of $26,090,743 at June 30, 2000. The decrease for
the six months ended June 30 was due to cash used in operating activities of
$11,953,856 and cash used in investing activities of $3,393,877. The decrease in
cash provided from operating and investing activities was offset by cash
provided by financing activities of $8,317,984.
We have financed the majority of our operations through the issuance of
equity securities. We have sold Common Stock and Preferred Stock generating
aggregate proceeds of $84,319,553 from inception through June 30, 2000.
In January 2000, we received net proceeds of $5,115,000 from the exercise
of the underwriter's over-allotment option. The amount received was net of the
estimated underwriting offering expenses. In May 2000, we received $588,208 from
the exercise of Series A warrants.
We used the net proceeds from our recent equity financing to fund capital
expenditures and to support sales and marketing activities, product development
activities, expanding our data center, investing in short term marketable
securities with maturities of one year or less, enhance new accounting and
financial information systems and for other expenses associated with our growth.
In the upcoming year, we specifically plan to enhance our new data center,
continue to develop new products and services, and to continue to invest in new
equipment to support our increasing human resources. We also plan to continue to
enhance new accounting and financial information systems.
We expect the proceeds that we received from our initial public offering in
December 1999, the exercise of the underwriter's over-allotment option in the
first quarter of 2000, exercise of Series A warrants in May 2000, together with
cash generated from operations to meet our working capital and capital
expenditure requirements for at least the next 12 months. Beyond the next 12
months, we may need to obtain additional debt and/or equity financing to fund
our operations and anticipated growth. Although there can be no guarantee, we
believe such funds will be available to us on commercially reasonable terms.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial
position, operating results or cash flows due to adverse changes in financial
market prices and rates. The Company is, or may become, exposed to market risk
in the areas of changes in United States interest rates and changes in foreign
currency exchange rates as measured against the United States dollar. These
exposures are directly related to our normal operating and funding activities.
Historically and as of June 30, 2000, we have not used derivative instruments,
engaged in hedging activities or entered into any foreign currency transactions.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On December 15, 1999, the Company consummated its initial public offering
(the "Offering") of its Common Stock, par value $.01 per share (the "Common
Stock"). The registration statement relating to the Offering (File No. 333-
78365) was declared effective on December 14, 1999. Banc of America Securities
LLC, William Blair & Company, and Prudential Volpe Technology were the managing
underwriters of the Offering. The Offering terminated on January 13, 2000 upon
the sale of 500,000 shares of the underwriters' over-allotment option. The
Company registered and sold a total, including the underwriters' over-allotment,
of 5,500,000 shares with an aggregate registered price of $60,500,000.
The Company incurred underwriting discounts and commissions of $4,235,000
with respect to the Offering during the period December 15, 1999 through January
13, 2000, none of which were direct or indirect payments to directors, officers,
general partners of the Company or their associates or to persons owning 10% or
more of any class of equity securities of the Company or to affiliates of the
Company.
<PAGE>
The net offering proceeds to the Company was $56,265,000, of which
$5,115,000 relates to the exercise of 500,000 shares of the underwriters' over-
allotment option on January 13, 2000. The Company used a portion of the proceeds
to repay $2,050,000 in bank debt. At the time of the Offering, 4,150,402 shares
of the Company's Series A, B and C Preferred Stock were converted to 4,150,402
shares of Common Stock. The Company expects to use its remaining net proceeds to
enhance our new data center, continue to develop new products and services, and
to continue to invest in new equipment to support our increasing human
resources. We also plan to continue to implement new accounting and financial
information systems.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
On May 30, 2000, Mr. Rob Helmick resigned as President and Chief Executive
Officer. Mr. Helmick continues to serve as Co-Chairman of the Board. Mr.
Oakleigh Thorne was appointed as Chief Executive Officer on May 30, 2000 and
serves as Chairman of the Board. In lieu of salary, benefits and other
compensation, an investment fund affiliated with Mr. Thorne has been granted
options to purchase up to 1,000,000 shares of the Company's Common Stock which
vested on May 30, 2000. 200,000 options have an exercise price of $4.125, the
fair market value of the Company's Common Stock on the date of the grant.
800,000 options have an exercise price of $15.00 per share which can be adjusted
to the fair market value at the date of the grant based on stock price
performance criteria. In addition to these stock options, Mr. Thorne also owns
shares of Company's Common Stock as set forth in the Ownership of Securities
table of the Company's Proxy Statement.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following is a list of exhibits filed as part of this Report on Form
10-Q. Where so indicated by footnote, exhibits which were previously filed
are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated parenthetically
except for in those situations where the exhibit number was the same as set
forth below.
Exhibit
Number Description
------------- ---------------------------------------------------
1 Statement Regarding Computation of Per Share Earnings (Loss)
(included in notes to financial statements)
10.1 Separation Agreement and Release between Rob Helmick and
eCollege.com
27 Financial Data Schedule
(b) On July 31, 2000, the Company filed a report on Form 8-K announcing that on
July 31, 2000, Robert Helmick, former Chief Executive Officer of eCollege.com,
sold 2,000,000 shares of eCollege.com common stock, par value $.01 per share, to
a group of investors that included Oakleigh Thorne, Chief Executive Officer of
eCollege.com, Oakleigh B. Thorne, who is Mr. Thorne's father, and others. After
the close of this private sale of securities, Mr. Helmick will own less than 9%
of the issued and outstanding shares of eCollege.com Common Stock, and Mr.
Oakleigh Thorne, together with entities controlled by Mr. Thorne and his father,
will own approximately 17.5% of the issued and outstanding shares of common
stock of eCollege.com.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report on Form 10-Q to be signed on its
behalf by the undersigned, thereunto duly authorized in Denver, Colorado, on
this 9th day of August, 2000.
eCollege.com
/s/ Oakleigh Thorne
----------------------------------------------
Name: Oakleigh Thorne
Title: Chief Executive Officer and Co-Chairman
of the Board of Directors
(principal executive officer)
/s/ Douglas H. Kelsall
----------------------------------------------
Name: Douglas H. Kelsall
Title: Chief Financial Officer and
Treasurer (principal financial
officer)
/s/ Linda Schmehl
----------------------------------------------
Name: Linda Schmehl C.P.A.
Title: Chief Accounting Officer
