NEWH NewHydrogen Inc (PK)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x   QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

OR

o   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   000-17840

NEW HORIZONS WORLDWIDE, INC.

(Exact name of registrant as specified in its charter)

One W. Elm Street, Suite 125, Conshohocken, PA 19428

(Address of principal executive offices)

(484) 567-3000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or for such shorter period that the registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days.

Yes    x       No    o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes    o       No    x

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

Number of shares of common stock outstanding at August 6, 2008: 11,260,269

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NEW HORIZONS WORLDWIDE, INC.

INDEX TO QUARTERLY REPORT

ON FORM 10-Q

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Information About Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements”, within the meaning of the Private Securities Reform Act of 1995, which involve risks and uncertainties.  Any statements about expectations, beliefs, plans, objectives, assumptions, future events or performance are not historical facts and are forward-looking statements.  These statements are often, but not always, preceded by words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “will continue,” “anticipate,” “estimate,” “intend,” “plan,” “projection,” “would,” “outlook” and other similar expressions.  The forward-looking statements in this report are based upon beliefs, assumptions and expectations of the Company’s management as to the Company’s future operations and economic performance, taking into account the information currently available. Forward-looking statements in this report include but are not limited to:

·                   the Company’s opinion regarding various franchising and legal actions;

·                   the Company’s critical accounting policies and management’s estimates; and

·                   the Company’s reporting of changes in internal control over financial reporting.

The Company’s results may differ significantly from the results discussed in the forward-looking statements.  Readers should not place undue reliance on these forward-looking statements.  Further, any forward-looking statement speaks only as of the date on which it is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.  Forward-looking statements involve certain factors, including risks and uncertainties that may cause actual results to differ materially from those contained in any forward-looking statements.  These factors include but are not limited to other risks and uncertainties as discussed under the heading Item 1A, “Risk Factors,” contained within our Annual Report on Form 10-K for the year ended December 31, 2007 and other risks and uncertainties detailed from time to time in our public announcements and SEC filings.

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PART I.   FINANCIAL INFORMATION

ITEM 1.      FINANCIAL STATEMENTS

NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

See accompanying notes to interim consolidated financial statements.

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NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Dollars in thousands, except per share data)

(UNAUDITED)

See accompanying notes to interim consolidated financial statements.

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NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollars in thousands)

(UNAUDITED)

See accompanying notes to interim consolidated financial statements.

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NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2008 and June 30, 2007

(Dollars in thousands, except per share data)

(UNAUDITED)

1.              Description of Business

New Horizons Worldwide, Inc. (“New Horizons” or the “Company”) franchises and owns computer-training centers. The Company has two reporting units: franchising operations and Company-owned training centers, both of which operate principally within the information technology (“IT”) training industry.  The franchising operations reporting unit earns revenue through the sale of New Horizons master and unit franchises within the continental United States and internationally, on-going royalties received in return for providing franchises with systems of instruction, sales and management concepts concerning computer training and the sale of courseware materials and e-learning products.  The Company-owned training centers reporting unit generates revenue through the sale and delivery of training for personal computing (“PC”) applications, technical software, business skills and healthcare information management.

2.             Basis of Presentation

Unaudited Interim Consolidated Financial Statements

The accompanying interim consolidated financial statements for the three and six months ended June 30, 2008 and 2007 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. These interim consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the consolidated balance sheets, consolidated operating results, and consolidated cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008 or for any other interim period during such year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 (the “2007 Form 10-K”). Amounts related to disclosure of December 31, 2007 balances within these interim consolidated financial statements were derived from the audited 2007 consolidated financial statements and notes thereto included in the 2007 Form 10-K, which was filed with the SEC on March 28, 2008.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and such differences could be material to the consolidated financial statements. The Company believes its estimates related to revenue recognition and deferral, allowance for doubtful accounts and valuation of deferred tax assets to be the most sensitive estimates impacting financial position and results of operations.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

3.              Stock-Based Compensation

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payments” (“SFAS 123R”), using the modified prospective application transition method. The modified prospective application transition method requires compensation cost to be recognized beginning on the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123R for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date. All Company option awards granted prior to January 1, 2006 are fully vested.

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In calculating the compensation expense related to stock options, the weighted average fair value of each employee option grant was estimated on the date of the grant using the Black-Scholes-Merton option pricing model with the following weighted-average assumptions used for grants during the six months ended June 30, 2008 and 2007:

The compensation expense related to the restricted common stock was calculated based on the market price of the Company’s common stock on the grant date of the restricted shares.

During the three and six months ended June 30, 2008, the Company recognized approximately $84 and $148, respectively, of share-based compensation expense. This compensation expense consisted of $77 for vested stock options and $7 for unvested restricted common stock for the three months ended June 30, 2008. For the six months ended June 30, 2008, compensation expense consisted of $134 for vested stock options and $14 for unvested restricted common stock. During the three and six months ended June 30, 2007, the Company recognized approximately $30 and $41, respectively, of share-based compensation expense for vested stock options. Unrecognized compensation expense for stock options and restricted common stock granted was as follows:

During the six months ended June 30, 2008, no stock options were exercised.

The Company has a net operating loss carry-forward as of June 30, 2008, and no tax benefit is generated from the stock-based awards and therefore no tax deduction is recognized in the Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007. Additionally, no incremental tax benefits were recognized from stock options exercised in 2007 that would have resulted in a reclassification to reduce net cash provided by operating activities with an offsetting increase in net cash provided by financing activities.

The Company provides for the grant of stock options and the award of restricted common stock to key employees and non-employee directors under its 2007 Omnibus Equity Plan.  The Company will not grant any further stock options under its 1997 Omnibus Equity Plan as the period to grant stock options under this plan expired on March 20, 2008.  A summary of award activity is described in further detail below.

Stock Options

A summary of stock option activity as of June 30, 2008 and changes during the six months then ended is presented as follows:

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Restricted Stock Awards

A summary of restricted stock award activity as of June 30, 2008 and changes during the six months then ended is presented as follows:

On August 24, 2007, the Company granted a total of 340,000 shares of restricted common stock to its CEO and three of its senior management employees. Under the terms of these Restricted Stock Agreements, since the Company exceeded an Adjusted EBITDA (as defined in the Restricted Stock Agreements) of $3,357 for the consecutive twelve month period ending December 31, 2007, 170,000 shares of the restricted shares vested. If the Company reaches its performance target of $7,565 in Adjusted EBITDA for the consecutive twelve month period ending December 31, 2008, an additional 170,000 shares of the restricted shares will vest. Unvested shares will be held by the Company in escrow and the individuals will be entitled to vote and receive dividends on such escrowed shares.

As of June 30, 2008, 170,000 of these restricted shares had vested.  The Company recognized $262 of compensation expense in the Company’s consolidated financial statements for the year ended December 31, 2007.  As of the six months ended June 30, 2008, no compensation expense for the remaining 170,000 restricted shares outstanding has been recognized.

In July 2006, the Company granted 350,000 shares of restricted common stock to its CEO.  Under the terms of this Restricted Stock Agreement, if the Company reaches an Adjusted EBITDA (as defined in this Restricted Stock Agreement) of (i) $5,000 in any consecutive twelve month period ending on or before June 30, 2009, or (ii) $1,250 during the three months ending June 30, 2009, 175,000 of the restricted shares will vest. If the Company reaches its performance target of $7,000 in Adjusted EBITDA during any consecutive twelve month period ending on or before June 30, 2011, an additional 175,000 shares of the Restricted Shares will vest. Unvested shares will be held by the Company in escrow, and the CEO will be entitled to vote and receive dividends on such escrowed shares.

As of June 30, 2008, 175,000 shares of the restricted stock had vested.  The Company recognized $140 of compensation expense in the Company’s consolidated financial statements for the year ended December 31, 2007 related to the vesting shares.  As of the six months ended June 30, 2008, the Company recognized $14 of compensation expense for the remaining 175,000 restricted shares outstanding.

4.             Business Segment Information

In accordance with SFAS 131, “ Disclosures about Segments of an Enterprise and Related Information” , the Company’s business units have been segregated into two reportable segments, franchising and Company-owned locations.  The two segments are managed separately due to differences in their sources of revenues and services offered.  The franchising segment earns revenue through the sale of New Horizons master and unit franchises within the continental United States and internationally, on-going royalties received in return for providing franchises with systems of instruction, sales and management concepts concerning computer training and the sale of courseware materials and e-learning products.  At June 30, 2008, the Company-owned locations segment operates wholly-owned computer training centers in two metropolitan areas (three metropolitan areas at June 30, 2007) within the continental United States and generates revenue through the sale and delivery of training for PC applications and technical software training courses and business skills courses.

Summarized financial information concerning the Company’s reportable segments is shown in the following tables:

For the three months ended June 30, 2008:

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For the three months ended June 30, 2007:

For the six months ended June 30, 2008:

For the six months ended June 30, 2007:

5.             Earnings Per Share

Earnings per share is computed in accordance with SFAS No. 128, “Earnings per Share.” Basic earnings per common share (“Basic EPS”) is computed by dividing net income attributable to common shareholders by the weighted average number of common shares

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outstanding during the period. Shares issued and shares reacquired during the period are weighted for the portion of the period they were outstanding.

Diluted earnings per common share (“Diluted EPS”) is computed similarly to Basic EPS except that the weighted average number of shares outstanding is increased to include the number of additional shares of common stock that would have been outstanding if potentially dilutive shares had been issued. The Company’s potentially dilutive common shares consist of shares issuable upon the conversion of the Company’s convertible preferred stock, the exercise of unexercised stock options and warrants, and the achievement of targets related to vesting of restricted stock.

The following data show the amounts used in computing the income per share and the effect on income and the weighted average number of shares of common stock for the three and six months ended June 30, 2008 and 2007:

The computation of Diluted EPS does not assume conversion, exercise or contingent issuance of securities that may have an anti-dilutive effect on earnings per share. Convertible preferred stock, stock options, warrants and restricted stock that have not been included in the diluted income per share computation totaled 634,666 and 1,442,666 shares of common stock for the three and six months ended June 30, 2008, respectively.  Convertible preferred stock, stock options, warrants and restricted stock that have not been included in the diluted income per share computation totaled 3,648,193 and 3,707,326 shares of common stock for the three and six months ended June 30, 2007, respectively.

6.             Debt

On July 3, 2007, the Company entered into Amendment No. 1 to its existing Credit Agreement (the “Credit Amendment”). The Credit Amendment has revised definitions for certain terms, amends and restates certain sections, and required the Company to file preliminary proxy materials concerning a meeting of the Company’s shareholders with the Securities and Exchange Commission, which materials were filed on October 5, 2007 and which meeting was held on November 6, 2007.

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The Credit Amendment provides for a $4,000 term loan, comprised of a single advance from each of the lenders party thereto, which matures on July 19, 2009. Under the terms of the Credit Amendment, interest is paid quarterly, at the annual rate of 10% per year. In the event that any payment is not made when due, all outstanding obligations under the Credit Amendment will accrue interest at the default rate equal to 12% per year. Accrued and unpaid interest on past due amounts will compound monthly. The indebtedness may be required to be prepaid in the event of certain receipts by the Company. No prepayment shall be required upon the disposition of any location owned by the Company. All or any portion of the outstanding principal may be prepaid in whole or in part subject to restrictions.

7.             Other Current Liabilities

Other current liabilities consist of:

8.             Provision for Income Taxes

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109” (“FIN 48”).  FIN 48 establishes a single model to address accounting for uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Utilization of the net operating losses (“NOL”) carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), and similar state and foreign provisions. These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the market value of a company by certain stockholders or public groups. Since the Company’s formation, the Company has raised capital through the issuance of preferred stock on several occasions which has resulted in such an ownership change.

Consequently, the Company’s utilization of the NOL carryforwards are subject to an annual limitation under Section 382 of the Code, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required.  Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact its effective tax rate.  Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance.

The Company adopted the provisions of FIN 48 on January 1, 2007.  Upon adoption, the Company recognized no adjustment in the amount of unrecognized tax benefits.  As of the date of adoption, the Company had no increase to the liability for unrecognized tax benefits. The Company’s policy is to recognize interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax expense.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions.  With few exceptions, the Company is no longer subject to U.S. federal income tax examinations for years before 2004; state and local income tax examinations before 2003; and foreign income tax examinations before 2002.  However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss carry-forward amount.

The Company is not currently under Internal Revenue Service, state, local or foreign jurisdiction tax examinations.

For the three and six months ended June 30, 2008, the Company recorded a provision for income taxes of $261 and $320, respectively, on pre-tax income of $1,383 and $2,802, respectively.  The tax provision is primarily comprised of taxes on state and foreign income and capital taxes, and is net of a $106 refund of prior year’s foreign source withholding taxes received in the first quarter of 2008.

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9.             Shareholders’ Equity

There were no changes in our capital structure (preferred stock or common stock) during the three or six months ended June 30, 2008.

On July 2, 2007, the Company completed a sale of Series C preferred stock and warrants to private investors, further discussion  is contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, which was filed with the SEC on March 28, 2008.

Dividends

The Company has not declared or paid any cash dividends on its common stock or on its Series B Preferred Stock and Series C Preferred Stock. At June 30, 2008, cumulative, undeclared and unaccrued dividends on the Series B Preferred Stock and Series C Preferred Stock totaled $1,025 and $160, respectively.  The dividends payable totaled $171 and $130 during the three months ended June 30, 2008 and 2007, respectively.  The dividends payable totaled $342 and $265 during the six months ended June 30, 2008 and 2007, respectively.

10.          Gain on Sale of Company-owned training centers

During 2007, the Company sold and re-franchised four of its Company-owned training centers in Chicago, Cleveland, Anaheim and New York pursuant to asset sale agreements under which the buyers collectively assumed net liabilities of $2,541. In addition, the buyers collectively paid $300 of franchise fees and prepaid $850 of royalties to be earned over the term of the franchise agreements. The Company determined that the sale of these centers did not meet all necessary criteria to be classified as discontinued operations within the Company’s consolidated financial statements at any time during the twelve months ended December 31, 2007. In addition, due to significant continuing involvement between the Company and these re-franchised centers, the Company deferred $1,269 of the gross gain on the sale of these centers. The deferred gain at the date of sale consisted of a discount to the buyer on royalty revenue over a defined term in each respective agreement. Subsequent to the sales, a portion of the deferred royalty revenue related to these four sales and sales made in prior years was earned and recognized totaling $979 through December 31, 2007.  The Company recognized an additional $54 and $194 of royalty revenues for the three and six months ended June 30, 2008, respectively.