Forward looking statements may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and matters described in this Annual Report generally.
Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning our company and our business made elsewhere in this Annual Report as well as other pubic reports filed with the United States Securities and Exchange Commission (the "SEC"). You should not place undue reliance on any forward-looking statement as a prediction of actual results or developments. We are not obligated to update or revise any forward-looking statement contained in this Report to reflect new events or circumstances unless and to the extent required by applicable law.
Available Information
Information regarding the Company’s annual reports on Form 10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K, and any amendments to these reports, are available to the public from the SEC’s website at http://www.sec.gov as soon as reasonably practicable after the Company electronically files such reports with the Securities and Exchange Commission. Any document that the Company files with the SEC may also be read and copied at the SEC’s public reference room located at 100 F Street, NE , Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
History
Digital Learning Management Corporation, a Delaware corporation (hereinafter sometimes referred to as the “Company,” “we,” “us,” and “our”), incorporated on February 18, 1999, under the name FreePCSQuote.Com, Inc., was a development stage company with a principal business objective to allow businesses the opportunity to generate revenues through the use of our Internet technology solutions and services. Through the use of our computer software, network technology, and systems management, we provided our customers outsourced web site and application hosting solutions. We had yet to generate significant revenues from operations through the end of fiscal 2003.
An objective of management became the acquisition of an operating company with experienced management and the potential for profitable growth in exchange for our securities. Pursuant to this objective, on January 16, 2004, we entered into an Agreement and Plan of Merger (the “Agreement”) pursuant to which we, through our wholly-owned subsidiary, FPQT Acquisition Corporation, a Nevada corporation (“Merger Sub”), acquired Digital Learning Institute, Inc., a privately held Delaware corporation (“DLI”) in exchange for shares of our Common Stock (the “Merger”). Upon consummation of the Merger, Aurangzeb Bhatti was named President and a Director, Umesh Patel was named Vice President and a Director and Al Jinnah was named Secretary. Eric Borgerson resigned as our President and sole Director.
Description of the Company Post-Merger
DLI is a for-profit continued education company that leveraged existing universities’ (course credits) accreditations, and campuses to provide training and education. The company enrolls active students though several different Vocational Schools, Colleges and Universities. Our business strategy during 2004 was to grow our enrollment base under our existing course offerings and to reduce the cost of learning through our proprietary Learning Management Software called ‘CourseMate’.
During 2004 we sought to increase our enrollment base, add to our curriculum offerings and supplement our accreditations offerings through our acquisition of McKinley University in 2003, as well as additional planned acquisitions of small vocational schools. The acquisitions were based on our belief that we would have more breadth in course offerings through the school’s accreditations and business class offerings while using our scaleable education software application to conduct courses over the Internet. In March 2005 we decided to discontinue and exit the traditional vocational training business and direct substantial proportion of our resources and concentrate our focus on our proprietary On-Line learning solution products, training and education.
On February 27, 2004, we completed a $3.0 million offering of convertible notes through a private placement to affiliated entities of Renaissance Capital.
On March 8, 2004, and in connection with the closing of the convertible note transaction with Renaissance Capital, the following individuals were appointed to our Board of Directors: Khalid Sheikh, Gregory J. Frazer, Richard Rappaport, Robert Pearson and Al Jinnah.
A major portion of the proceeds from the convertible notes were used to complete the acquisition of two Vocational Training Schools, Software Education of America, Inc. (SEA), and Global Computer systems, Inc. (Global). SEA and Global discontinued all operations in March 2005.
DLI entered into an agreement to acquire SEA on January 13, 2004. The transaction was subject to approval of the change-of-control of SEA from the California Bureau for Private Postsecondary Vocational Education ("BPPVE") and the Accrediting Commission of Career Schools and Colleges of Technology ("ACCSCT"). The BPPVE approval was received during the quarter ended June 30 and as of May 1, 2004, DLI assumed responsibility for the marketing and managing of SEA sales and providing working capital. DLI advanced funding to SEA pending final closing of the transaction which occurred on July 1, 2004 after receipt of the formal approval from ACCSCT on July 1, 2004. Effective July 1, 2004 SEA became a wholly-owned subsidiary of DLI
We entered into an agreement to acquire Global on April 30, 2004. The transaction was subject to approval of the change-of-control of Global from the BPPVE. As of September 1, 2004, DLI assumed responsibility for the marketing and managing of Global sales and providing working capital. DLI advanced funding to Global pending final closing of the transaction, which occurred on November 15, 2004.
On February 27, 2004, we raised a total of $3,000,000 from three investors in an offering of 7% convertible debenture notes through a private placement. The terms of the debentures are for a period of 7 years. Interest accrues at 7% per annum and is due and payable monthly beginning April 1, 2004. The debentures mature on February 27, 2011, at which time all remaining unpaid principal and interest will be payable in full. If the debentures are not sooner redeemed or converted as provided in the loan, commencing February 27, 2007 and continuing on the first day of each successive month prior to maturity, we will pay to the lenders monthly principal installments of $10 per $1,000 of the then remaining principal balance. These debentures are convertible, at the holder’s option, into common stock at a rate of $0.4478 per share, entitling the holders to 6,699,833 shares of our common stock.
On March 19, 2004, we effectuated our name change from FreePCSQuote.Com, Inc. to Digital Learning Management Corporation and a 7.8680269:1 forward split of our Common Stock. In connection with the name change, our trading symbol on the Over-the-Counter Bulletin Board (the “OTCBB”) changed from “FPQT” to “DGTL.”
In April 2004, the Company changed from Nevada to Delaware as its place of incorporation.
On February 22, 2005 the Company was served with notice of default under its $3.0 million convertible notes.
On February 22, 2005 Robert Pearson resigned as a director. On February 28, 2005, Richard Rappaport resigned as a director.
On March 16, 2005, we decided to discontinue operations at our vocational schools and our acquisition strategy of accredited vocational schools and campuses. In connection with this change in business strategy, we decided to close the operations of SEA and Global.
In April 2005, the principal shareholders have loaned the Company $264,000 to keep the Company operating.
Business and Operations
After the merger with FreePCSQuote.Com, we operated as a for-profit continued education company that leveraged existing schools and university accreditations (course credits), and campuses to provide vocational training and education. We had enrolled active students though several different vocational schools, colleges and universities. Our strategy was to grow our enrollment base under our existing course offerings and to reduce the cost of learning through implementing our proprietary Learning Management Software which we branded under the name ‘CourseMate’.
We were also looking to increase our enrollment base, add to our curriculum offerings and supplement our accreditations offerings through additional acquisitions of small vocational schools. The acquisitions were based on our belief that the company would have more breadth in course offerings through the school’s accreditations and business class offerings while using its scaleable education software application to conduct courses over the Internet.
In March 2005 the Company closed its vocational schools and stopped offering In-Class vocational training. We are now a provider of enterprise e-learning solutions and related services to the education industry, government agencies and corporate clients. Our patented Virtual University Appliance (“VU Appliance”) is a state-of-the-art hardware and software package which incorporates our CourseMate Virtual University System.
The VU Appliance product, which was introduced by the Company in October 2004, is a pre-packaged and “turn-key” hardware and software solution designed to address the e-Learning needs of corporations and educational institutions. It is a comprehensive "out-of-the-box" virtual learning solution that allows customers to quickly create 100% web-based virtual learning environments. The platform allows customers to create, publish and deliver courseware for e-Learning in addition to managing their traditional classroom learning environment. The Company utilizes its acquired United States Patent (Provisional) in its VU Appliance. The Company believes its success in the future lies in successfully marketing, selling and improving its VU Appliance product and related services. The Company intends to remain focused on further developing and adding to its intellectual property assets, utilizing its expertise to help the online learning initiatives of its customers with e-Learning systems solutions.
The VU Appliance is feature-rich and allows corporations, educational institutions and industry associations to create web-based virtual e-learning environments very quickly and inexpensively. The appliance is a standard rack mounted device and comes pre-configured with the following software:
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Course
Builder - a software for creating/aggregating content for
courses
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Courseware
Repository - for storing all the courses and tracking their
usage
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Learning
Management and Registration System (LMS) - for registering and tracking
Online as well as traditional in-class and web-cast
students
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Online
Exams Server - for creating comprehensive Exams, Quizzes and
exercises
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Online
Evaluations Server - for Students Evaluations, Instructor Evaluations,
and
other progress/quality tracking features
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Collaboration
Server for Online Discussion Forums & Chat Sessions
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Online
Marketing Server - for promoting new courses and recruiting
Instructor/Mentors
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It
has also e-commerce functionality built-in, so students can pay on-line
using their credit card and take a self study course at their own
space.
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The Appliance solution can accept content created in multiple formats and presents that content over the Internet or Intranet. All interaction and administration is performed with a web browser. The appliance can be placed at the client’s locations behind the fire wall or housed and managed at any remote hosting location. Our clients can use our hard-software solution to integrate technology into the education experience and campus life as well as in government and corporate training environments. Our products support activities such as professor or trainer assigned digital material on class or a corporate website, student collaboration with peers or complete research online; an administrator managing a departmental website; or a merchant conducting cash-free transactions with students or employees and faculty through pre-funded debit accounts. Our target clients include government agencies, colleges, universities, vocation schools, other education providers and corporations, as well as textbook publishers and education-focused merchants who serve these education providers and training entities.
We expect to generate revenues from sales of our VU Appliance product, licensing of the product and professional services such as hosting, customization, training, courseware development and third party course license fees. Our product revenues consist of bundled hard-software product sales, annual licensing fees, client hosting engagement. We typically sell our licenses and hosting services under annually renewable agreements, and our clients generally pay the annual fees in the beginning of the annual contract term.. Billing from these revenues are recognized as deferred revenues and are then recognized ratably into revenue over the contract term. Our product sale revenues are recognized upon the shipment of the product to our customers.
We derive professional services revenues primarily from training, implementation, installation and other consulting services. All our professional services revenues are on time and material and are recognized as the services are performed.
Competition
The market for e-Learning systems is very competitive and there are several products in the market from large and well capitalized companies such as SumTotal™, eCollege™, Blackboard™ and WebCT™ and several others. These companies have far greater resources than us and therefore can make our entry in the e-Learning systems marketplace difficult. With this in mind, there can be no assurance that we will succeed in our business objectives.
Patents
We have obtained a United States Provisional Patent on our Virtual University Appliance product. The preliminary patent was granted on December 12, 2004. The patent is for a hardware and software combination designed to make e-Learning easier to implement. We have capitalized the cost of the development of this product at $360,000 for the past two years. We believe our patent is designed to bring simplicity to complexity and make e-learning initiatives easier to implement by packaging and tying all e-learning components and their related processes together in our VU Appliance.
Growth Strategy
We seek to capitalize on our position as a low-cost provider in our market to grow our business by supporting several significant aspects of education, including on-line teaching, on-line learning, commerce and faculty and student affairs. Key elements of our growth strategy include:
Increasing penetration of the U.S. postsecondary education and Corporate market. As of December 31, 2004, we have packaged our suite of e-Learning products as a ‘turn-key’ appliance targeted towards mid-sized and smaller postsecondary institutions and corporate accounts. We intend to capitalize on our ability to rapidly deliver a fully functional e-Learning platform for under $30,000.
Growing annual hosting revenues. We intend to increase annual hosting revenues with clients by selling new hosting contracts and upgrading existing contracts, cross-selling complementary applications and focusing on client satisfaction.
Offering new products to our target markets. Using feedback gathered from our clients and our sales and technical support groups, we intend to continue to develop and offer new upgrades, applications and application suites to increase our presence on campuses and expand the value provided to our clients.
Increasing sales to international postsecondary education institutions and Corporations. We intend to continue to expand sales and marketing efforts to increase sales of our applications to international postsecondary education institutions as well as Corporations.
Pursuing strategic relationships and acquisition opportunities. We intend to continue to pursue strategic relationships with, acquisitions of, and investments in, companies that enhance the technological features of our products, offer complementary products, services and technologies, or broaden the scope of our product offerings into other areas.
Industry Overview
We believe that the global education industry is large, complex and changing rapidly, due in part to the accelerating adoption of information technology. According to the U.S. Department of Education, overall annual spending on education in the United States, including postsecondary and K-12 education, was $745 billion in the 2001-2002 school year. In addition, Gartner, Inc., an independent market research firm, estimates that worldwide spending on hardware, internal services, information technology services and software in the education industry was $34.0 billion in 2003.
Colleges, universities, schools, government agencies and other education providers in the United States and many other countries are under increasing pressure to accommodate the rising number of students and working adults seeking education and to provide more flexible and efficient methods of delivering education services. In response, we believe that many institutions are seeking to utilize technology and Internet-based applications to improve learning, flexibility and their overall competitiveness in attracting and serving technology-oriented students. One such application is online distance learning. Eduventures, Inc., an education consulting and research firm, estimates that 350,000 students, or slightly less than 2% of the total postsecondary student population, were enrolled in online distance learning programs in 2002 and that this market will grow from $2.5 billion in the 2002-2003 school year to more than $4.2 billion in the 2004-2005 school year, representing a compound annual growth rate of 31%.
Employees and Labor Relations
We currently have two full-time employees and three contract employees with whom our labor relations are good.
Legislative Actions and Potential New Accounting Pronouncements
In order to comply with the newly adopted Sarbanes-Oxley Act of 2002 and proposed accounting changes by the Securities and Exchange Commission, we may be required to increase our internal controls, hire additional personnel and additional outside legal, accounting and advisory services, all of which could cause our general and administrative costs to increase. Proposed changes in the accounting rules, including legislative and other proposals to account for employee stock options as compensation expense among others, could increase the expenses that we report under Generally Accepted Accounting Principles and could adversely affect operating results.
RISK FACTORS
You should carefully consider the risks described below before making an investment decision. Investing in our common stock involves a high degree of risk. Any of the following factors could harm our business and future results of operation. As a result, the trading price of our common stock could decline and result in a partial or complete loss of your investment.
Risks Related to Our Business
We have only had a few profitable quarters and may never achieve sustained profitability.
Although we were profitable in 2003 on a net income basis, we have not been profitable in 2004 and 2005, and may not be profitable in future periods, either on a short- or long-term basis. Our profitability was not attributed to any sales of our products. We incurred a net loss of ($3,121,551) for the year ended December 31, 2005. As of December 31, 2005, we had an accumulated deficit of $9,105,814. We can give you no assurance that operating losses will not recur in the future or that we will ever sustain profitability on a quarterly or annual basis. These conditions raise substantial doubt as to our ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Providing enterprise software applications to the education industry is an emerging and uncertain business; if the market for our products fails to develop, we will not be able to grow our business.
Our success will depend on our ability to raise new capital and generate revenues by providing enterprise software applications and services to colleges, universities, schools, government agencies and other education providers. This market has only recently developed and the viability and profitability of this market is unproven. Our ability to grow our business will be compromised if we do not develop and market products and services that achieve broad market acceptance with our current and potential clients and their students and employees. The use of online education, transactional or content management software applications and services in the education industry may not become widespread and our products and services may not achieve commercial success. Even if potential clients decide to implement products of this type, they may still choose to design, develop or manage all or a part of their system internally.
Given our clients’ relatively early adoption of enterprise software applications aimed at the education industry, they are likely to be less risk-averse than most colleges, universities, schools, government agencies and other education providers. Accordingly, the rate at which we have been able to establish relationships with our clients in the past may not be indicative of the rate at which we will be able to establish additional client relationships in the future.
Our clients use our products to facilitate online education, which is a relatively new field; if online education does not continue to develop and gain acceptance, demand for our products could suffer.
Our success will depend in part upon the continued adoption by our clients and potential clients of online education initiatives. Some academics and educators are opposed to online education in principle and have expressed concerns regarding the perceived loss of control over the education process that can result from offering courses online. Some of these critics, particularly college and university professors, have the capacity to influence the market for online education, and their opposition could reduce the demand for our products and services. In addition, the growth and development of the market for online education may prompt some members of the academic community to advocate more stringent protection of intellectual property associated with course content, which may impose additional burdens on clients and potential clients offering online education. This could require us to modify our products, or could cause these clients and potential clients to abandon their online education initiatives.
Our level of fixed expenses may cause us to incur operating losses if we are unsuccessful in achieving revenue growth.
Our expense levels are based, in significant part, on our estimates of future revenues and are largely fixed in the short term. As a result, we may be unable to adjust our spending in a timely manner if our revenues fall short of our expectations. Accordingly, any significant shortfall of revenues in relation to our expectations would have an immediate and material effect on our results of operations. In addition, as our business grows, we anticipate increasing our operating expenses to expand our product development, technical support, sales and marketing and administrative organizations. Any such expansion could cause material losses to the extent we do not generate additional revenues sufficient to cover the additional expenses.
Because most of our hosting and support services are renewable on an annual basis, a reduction in our license renewal rate could significantly reduce our revenues.
Our clients have no obligation to renew their hosting or support contracts for our products after the expiration of the initial license period, which is typically one year, and some clients have elected not to do so. A decline in license renewal rates could cause our revenues to decline. Although we have experienced favorable license renewal rates in recent periods, we have limited historical data with respect to rates of renewals, so we cannot accurately predict future renewal rates. Our license renewal rates may decline or fluctuate as a result of a number of factors, including client dissatisfaction with our products and services, our failure to update our products to maintain their attractiveness in the market or budgetary constraints or changes in budget priorities faced by our clients.
If our products and services do not gain widespread market acceptance, our financial results could suffer.
We introduced our newest software application suite as an ‘Appliance’ called the “Virtual University Appliance” in October 2004. Our ability to grow our business will depend, on client acceptance of this product, which is currently unproven. If we are not successful in gaining widespread market acceptance of this product, our revenues may fall below our expectations, which could cause our stock price to decline.
Because we generally recognize certain types of revenues which are ratably over the term of our contract with a client, downturns or upturns in sales will not be fully reflected in our operating results until future periods.
We recognize most of our hosting and support revenues from clients monthly over the terms of their agreements, which are typically 12 months, although terms can range from one month to 48 months. As a result, much of the revenue we report in each quarter is attributable to agreements entered into during previous quarters. Consequently, a decline in sales, client renewals, or market acceptance of our products in any one quarter will not necessarily be fully reflected in the revenues in that quarter, and will negatively affect our revenues and profitability in future quarters. This ratable revenue recognition also makes it difficult for us to rapidly increase our revenues through additional sales in any period, as revenues from new clients must be recognized over the applicable agreement term.
Our operating margins may suffer if our professional services revenues increase in proportion to total revenues because our professional services revenues have lower gross margins.
Because our professional services revenues typically have lower gross margins than our product revenues, an increase in the percentage of total revenues represented by professional services revenues could have a detrimental impact on our overall gross margins, and could adversely affect our operating results. In addition, we sometimes subcontract professional services to third parties, which further reduce our gross margins on these professional services. As a result, an increase in the percentage of professional services provided by third-party consultants could lower our overall gross margins.
If our products contain errors or if new product releases are delayed, we could lose new sales and be subject to significant liability claims.
Because our systems and software products are complex, they may contain undetected errors or defects, known as bugs. Bugs can be detected at any point in a product’s life cycle, but are more common when a new product is introduced or when new versions are released. In the past, we have encountered product development delays and defects in our products. We would expect that, despite our testing, errors will be found in new products and product enhancements in the future. Significant errors in our products could lead to delay in sales and subject us to some liability claims.
Our success depends in part on our ability to expand the content of our existing programs and develop new programs in a cost-effective manner and on a timely basis.
Our success depends in part on our ability to expand the content of our programs, develop new programs in a cost-effective manner, and meet our customer’s needs in a timely manner. The expansion of our existing programs and the development of new programs may not be accepted by our customers or the online education market. Even if we are able to develop acceptable new programs, we may not be able to introduce these new programs as quickly as our customers require or as quickly as our competitors.
Failure to adequately respond to changes in market need and technologies could have a material adverse effect on our business and results of operations.
Many of our customers must keep pace with such shifting technological requirements and our inability to adequately respond to such needs in market requirements because of financial constraints, technological change or other factors could have a material adverse effect on our business and results of operations.
Capacity constraints or system disruptions to our computer networks could damage our reputation and limit our ability to attract and retain students.
The performance and reliability of our program infrastructure is critical to our reputation and our ability to attract and retain customers. Any system error or failure, or a sudden and significant increase in traffic, may result in the unavailability of our computer networks. We have experienced system failures due to both software defects and operational errors. Most failures resulted in brief periods of slow performance rather than interruptions in service. Individual, sustained, or repeated occurrences could significantly damage our reputation and result in a loss of potential or existing customers. We cannot assure anyone that we will be able to expand our program infrastructure on a timely basis sufficient to meet demand for our programs.
Our computer systems and operations are vulnerable to interruption or malfunction due to events beyond our control, including natural disasters and telecommunications failures. We presently have a limited amount of redundant facilities, and our formal disaster recovery plan has never been tested. Any interruption to our computer systems or operations could have a material adverse effect on our ability to attract and retain students.
Our computer networks may be vulnerable to security risks that could disrupt operations and require us to expend significant resources.
Our computer networks may be vulnerable to unauthorized access, computer hackers, computer viruses, and other security problems. A user who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in operations. Due to the sensitive nature of the information contained on our networks, such as students’ grades, our networks may be targeted by hackers. As a result, we may be required to expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these breaches.
We cannot predict our future capital needs, and may not be able to secure additional financing.
We will likely need to raise additional funds in the future to fund our operations, to expand our markets and product offerings, or to respond to competitive pressures or perceived opportunities. We cannot assure that additional financing will be available on favorable terms, or at all. If adequate funds are not available when required or on acceptable terms, we may be forced to cease our operations, and even if we are able to continue operations, our ability to increase revenues may be adversely affected.
We depend on the continued services of our executive officers and the loss of a key executive could severely impact our operations.
The execution of our present business plan depends on the continued services of Umesh Patel. While we have an employment agreement with him, the loss of his services would be detrimental to us and could have a material adverse effect on our business, financial condition and results of operations.
Our future success depends in part upon our ability to recruit and retain key personnel.
Our success to date has been, and our continuing success will be, substantially dependent on the continued services of our executive officers and other key personnel, who generally have extensive experience in the industry and have been employed by us for substantial periods of time. If we ceased to employ any of these integral personnel and failed to manage a smooth transition to new personnel, our business could suffer.
Our success also depends, in large part, upon our ability to attract and retain highly qualified marketing personnel. Due to the nature of our business, we may have difficulty locating and hiring qualified personnel to fill open positions, and retaining such personnel once hired. The loss of the services of any key employees, or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could have an adverse effect on our business and results of operations.
Our business is subject to seasonal fluctuations, which may cause our operating results to fluctuate from quarter to quarter. This fluctuation may result in volatility or have an adverse effect on the market price of our Common Stock.
We experience, and expect to continue to experience, seasonal fluctuations in our revenue because the bulk of our customers tailor their purchase of our products to student enrollment and these enrollments decrease during the summer months. These seasonal fluctuations can effect in our operating results which could result in volatility or have an adverse effect on the market price of our Common Stock. In addition, as our revenues continue to grow, these seasonal fluctuations may become more evident.
Our future success depends substantially on our ability to successfully sell and deliver our Virtual University Appliance product.
We have invested substantial human and capital resources in the development of our proprietary Virtual University Appliance product. We can provide no assurance that this product will be well received by our target market. If the product is not well received, our operating results will be adversely affected.
We may fail to protect adequately our proprietary technology, which would allow competitors to take advantage of our efforts.
We rely upon proprietary know-how and continuing technological innovation to remain competitive. We protect this information with reasonable security measures, including the use of confidentiality agreements with our consultants and corporate collaborators. It is possible that these individuals will breach these agreements and that any remedies for a breach will be insufficient to allow us to recover our costs. Furthermore, our know-how and other technology may otherwise become known or be independently discovered by our competitors.
Our products and services could infringe on the intellectual property rights of others, which may cause us to engage in costly litigation and, if is not successful, could cause us to pay substantial damages and prohibit us from selling our products or servicing our clients.
We cannot be certain that our technology and other intellectual property do not infringe upon the intellectual property rights of others. Authorship and priority of intellectual property rights may be difficult to verify. We may be subject to legal proceedings and claims from time to time in the ordinary course of our business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties.
If our products violate third-party proprietary rights, we cannot assure you that we would be able to arrange licensing agreements or other satisfactory resolutions on commercially reasonable terms, if at all. Any claims made against us relating to the infringement of third-party propriety rights could result in the expenditure of significant financial and managerial resources and injunctions preventing us from providing services. Such claims could severely harm our financial condition and ability to compete.
If we fail to maintain effective internal controls over financial reporting, the price of our Common Stock may be adversely affected.
Our internal controls over financial reporting may have weaknesses and conditions that need to be addressed, the disclosure of which may have an adverse impact on the price of our Common Stock. We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or operating results. In addition, management’s assessment of our internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal controls over financial reporting, disclosure of management’s assessment of our internal controls over financial reporting or disclosure of our public accounting firm’s attestation to or report on management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our Common Stock.
Our business is subject to reporting requirements that are currently evolving and, once established could substantially increase our operating expenses and divert management's attention from the operation of our business.
Because our Common Stock is publicly traded, we are subject to a variety of rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Securities and Exchange Commission, the Public Company Accounting Oversight Board and the OTC Bulletin Board, have recently issued new requirements and regulations and are currently developing additional regulations and requirements in response to recent laws enacted by Congress, most notably the Sarbanes-Oxley Act of 2002. As certain rules are not yet finalized, we do not know the level of resources we will have to commit in order to be in compliance. Our compliance with current and proposed rules is likely to require the commitment of significant financial and managerial resources. As a result, our management's attention might be diverted from other business concerns, which could negatively affect our business.
Risks Related To Our Industry
The market for online learning may not continue to develop.
The use of online education and training may not increase as anticipated and our programs may not be accepted by working adult students. Also, some educators are opposed to online education and have the capacity to negatively influence the market for our programs. Some critics have also expressed concerns regarding the perceived loss of control over the educational process that can result from the outsourcing of online campuses and courses. We may be unable to continue to increase the number of students and revenues if the higher education and training market does not more generally accept online learning.
We operate in a highly competitive market with rapid technology changes and we may not have the resources needed to compete successfully.
Online education is a highly fragmented and competitive market that is subject to rapid technological change. Competitors vary in size and organization from traditional colleges and universities, many of which have some form of online education programs, to for-profit schools, corporate universities, and software companies providing online education and training software. We expect the online education and training market to be subject to rapid changes in technologies. We may not have the resources necessary to compete with the rapidly changing technologies being developed by our competitors and our success will depend on our ability to adapt to these changing technologies.
Competitors may harm our business by operating more effectively or more efficiently in its market.
The postsecondary education market is highly competitive. Our schools compete with traditional public and private two-year and four-year colleges and universities and other for-profit schools, including those that offer distance-learning programs. Certain public and private colleges and universities may offer programs similar to those offered by us. Public institutions are often able to charge lower tuition, due in part to government subsidies, government and foundation grants, tax-deductible contributions and other financial resources not available to for-profit schools like those operated by us. Some of our competitors, in both the public and private sectors, have substantially greater financial and other resources, which may allow them to have greater success in the market.
Changes in the extensive regulations to which we are subject could increase our cost of doing business or affect our ability to grow.
State regulations for distance education are currently uncertain and may require us to expend significant resources and significantly limit our ability to expand our business.
State regulations for distance education providers are uncertain. We may have to devote significant time and financial resources in order to comply with various state laws and regulations if states determine to regulate online education. We may not have sufficient resources to comply with any new laws and regulations that may be enacted, which could preclude us from operating in one or more states and could significantly limit the ability to expand our business. Schools would not buy our VUS if state or federal governmental agencies restrict them from enrolling students for online education.
Risks Related To Our Capital Structure
There is no assurance of an established public trading market.
Although our Common Stock trades on the OTCBB a regular trading market for the securities may not be sustained in the future. The NASD has enacted recent changes that limit quotations on the OTCBB to securities of issuers that are current in their reports filed with the Securities and Exchange Commission. The effect on the OTCBB of these rule changes and other proposed changes cannot be determined at this time. The OTCBB is an inter-dealer, Over-The-Counter market that provides significantly less liquidity than the NASD’s automated quotation system (the “NASDAQ Stock Market”). Quotes for stocks included on the OTCBB are not listed in the financial sections of newspapers as are those for the NASDAQ Stock Market. Therefore, prices for securities traded solely on the OTC Bulletin Board may be difficult to obtain and holders of common stock may be unable to resell their securities at or near their original offering price or at any price. Market prices for our Common Stock will be influenced by a number of factors, including:
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the
issuance of new equity securities;
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changes
in interest rates;
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competitive
developments, including announcements by competitors of new products
or
services or significant contracts, acquisitions, strategic partnerships,
joint ventures or capital commitments;
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variations
in quarterly operating results;
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change
in financial estimates by securities analysts;
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the
depth and liquidity of the market for our Common Stock;
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investor
perceptions of our company and the technologies industries generally;
and
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general
economic and other national
conditions.
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Our stock price is volatile and could decline in the future.
The price of our Common Stock has been volatile in the past and will likely continue to fluctuate in the future. We believe that a number of factors, both within and outside our control, could cause the price of our Common Stock to fluctuate, perhaps substantially. Factors such as the following could have a significant adverse impact on the market price of our Common Stock:
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our
ability to obtain additional financing and, if available, the terms
and
conditions of the financing;
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our
financial position and results of operations;
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developments
with our collaborators, if any;
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developments
concerning our intellectual property rights or those of our competitors
(including litigation);
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status
of litigation, if any;
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period-to-period
fluctuations in our operating results;
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changes
in estimates of our performance by any securities
analysts;
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new
regulatory requirements and changes in the existing regulatory
environment; and
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market
conditions for education stocks in
general.
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Penny stock regulations may impose certain restrictions on the marketability of our securities.
Our Common Stock is considered to be a “penny stock”. The Securities and Exchange Commission (the “Commission”) has adopted regulations which generally define a “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. As a result, our Common Stock is subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the Commission relating to the penny stock market. The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative, current quotations for the securities ad, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell our securities and may affect the ability of investors to sell our securities in the secondary market and the price at which such purchasers can sell any such securities.
Stockholders should be aware that, according to the Securities and Exchange Commission, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:
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control
of the market for the security by one or a few broker-dealers that
are
often related to the promoter or issuer;
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manipulation
of prices through prearranged matching of purchases and sales and
false
and misleading press releases;
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“boiler
room” practices involving high pressure sales tactics and unrealistic
price projections by inexperienced sales persons;
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excessive
and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
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the
wholesale dumping of the same securities by promoters and broker-dealers
after prices have been manipulated to a desired level, along with
the
inevitable collapse of those with consequent investor
losses.
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Broker-dealer requirements may affect trading and liquidity.
Section 15(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 15g-2 promulgated thereunder by the SEC require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account.
Potential investors in our Common Stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be “penny stock.” Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transaction in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for holders of our Common Stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.
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