================================================================================
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 SEPTEMBER 30, 2004
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 1-13725
-------------
ILINC COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0545043
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2999 NORTH 44TH STREET, SUITE 650, PHOENIX, ARIZONA 85018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(602) 952-1200
(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 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 ( )
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes ( ) No (X)
The number of shares of Common Stock of the Registrant, par value $.001
per share, outstanding at October 12, 2004 was 24,145,938, net of shares held in
treasury.
================================================================================
FORM 10-Q REPORT INDEX
PART I--FINANCIAL INFORMATION PAGE
----
Item 1--Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2004 and
March 31, 2004........................................................................ 4
Unaudited Condensed Consolidated Statements of Operations for the Three and Six
Months Ended September 30, 2004 and 2003.............................................. 5
Unaudited Condensed Consolidated Statement of Changes in Shareholders'
Equity for the six months ended September 30, 2004.................................... 6
Unaudited Condensed Consolidated Statements of Cash Flows for the Six
Months Ended September 30, 2004 and 2003.............................................. 7
Notes to Unaudited Condensed Consolidated Financial Statements........................ 8
Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................ 18
Item 3--Quantitative and Qualitative Disclosures about Market Risk............................ 32
Item 4--Controls and Procedures............................................................... 32
PART II--OTHER INFORMATION
Item 1--Legal Proceedings..................................................................... 33
Item 2--Change in Securities and Use of Proceeds.............................................. 33
Item 3--Defaults of Senior Securities......................................................... 33
Item 4--Submission of Matters to a Vote of Security Holders................................... 34
Item 5--Other Information..................................................................... 34
Item 6--Exhibits ............................................................................. 36
Signatures.................................................................................... 37
Certifications................................................................................ 38
2
Unless the context requires otherwise, references in this document to
"iLinc Communications," "iLinc" the "Company," "we," "us," and "our" refer to
iLinc Communications, Inc. The Company's trademarks and service marks include
iLinc, iLinc Communications, LearnLinc, MeetingLinc, SupportLinc, and
ConferenceLinc, graphics associated with that four-product suite of Web
collaboration products, Glyphics, e-Learning Simplified, ThoughtWare, Quisic,
and Learning-Edge. We may also refer to trademarks of other corporations and
organizations in this report.
FORWARD - LOOKING STATEMENTS
Statements contained in this report that involve words like
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions are intended to identify forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995, the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended. These are statements that relate to future periods and include, but are
not limited to, statements as to our ability to: sell our products and services;
improve the quality of our software; derive overall benefits of our products and
services; introduce new products and versions of our existing products; sustain
and increase revenue from existing products; integrate current and emerging
technologies into our product offerings; control our expenses including those
related to sales and marketing, research and development, and general and
administrative expenses; control changes in our customer base; support our
customers and provide sufficient technological infrastructure; obtain sales or
increase revenues; impact the results of legal proceedings; control and
implement changes in our employee headcount; obtain sufficient cash flow; manage
liquidity and capital resources; realize positive cash flow from operations; or
realize net earnings.
Such forward-looking statements involve certain risks and uncertainties
that could cause actual results to differ materially from anticipated results.
These risks and uncertainties include, but are not limited to, our dependence on
our products or services, market demand for our products and services, our
ability to attract and retain customers and channel partners, our ability to
expand our technological infrastructure to meet the demand from our customers,
our ability to recruit and retain qualified employees, the ability of channel
partners to successfully resell our products, the status of the overall economy,
the strength of competitive offerings, the pricing pressures created by market
forces, and the risks discussed herein (see "Managements Discussion and Analysis
of Financial Condition and Results of Operations"). All forward-looking
statements included in this report are based on information available to us as
of the date hereof. We expressly disclaim any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statements
contained herein, to reflect any change in our expectations or in events,
conditions or circumstances on which any such statement is based. Readers are
urged to carefully review and consider the various disclosures made in this
report and in our other reports filed with the SEC that attempt to advise
interested parties of certain risks and factors that may affect our business.
A copy of the annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and all amendments to those reports are
available free of charge on our website found at www.ilinc.com, as soon as
reasonably practical after such material is electronically filed with the
Securities and Exchange Commission.
3
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ILINC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30,
2004 MARCH 31,
(UNAUDITED) 2004 (A)
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 1,112 $ 292
Accounts receivable, net of allowance for doubtful accounts of $125 and $24,
respectively ................................................................... 1,970 1,097
Note receivable .................................................................. 25 25
Prepaid and other current assets ................................................. 214 108
---------------- ----------------
Total current assets ........................................................... 3,321 1,522
Property and equipment, net ......................................................... 1,662 310
Goodwill ............................................................................ 10,551 9,190
Intangible assets, net .............................................................. 2,972 1,061
Note receivable ..................................................................... -- 25
Other assets ........................................................................ 33 51
Assets of discontinued operations .................................................. 193 301
---------------- ----------------
Total assets ................................................................... $ 18,732 $ 12,460
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt, including notes to shareholders ............... $ 998 $ 961
Accounts payable and accrued liabilities ......................................... 3,966 2,301
Current portion of capital lease liabilities ..................................... 342 289
Deferred revenue ................................................................. 1,032 1,084
---------------- ----------------
Total current liabilities ...................................................... 6,338 4,635
Long term debt, less current maturities, net of discount of $2,360 and $1,960,
respectively .................................................................. 6,466 4,444
Capital lease liabilities, less current maturities .................................. 163 15
---------------- ----------------
Total liabilities .............................................................. 12,967 9,094
---------------- ----------------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value 10,000,000 shares authorized, 127,500 and
150,000 shares issued and outstanding, liquidation preference of $1,275,000
and $1,500,000, respectively ................................................... -- --
Common stock, $.001 par value 100,000,000 shares authorized, 25,578,350 and
19,257,304 issued, respectively .................................................. 26 19
Additional paid-in capital ....................................................... 42,151 36,395
Accumulated deficit .............................................................. (35,004) (31,640)
Less: 1,432,412 treasury shares at cost ......................................... (1,408) (1,408)
---------------- ----------------
Total shareholders' equity ..................................................... 5,765 3,366
---------------- ----------------
Total liabilities and shareholders' equity ..................................... $ 18,732 $ 12,460
================ ================
(A) Derived from the audited consolidated financial statements as of March 31, 2004.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
ILINC COMMUNICATIONS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenues:
License ................................................. $ 746 $ 589 $ 1,635 $ 1,189
Software and audio services ............................. 1,420 299 2,131 567
Maintenance and professional services ................... 568 505 939 979
------------- ------------- ------------- -------------
Total revenues ...................................... 2,734 1,393 4,705 2,735
------------- ------------- ------------- -------------
Cost of revenues:
License ................................................. 37 77 79 94
Software and audio services ............................. 1,096 125 1,620 266
Maintenance and professional services ................... 269 247 382 448
Amortization of acquired developed technology ........... 125 56 202 113
------------- ------------- ------------- -------------
Total cost of revenues .............................. 1,527 505 2,283 921
------------- ------------- ------------- -------------
Gross profit ............................................... 1,207 888 2,422 1,814
------------- ------------- ------------- -------------
Operating expenses:
Research and development ................................ 410 222 741 491
Sales and marketing ..................................... 1,259 501 2,281 896
General and administrative .............................. 904 414 1,620 856
------------- ------------- ------------- -------------
Total operating expenses ............................ 2,573 1,137 4,642 2,243
Loss from operations ....................................... (1,366) (249) (2,220) (429)
Interest expense ........................................ (457) (282) (1,089) (591)
Interest income ......................................... 8 1 19 15
Other income ............................................ (1) -- 10 (10)
Gain on debt settlement ................................. 14 (60) 22 291
------------- ------------- ------------- -------------
Loss from continuing operations before income taxes ........ (1,802) (590) (3,258) (724)
Net income from discontinued operations .................... -- 129 -- 137
------------- ------------- ------------- -------------
Net loss ................................................... $ (1,802) $ (461) $ (3,258) $ (587)
============= ============= ============= =============
Preferred stock dividends .................................. (26) (15) (55) (15)
Imputed preferred stock dividends .......................... -- (247) -- (247)
------------- ------------- ------------- -------------
Loss available to common shareholders ...................... $ (1,828) $ (723) $ (3,313) $ (849)
============= ============= ============= =============
Loss per common share, basic and diluted
From continuing operations .............................. $ (0.08) $ (0.05) $ (0.15) $ (0.06)
From discontinued operations ............................ -- -- -- 0.01
------------- ------------- ------------- -------------
Net loss per common share ............................... $ (0.08) $ (0.05) $ (0.15) $ (0.05)
============= ============= ============= =============
Number of shares used in calculation of loss per share,
basic and diluted ...................................... 24,132 16,025 22,214 15,911
============= ============= ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
ILINC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
----------------------- ----------------------- PAID-IN ACCUMULATED TREASURY SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, April 1, 2004 ........ 150 $ -- 19,257 $ 19 $ 36,395 $ (31,640) $ (1,408) $ 3,366
Glyphics acquisition ........... -- -- 2,820 3 2,760 -- -- 2,763
Warrant grant .................. -- -- -- -- 82 -- -- 82
Vesting of restricted
stock grant .................... -- -- -- -- 20 -- -- 20
Issuance of common stock
in private placement
(net of expenses) ............ -- -- 1,635 2 1,738 (51) -- 1,689
Convertible notes
converted to common
stock ....................... -- -- 714 1 493 -- -- 494
Preferred stock conversions .... (23) -- 450 -- -- -- -- --
Debt converted to common
stock ........................ -- -- 551 -- 583 -- -- 583
Preferred stock dividends ...... -- -- -- -- -- (55) -- (55)
Stock option exercises ......... -- -- 151 1 80 -- -- 81
Net loss ....................... -- -- -- -- -- (3,258) -- (3,258)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, September 30,
2004 ........................... 127 $ -- 25,578 $ 26 $ 42,151 $ (35,004) $ (1,408) $ 5,765
=========== =========== =========== =========== =========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
ILINC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2004 2003
------------- -------------
Net cash used in operating activities ....................... $ (1,773) $ (1,017)
------------- -------------
Cash flows from investing activities:
Capital expenditures ..................................... (105) --
Acquisitions, net of cash acquired ....................... (408) (130)
Deferred acquisitions costs .............................. (35) --
Cash acquired in acquisition ............................. 4 --
------------- -------------
Net cash used in investing activities ............... (544) (130)
------------- -------------
Cash flows from financing activities:
Proceeds from 2004 private placement ..................... 4,250 --
Proceeds from issuance of convertible preferred stock .... -- 1,500
Preferred stock dividends ................................ (55) (15)
Proceeds from exercise of stock options .................. 81 --
Repayment of long-term debt .............................. (398) (180)
Repayment of capital lease liabilities ................... (174) (108)
Financing costs incurred ................................. (669) (212)
------------- -------------
Net cash provided by financing activities .......... 3,035 985
------------- -------------
Cash flows from continuing operations ....................... 718 (162)
Cash flows from discontinued operations ..................... 102 331
------------- -------------
Net change in cash and cash equivalents ............. 820 169
Cash and cash equivalents, beginning of period .............. 292 409
------------- -------------
Cash and cash equivalents, end of period .................... $ 1,112 $ 578
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
ILINC COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND NATURE OF OPERATIONS
Headquartered in Phoenix, Arizona, iLinc Communications, Inc. is a
leading provider of Web conferencing, audio conferencing and collaboration
software and services. We develop and sell software that provides real-time
collaboration and training using Web-based tools. Our four-product iLinc Suite,
led by LearnLinc (which also includes MeetingLinc, ConferenceLinc, and
SupportLinc), is an award winning virtual classroom, Web conferencing and
collaboration suite of software. With our Web collaboration, conferencing and
virtual classroom products, we provide simple, reliable and cost-effective tools
for remote presentations, meetings and online events. Our software is based on a
proprietary architecture and code that finds its origins as far back as 1994, in
what we believe to be the beginnings of the Web collaboration industry. Versions
of the iLinc Suite have been translated into six languages, and it is currently
available in version 7.5. Our customers may choose from several different
pricing options for the iLinc Suite, and may receive our products on a
stand-alone basis or integrated with one or a number of our other award-winning
products, depending upon their needs. Uses for our four-product suite of Web
collaboration software include online business meetings, sales presentations,
training sessions, product demonstrations and technical support assistance. We
sell our software solutions to large and medium-sized corporations inside and
outside of the Fortune 1000, targeting certain vertical markets. We market our
products using a direct sales force and a distribution channel consisting of
referral agents, value-added resellers (VAR's). We allow customers to choose
between purchasing a perpetual license or subscribing to a periodic license of
our products, providing for flexibility in pricing and payment methods.
We maintain corporate headquarters in Phoenix, Arizona in a 14,000
square foot Class A facility and have maintained facilities there since the
Company's inception in 1998. We also maintain a 2,500 square foot Class B
facility in Troy, New York with an emphasis in that location on research and
development, and technical support. As a part of the Glyphics acquisition, we
also maintain offices in Springville, Utah, occupying Class A facility in two
adjacent buildings. The first building houses its administrative and IT
functions, with 10,000 square feet of space, with the second housing the
operator complex and sales organizations with 6,122 square feet. The Springville
offices can accommodate up to 100 employees and are fully equipped with up to
date computer equipment. The facilities also provide a fully redundant
co-location and server facility for all audio conferencing service activities.
We began operations in March of 1998. Our formation included the
simultaneous rollup of fifty private dental businesses and an initial public
offering. Our initial goals included providing training enhancement services
over the Internet using a browser-based system. In 2002, we began shifting our
focus away from our legacy business, settling on our focus of Web conferencing
and audio conferencing, and in doing so ultimately changed our name to iLinc
Communications, Inc. in February 2004.
The unaudited condensed consolidated financial statements included
herein have been prepared by the Company, pursuant to the rules and regulations
of the Securities and Exchange Commission (the "SEC"). Pursuant to such
regulations, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes the presentation
and disclosures herein are adequate to make the information not misleading, but
do not purport to be a complete presentation inasmuch as all note disclosures
required by generally accepted accounting principles are not included. In the
opinion of management, the unaudited condensed consolidated financial statements
reflect all elimination entries and normal recurring adjustments that are
necessary for a fair statement of the results for the interim periods ended
September 30, 2004 and 2003.
Fiscal operating results for interim periods are not necessarily
indicative of the results for full years. It is suggested that these unaudited
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements of the Company and related notes thereto, and
management's discussion and analysis related thereto, all of which are included
in the Company's annual report on Form 10-K as of and for the year ended March
31, 2004, as filed with the SEC.
8
2. BASIS OF PRESENTATION AND LIQUIDITY
The Company's condensed consolidated financial statements have been
prepared on a basis which assumes that it will continue as a going concern and
which contemplates the realization of its assets and the satisfaction of its
liabilities and commitments in the normal course of business. The Company has a
significant working capital deficiency, and has historically suffered
substantial recurring losses and negative cash flows from operations. These
matters, among others, including those more fully discussed herein, raise
substantial doubt about the Company's ability to continue as a going concern.
Furthermore, our independent registered public accountants expressed their
substantial doubt as to our ability to continue as a going concern in their
report on our 2004 and 2003 consolidated financial statements included in our
2004 annual report on Form 10-K. Management's plan with regard to these matters
include continued development, marketing and sale of its Web conferencing, audio
conferencing and e-Learning products and services through both internal growth
through direct and indirect sales efforts and by external growth by acquisition.
Although management continues to pursue these plans, there is no assurance that
the Company will be successful in obtaining sufficient revenues from its
products and services to generate profits or to provide adequate cash flows to
sustain operations. The condensed consolidated financial statements do not
include any adjustments related to the outcome of this uncertainty.
On January 1, 2004, the Company discontinued its dental practice
management services segment. Accordingly, the Company has reflected these
operations as discontinued and has restated the prior year condensed
consolidated financial statements to conform to such presentation. Discontinued
operations are discussed further in Note 11.
3. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The Company has not materially added to or changed its significant
accounting policies since March 31, 2004. For a description of these policies,
refer to Note 4 of the consolidated financial statements in the Company's annual
report on Form 10-K as of and for the year ended March 31, 2004. The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. The more
significant areas requiring use of estimates and judgment relate to revenue
recognition, accounts receivable and notes receivable valuation reserves,
realizability of intangible assets, realizability of deferred income tax assets
and the evaluation of contingencies and litigation. Management bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. The results of such estimates
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
materially differ from these estimates under different assumptions or
conditions.
STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT TO SFAS NO.
123." SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method on accounting for stock-based employee
compensation. The Company has adopted the disclosure provisions of SFAS No. 123
and accordingly the implementation of SFAS No. 148 did not have a material
effect on the Company's consolidated financial position or results of
operations.
The fair value for options granted was estimated at the date of grant
using a Black-Scholes option-pricing model with the following weighted-average
assumptions for the six months ended September 30, 2004 and 2003.
SIX MONTHS ENDED SEPTEMBER 30,
----------------------------------
2004 2003
--------------- ---------------
Risk free interest rate 4.24% - 4.71% 3.88% - 4.45%
Dividend yield 0% 0%
Volatility factors of the expected
market price of the Company's
common stock 89% - 194% 70% - 139%
Weighted-average expected life of
Options 10 years 10 years
9
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- --------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- -------------
Net loss available to common shareholders, as reported ... $ (1,828) $ (723) $ (3,313) $ (849)
Plus: Stock-based employee compensation expense
included in reported net loss ......................... -- -- -- --
Less: Total stock-based employee compensation expense
determined using fair value based method .............. (102) (28) (160) (86)
-------------- -------------- -------------- -------------
Pro forma net loss ....................................... $ (1,930) $ (751) $ (3,473) $ (935)
============== ============== ============== =============
Loss per share:
Basic and diluted - as reported .......................... $ (0.08) $ (0.05) $ (0.15) $ (0.05)
============== ============== ============== =============
Basic and diluted - pro forma ............................ $ (0.08) $ (0.05) $ (0.16) $ (0.06)
============== ============== ============== =============
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the Financial Accounting Standards Board ("FASB") issued
an Exposure Draft for a Proposed Statement of Financial Accounting Standards,
"Share-Based Payment." This proposed Statement addresses the accounting for
transactions in which a company receives employee services in exchange for (a)
equity instruments of the company or (b) liabilities that are based on the fair
value of the company's equity instruments or that may be settled by the issuance
of such equity instruments. This proposed Statement would also eliminate the
ability to account for share-based compensation transactions using APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and generally would require
that such transactions be accounted for using a fair-value-based method. The
FASB has indicated that the effective date for this statement, when finalized
would be for periods beginning after June 15, 2005. We are currently assessing
the impact of this proposed Statement on our share-based compensation programs,
however, we expect that the requirement to expense stock options and other
equity interests that have been or will be granted to employees will increase
our operating expenses and result in lower earnings per share.
4. EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income available
to common stockholders by the weighted-average number of common shares
outstanding for each reporting period presented. Diluted earnings per share are
computed similar to basic earnings per share while giving effect to all
potential dilutive common stock equivalents that were outstanding during each
reporting period. For the six months ended September 30, 2004 and 2003, options
and warrants to purchase 10,209,474 and 9,531,977 shares of common stock were
excluded from the computation of diluted earnings per share because of their
anti-dilutive effect. Furthermore, a restricted stock grant of 450,000 shares
has been excluded from the earnings per share calculations. Lastly, shares of
our common stock currently not reflected as issued and outstanding totaling
500,000 (related to the Quisic acquisition and held in escrow pending the
outcome of litigation) and 704,839 (relating to the Glyphics acquisition and
held in escrow pending determination of the performance requirement and
indemnity claims - Note 10) have been excluded from the computation.
10
5. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill consisted of the following:
---------------------------
SEPTEMBER 30, MARCH 31,
---------------------------
2004 2004
------------ -----------
(IN THOUSANDS)
Goodwill............................... $ 10,551 $ 9,190
============ ===========
The changes in the carrying amount of the goodwill for the six months
ended September 30, 2004 (in thousands):
Balance, March 31, 2004.............................................. $ 9,190
Mentergy royalty earnout.......................................... 408
Glyphics acquisition.............................................. 953
----------
Balance, September 30, 2004.......................................... $ 10,551
==========
Intangible assets consisted of the following (in thousands):
SEPTEMBER 30, 2004
---------------- ---------------- ----------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET
---------------- ---------------- ----------------
AMORTIZED INTANGIBLE ASSETS:
Deferred offering costs ..... $ 1,117 $ (244) $ 873
Purchase software ........... 1,482 (543) 939
Customer relationship ....... 1,260 (100) 1,160
---------------- ---------------- ----------------
$ 3,859 $ (887) $ 2,972
================ ================ ================
MARCH 31, 2004
---------------- ---------------- ----------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET
---------------- ---------------- ----------------
Deferred offering costs ..... $ 887 $ (161) $ 726
Purchase software ........... 675 (343) 332
Customer relationship ....... 32 (29) 3
---------------- ---------------- ----------------
$ 1,594 $ (533) $ 1,061
================ ================ ================
6. ACCOUNT PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following:
---------------------------
SEPTEMBER 30, MARCH 31,
--------------------------
2004 2004
----------- -----------
(IN THOUSANDS)
Accounts payable trade ............................... $ 1,848 $ 1,000
Accrued state sales and federal excise tax ........... 175 40
Accrued interest ..................................... 270 204
Amount payable to Quisic shareholders ................ 150 50
Amounts related to acquisitions ...................... 224 33
Accrued salaries and related benefits ................ 321 190
Amount payable to third party providers .............. 663 327
Amount payable to Interactive Alchemy ................ 123 149
Deferred rent liability .............................. 67 80
Lease termination liability .......................... 93 171
Other ................................................ 32 57
----------- -----------
Total accounts payable and accrued liabilities..... $ 3,966 $ 2,301
=========== ===========
11
7. LONG-TERM DEBT
Long-term debt consisted of the following:
-------------------------
SEPTEMBER 30, MARCH 31,
-------------------------
2004 2004
-------- --------
(IN THOUSANDS)
Convertible redeemable subordinated notes....... $ 5,625 $ 5,625
Convertible redeemable subordinated notes ...... -- 500
Senior notes ................................... 3,187 --
Subordinated promissory notes .................. -- 913
Shareholders' notes payable .................... 282 287
Notes payable .................................. 730 40
-------- --------
9,824 7,365
Less: current portion of long-term debt ........ (998) (961)
Discount .............................. (1,534) (882)
Beneficial conversion feature ......... (826) (1,078)
-------- --------
Long-term debt ................................. $ 6,466 $ 4,444
======== ========
In April of 2004, the Company completed a private placement offering
with gross proceeds of $4.25 million that provided the Company $3.8 million of
net proceeds. Under the terms of this offering, the Company issued $3,187,500 in
unsecured senior notes and 1,634,550 shares of Common Stock of the Company. The
senior notes were issued as a series of notes pursuant to a unit purchase and
agency agreement. The senior notes are unsecured, non-convertible, and the
purchasers received no warrants. The placement agent received a commission equal
to 10% of the gross proceeds together with a warrant for the purchase of 163,455
shares of the Company's common stock with an exercise price equal to 120% of the
price paid by investors. The senior notes bear interest at a rate of 10% per
annum and accrued interest is due and payable on a quarterly basis beginning
July 15, 2004, with principal due at maturity on July 15, 2007. The senior notes
are redeemable by the Company at 100% of the principal value at any time after
July 15, 2005. The notes and common stock were issued with a debt discount of
$768,269. The fair value of the warrants was estimated and used to calculate a
discount of $119,688 of which $68,130 was allocated to the notes and $51,558 was
allocated to equity. The total discount allocated to the notes of $836,399 is
being amortized to interest expense over the term of the notes which is
approximately 39 months. The senior notes are unsecured obligations of the
Company but are senior in right of payment to all existing and future
indebtedness of the Company. Individuals and entities participating in this
offering have the right to demand registration of the common stock issued
therefrom upon written notice to the Company and also have piggy-back
registration rights should the company file a registration statement before the
shares are otherwise registered.
In February of 2004, the Company completed a private placement offering
raising capital of $500,000 that was used for general corporate purposes. Under
the terms of the offering, the Company issued unsecured subordinated convertible
notes that had a term of 24 months. The notes bore interest at the rate of 8%
per annum for the first twelve months and then 10% for the second twelve months
and required quarterly payments of interest only, with the principal due at
maturity on February 12, 2006. The holders of the notes could convert the
outstanding principal into shares of the Company's common stock at the fixed
price of $0.70 per share. At the issue date, the Company calculated a beneficial
conversion feature of the notes to be $214,286, which was to be amortized as
interest expense over the 2-year life of the debt. During the six months ending
September 30, 2004, the holders of those notes fully converted the principal
balance of their notes into 714,285 shares of the Company's common stock and the
full amount recorded as a result of the beneficial conversion feature was
expensed in the period. The common stock issued upon conversion of these notes
was registered with the SEC and may be sold pursuant to a resale prospectus
dated May 24, 2004.
In March of 2002, the Company completed a private placement offering
raising capital of $5,775,000. Under the terms of this offering, the Company
issued convertible redeemable subordinated notes and warrants to purchase
5,775,000 shares of the Company's common stock. These notes bear interest at 12%
per annum and require quarterly payments of interest only, with the principal
due at maturity on March 29, 2012. The note holders may convert the notes into
shares of the Company's common stock at the fixed price of $1.00 per share. The
12
Company may force conversion of these notes into shares of the Company's common
stock at the conversion price, if at any time the closing price of the Company's
common stock equals or exceeds $3.00 per share for 20 consecutive trading days.
These notes are subordinated to any present or future senior indebtedness, with
no waiver required. The exercise price of the warrants is $3.00 per share. The
Company may force exercise of the warrants at the exercise price, if at any time
the closing price of the Company's common stock equals or exceeds $5.50 per
share for 20 consecutive trading days. The warrants expire on March 29, 2005.
The fair value of the warrants was estimated using the Black-Scholes pricing
model with the following assumptions: contractual and expected life of three
years, volatility of 75%, dividend yield of 0%, and a risk-free rate of 3.87%.
The fair value was then used to calculate a discount of $1,132,000, which is
being amortized to interest expense over the ten year term of the notes. Since
the carrying value of the notes was less than the conversion value, a beneficial
conversion feature of $1,132,000 was calculated and recorded as an additional
discount to the notes and is being amortized as interest expense over the ten
year term of the notes. Upon conversion of these notes, any remaining discount
associated with the beneficial conversion feature will be expensed in full at
the time of conversion. During fiscal 2004, holders with a principal balance
totaling $150,000 converted their shares into 150,000 common shares of the
Company. The common stock underlying these notes and the warrants was registered
with the SEC and may be sold if converted into common stock pursuant to a resale
prospectus dated May 24, 2004.
In October 2001, the Company issued $1.1 million of subordinated
promissory notes to the shareholders of Learning-Edge, Inc. under the terms of
the acquisition agreement. These notes bear interest at rates ranging from at
7.5% to 9.0% and were due in two equal installments on April 1, 2005 and on
October 1, 2005, respectively. The notes contained a provision that specified
that if the Company raised capital in excess of $3 million and up to $5 million
then an increasing percentage of the outstanding principal was to be repaid. As
a result of this provision and the capital raise in April of 2004 of $4.25
million, the entire outstanding balance of these notes have been fully
extinguished with cash payments of $333,000 and conversions of $583,000 of notes
into 550,633 shares of the Company's common stock.
In connection with the Company's initial public offering (IPO) in March
of 1998, the Company issued $468,000 of notes to certain shareholders who had
provided capital prior to the IPO. These notes are due in April of 2005 and
require quarterly payments of interest only at the rate of 10%. The outstanding
principal balance on these notes is $278,000 as of September 30, 2004.
In connection with the Company's acquisition of Glyphics
Communications, Inc. (Note 10), the Company assumed $751,000 in loan
obligations, the unpaid balance of which ($730,000 at September 30, 2004) is
currently due in the short term. The rates of interest on such notes range from
4% to 10% per annum.
The aggregate maturities of long-term debt excluding capital leases for
each of the next five years subsequent to September 30, 2004 were as follows (in
thousands):
2005................................................... $ 998
2006................................................... 8
2007................................................... 3,193
2008................................................... --
2009................................................... --
Thereafter............................................. 5,625
----------
$ 9,824
==========
13
8. STOCK OPTION PLANS AND WARRANTS
The Company grants stock options under its 1997 Stock Compensation Plan
(the "Plan"). The Company recognizes stock-based compensation issued to
employees at the intrinsic value between the exercise price of options granted
and the fair value of stock for which the options may be exercised. However, pro
forma disclosures as if the Company recognized stock-based compensation at the
fair value of the options themselves are presented below. Under the Plan, the
Company is authorized to issue up to 3,500,000 shares of the Company's common
stock to its employees in the form of stock options.
At September 30, 2004, stock options had been granted that represent
the right to acquire 2,398,355 shares of the Company's common stock. The
Compensation Committee of the Board of Directors administers the Plan. Stock
options granted to employees have a contractual term of 10 years (subject to
earlier termination in certain events), and have an exercise price no less than
the fair market value of the Company's common stock on the date of grant. The
stock options vest at varying rates over a one to five year period.
The following is a summary of the stock options activity for the
six-month period ended September 30, 2004:
WEIGHTED
NUMBER OF WEIGHTED AVERAGE
SHARES AVERAGE FAIR-VALUE
UNDERLYING EXERCISE OF GRANTED
OPTIONS PRICES OPTIONS
---------- ---------- ------------
Outstanding at March 31, 2004 ........ 2,282,855 $ 1.43
Granted .............................. 358,000 0.82 $ 1.00
============
Exercised ............................ (151,160) 0.50
Forfeited ............................ (91,340) 0.72
Expired .............................. --
---------- ----------
Outstanding at September 30, 2004 .... 2,398,355 $ 1.36
========== ==========
On September 20, 2004, the Compensation Committee approved 349,900
options to be granted to employees on October 1, 2004. These options have a
contractual life of 10 years and a vesting schedule of 25% six months after the
date of grant and then one-thirty-sixth per month thereafter.
The following is a summary of the exercise prices of the outstanding
stock options as of September 30, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE AVERAGE
NUMBER OF EXERCISE REMAINING CONTRACTUAL NUMBER OF EXERCISE
SHARES PRICE LIFE (YEARS) SHARES PRICE
-------------- ----------- ----------------------- ------------- ----------
$ 0.01 - $ 0.99 1,671,956 $ 0.49 6.15 977,676 $ 0.56
$ 1.00 - $ 1.99 123,125 $ 1.52 6.79 87,125 $ 1.72
$ 2.00 - $ 2.99 430,000 $ 2.22 4.77 430,000 $ 2.22
$ 3.00 - $ 8.50 173,274 $ 6.98 3.58 173,274 $ 6.98
----------- -----------
2,398,355 1,668,075
=========== ===========
The following is a summary of information concerning outstanding
warrants to purchase the Company's common stock as of September 30, 2004:
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
-------------------------------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE AVERAGE
NUMBER OF EXERCISE REMAINING CONTRACTUAL NUMBER OF EXERCISE
SHARES PRICE LIFE (YEARS) SHARES PRICE
-------------- ----------- ----------------------- ------------- ----------
$ 0.40 - $ 0.40 250,000 $ 0.40 2.13 250,000 $ 0.40
$ 0.42 - $ 0.42 543,182 $ 0.42 6.89 543,182 $ 0.42
$ 0.44 - $ 0.44 132,972 $ 0.44 6.95 132,972 $ 0.44
$ 0.50 - $ 0.50 25,000 $ 0.50 1.25 25,000 $ 0.50
$ 0.78 - $ 0.78 163,455 $ 0.78 2.55 163,455 $ 0.78
$ 1.50 - $ 1.50 921,510 $ 1.50 2.89 921,510 $ 1.50
$ 3.00 - $ 3.00 5,775,000 $ 3.00 0.49 5,775,000 $ 3.00
----------- -----------
7,811,119 7,811,119
=========== ===========
14
In December of 2001, the Company, under the initiative of the
Compensation Committee with the approval of the Board of Directors, issued to
its chief executive officer an incentive stock grant under the Plan of 450,000
restricted shares of the Company's common stock as a means to retain and
incentivize the chief executive officer. The incentive shares are fully vested
after 10 years from the date of grant. The incentive shares were valued at
$405,000 based on the closing price of the stock on the date of grant, which is
recorded as compensation expense ratably over the ten-year vesting period.
Vesting of the incentive shares accelerates based on the Company's share price
as follows:
PERFORMANCE CRITERIA SHARES VESTED
--------------------------------------------------------------------- ----------------
Share price trades for $4.50 per share for 20 consecutive days 150,000 shares
Share price trades for $8.50 per share for 20 consecutive days 150,000 shares
Share price trades for $12.50 per share for 20 consecutive days 150,000 shares
9. COMMITMENTS AND CONTINGENCIES
The Company is subject to various commitments and contingencies as
described in Note 14 to the consolidated financial statements in the Company's
Annual Report on Form 10-K as of and for the year ended March 31, 2004. During
the six-month period ended September 30, 2004, the following changes occurred
with respect to certain of the Company's commitments and contingencies:
In conjunction with the acquisition of certain assets from Mentergy,
Inc. ("Mentergy"), the Company agreed to provide a royalty earn-out payment due
upon sales of its Web conferencing products. The royalty earn-out was originally
equal to 20% for all revenues collected from the sale or license of that Web
conferencing software (originally named LearnLinc) over a three-year period
beginning with the closing date of November 4, 2002, with the first $600,000 of
collected revenues not subject to the royalty, and the maximum amount being
$5,000,000. After settling with one of the original Mentergy partners, the
royalty has been reduced to 18.7%. The Company accounts for any such amounts
collected as additional purchase consideration in accordance with EITF No. 95-8
at the time such amounts are accrued as revenue. The Company has accrued
Mentergy royalties totaling $201,000 for the period ended September 30, 2004.
On June 14, 2002, the Company acquired the assets of Quisic
Corporation. Subsequently, on November 4, 2002, two former employees of Quisic
Corporation (their CEO and CIO), filed a lawsuit in the Superior Court of the
State of California styled George B. Weathersby, et. al. vs. Quisic Corporation,
et. al. claiming damages against Quisic and the Board of Directors of Quisic
arising from their employment termination by the Quisic Board. The Company was
also added as a third party defendant with an allegation of successor liability,
but only to the extent that Quisic Corporation is found liable, and then only to
the extent the plaintiffs prove their successor liability claim against the
Company. The Company only acquired certain assets of Quisic Corporation in an
asset purchase transaction. Based upon the facts and circumstances known, the
Company believes that the plaintiffs' claims are without merit, and furthermore,
that the Company is not the successor of Quisic, and therefore the Company
intends to vigorously defend this aspect of the lawsuit. While in the opinion of
management, resolution of these matters is not expected to have a material
adverse effect on the Company's financial position, results of operations or
cash flows, the ultimate outcome of any litigation is uncertain. Were an
unfavorable outcome to occur that awarded to the Plaintiffs against defendant
Quisic large sums, and then the court determined that the Company is a successor
to Quisic, then the impact is likely to be material to the Company. Subsequent
to the defendants' answers being filed, the court ordered that an arbitration of
the merits be held, but the date of that arbitration has not been set.
On June 11, 2003, Kepner-Tregoe, Inc. filed suit in the Supreme Court
of the State of New York, County of New York, styled, Kepner-Tregoe, Inc. vs.
Internal & External Communications, Inc., et. al., against Quisic Corporation
and the Board of Directors of Quisic seeking to collect an arbitration award
against Internal & External Communications, Inc. (a subsidiary of Quisic). The
Company was also added as a third party defendant with an allegation of
successor liability, but only to the extent that Quisic Corporation is found
liable, and then only to the extent the plaintiffs prove their successor
liability claim against the Company. The Company only acquired certain assets of
Quisic Corporation in an asset purchase transaction. As a part of the Quisic
acquisition transaction consideration, the Company placed into escrow 500,000
shares of its common stock that was to secure a revenue performance requirement.
That revenue performance target was not achieved and the Company demanded the
return of the shares of common stock. The shareholders of Quisic do not dispute
the right of the Company to obtain those shares. However, since the claims of
the plaintiffs assert potential rights to those shares, the plaintiff and the
15
escrow agent entered into a stipulation that required the escrow agent to
continue to hold those shares until further court order disposing of the
litigation and directing the delivery of those shares to the appropriate parties
as the court and the parties may agree. Those 500,000 shares are not counted as
shares outstanding or as treasury shares as the performance contingency
associated with those shares was not met. The Company believes that it is not
the successor of Quisic, and therefore the Company intends to vigorously defend
this aspect of the lawsuit. While in the opinion of management, resolution of
these matters is not expected to have a material adverse effect on the Company's
financial position, results of operations or cash flows, the ultimate outcome of
any litigation is uncertain. Were an unfavorable outcome to occur that awarded
to the Plaintiffs against defendant Quisic large sums, and then the court
determined that the Company is a successor to Quisic, then the impact is likely
to be material to the Company. Subsequent to the defendants' answers being
filed, the Quisic defendants sought an order dismissing the plaintiff's claims
and that order is still pending.
In conjunction with the acquisition of Glyphics Communications, Inc.
(Note 10), the Company entered into employment agreements with two former
officers/owners. The agreements provide for two-year terms with aggregate
employment related compensation of $723,000, before bonuses and options. The
Company also assumed capital lease obligations with an aggregate obligation at
the time of acquisition of $375,000. The effective interest rate on these
obligations ranges from 5.55% to 18.0% per annum. Furthermore, the Company
assumed an operating lease of certain facilities in Springville, Utah with a
term ending in January of 2008 and rent at $9,776 per month, which increases to
$12,206 per month.
10. BUSINESS COMBINATION
We executed an agreement to acquire substantially all of the assets of
and assume certain liabilities of Glyphics Communications, Inc., a Utah based
private company. The acquisition had a stated effective date of June 1, 2004 and
was fully consummated on June 14, 2004. The purchase price, (which was
originally estimated to total $5.568 million), was based on a multiple of the
Glyphics' 2003 annual audio conferencing business revenues (as defined in the
asset purchase agreement). The purchase price was paid with the assumption of
specific liabilities, with the balance paid using our common stock at the fixed
price of $1.05 per share. The Company plans to continue to pursue the business
formerly conducted by the seller on an integrated basis with its existing Web
conferencing products.
In exchange for the assets received, the Company assumed $2.1 million
in debt and issued 2.8 million shares of its common stock. An additional 704,839
shares of the Company's common stock is currently being held in escrow and is
subject to the claims of the Company for: (1) the amount, if any, that the
audited audio conferencing business revenues (as defined in the asset purchase
agreement) earned by the Company during the twelve months after the closing date
are less than the audited audio conferencing business revenues (as defined in
the asset purchase agreement) recorded by Glyphics during the twelve months
ending December 31, 2003, (2) the representations and warranties made by
Glyphics' and its shareholders in the asset purchase agreement, and (3) the
amount if any that the liabilities accrued or paid by the Company are in excess
of those specifically scheduled and assumed as part of the asset purchase
agreement. Those contingent escrow shares are contractually required to be
returned to the Company by the escrow agent in the event that those revenue
performance targets and contingent liability requirements are not achieved. As
of September 30, 2004, the Company had accrued certain liabilities in excess of
those scheduled and therefore, may be making a claim against those shares.
The Glyphics' shareholders receiving our common stock as a result of
the transaction have the right to demand registration of their common stock upon
written notice, one year from the date of the transaction, to the Company and
also have piggy-back registration rights should the Company file a registration
statement before the shares are otherwise registered. Operating results
associated with audio conferencing operations are included as of June 1, 2004.
The purchase price recorded was calculated as follows:
AMOUNT
------------
Issuance of iLinc's common stock (valued at $0.98 per share
using the five day average closing price) ............ $ 2,763
Additional acquisition costs.................................. 313
Assumed liabilities........................................... 2,085
------------
Total purchase price....................................... $ 5,161
============
16
The total purchase price was allocated to assets acquired, in
accordance with SFAS No. 141 "Business Combinations," based upon estimated fair
market values as determined by an appraisal report obtained from an independent
appraisal firm. Management of the Company is currently reviewing such appraisal
and expects to finalize this purchase price allocation in the Company's next
fiscal quarter. The excess purchase price over the estimated fair market value
of the tangible and intangible assets acquired was allocated to goodwill. As
this transaction is intended to qualify as a tax-free acquisition, the tax bases
of the acquired assets remain unchanged. As a result, a deferred tax liability
of $1,132,000 has been established in an amount equal to the Company's statutory
tax rate multiplied by the difference between the allocated book value of
acquired non-goodwill assets and the tax bases of those assets. This increase to
deferred tax liability resulted in a corresponding increase to the acquired
goodwill. However, due to the presence of a valuation allowance against the net
deferred tax asset, a second entry was then recorded to report the impact of the
necessary decrease to the valuation allowance, with the offset being a reduction
in acquired goodwill. The net result of these entries was to increase the
deferred tax liability and decrease the valuation allowance by the same amount.
The purchase price of Glyphics has been allocated as follows:
PURCHASE
PRICE ALLOCATION
----------------
(IN THOUSANDS)
Current assets................................................ $ 616
Property and equipment........................................ 1,609
Goodwill ..................................................... 953
Identifiable intangible assets ............................... 2,035
Current liabilities........................................... (1,324)
Notes payable................................................. (751)
Capital leases................................................ (375)
Common stock.................................................. (3)
Additional paid-in capital.................................... (2,760)
---------------
$ --
===============
The following unaudited pro forma summary of condensed financial
information presents the Company's combined results of operations as if the
acquisition of Glyphics had occurred at the beginning of each period presented,
after including the impact of certain adjustments including: (i) elimination of
sales between the two companies and (ii) increase in amortization of the
identifiable intangible assets and an increase in depreciation expense recorded
as part of the acquisition.
PRO FORMA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-----------------------------------------------
THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED
SEPTEMBER SEPTEMBER SEPTEMBER
30, 2003 30, 2004 30, 2003
-----------------------------------------------
Revenues........................................................ $ 2,306 $ 5,297 $ 4,424
Loss from continuing operations................................. (111) (2,450) (1,166)
Net loss from continuing operations............................ (899) (3,499) (1,923)
Loss per basic and diluted share from continuing operations..... $ (0.05) $ (0.15) $ (0.10)
Weighted average shares outstanding:
Basic and diluted........................................... 18,844 23,154 18,730
The pro forma financial information presented does not purport to
indicate what the combined results of operations would have been had the
combination occurred at the beginning of the periods presented or the results of
operations that may be obtained in the future.
17
11. DISCONTINUED OPERATIONS
Effective January 1, 2004, the Company discontinued its dental practice
management services. In accordance with SFAS 144 "ACCOUNTING FOR IMPAIRMENT ON
DISPOSAL OF LONG-LIVED ASSETS", the Company has restated its historical results
to reflect its dental practice management service business segment as a
discontinued operation.
A summary of the results from discontinued operations for the six
months ended September 30, 2004 and 2003 are as follows (in thousands):
SIX MONTHS ENDED SEPTEMBER 30,
2004 2003
-------------- --------------
Net revenue .................................................. $ -- $ 117
Operating expenses ........................................... -- (27)
-------------- --------------
Income from operations ....................................... -- 144
Interest expense ............................................. -- (68)
Interest income .............................................. -- 16
Gain on termination of service agreements with Affiliated
Practices .................................................. -- 14
Gain on debt settlement ...................................... -- 31
Tax expense .................................................. -- --
-------------- --------------
Net income from discontinued operations ...................... $ -- $ 137
============== ==============
Interest expense of $0 and $68,000 for six months ended September 30,
2004 and 2003 was allocated to the discontinued dental practice management
services business segment since it relates to specific debts that were incurred
in order to provide the dental practice management services.
A summary of the assets of our discontinued operations are as follows:
SEPTEMBER 30, MARCH 31,
2004 2004
------------- ------------
(IN THOUSANDS)
Notes receivable, net........................... $ 193 $ 301
------------- ------------
$ 193 $ 301
============= ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-Q THAT INVOLVE
WORDS LIKE "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS,"
"ESTIMATES" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995, THE SECURITIES ACT OF 1933, AS AMENDED, AND THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
ANTICIPATED RESULTS. THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED
TO, OUR DEPENDENCE ON OUR PRODUCTS OR SERVICES, MARKET DEMAND FOR OUR PRODUCTS
AND SERVICES, OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS AND CHANNEL PARTNERS,
OUR ABILITY TO EXPAND OUR TECHNOLOGICAL INFRASTRUCTURE TO MEET THE DEMAND FROM
OUR CUSTOMERS, OUR ABILITY TO RECRUIT AND RETAIN QUALIFIED EMPLOYEES, THE
ABILITY OF CHANNEL PARTNERS TO SUCCESSFULLY RESELL OUR SERVICES, THE STATUS OF
THE OVERALL ECONOMY, THE STRENGTH OF COMPETITIVE OFFERINGS, THE PRICING
PRESSURES CREATED BY MARKET FORCES, AND THE OTHER RISKS DISCUSSED HEREIN. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE BASED ON INFORMATION
AVAILABLE TO US AS OF THE DATE HEREOF. WE EXPRESSLY DISCLAIM ANY OBLIGATION OR
UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN, TO REFLECT ANY CHANGE IN OUR EXPECTATIONS OR IN
EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED. OUR
REPORTS ARE AVAILABLE FREE OF CHARGE AS SOON AS REASONABLY PRACTICABLE AFTER WE
FILE THEM WITH THE SEC AND MAY BE OBTAINED THROUGH OUR WEBSITE.
18
OVERVIEW
Headquartered in Phoenix, Arizona, iLinc Communications, Inc. is a
leading provider of Web conferencing, audio conferencing and collaboration
software and services. Our four-product iLinc Suite, led by LearnLinc (which
also includes MeetingLinc, ConferenceLinc, and SupportLinc), is an award winning
virtual classroom, Web conferencing and collaboration suite of software. With
our Web collaboration, conferencing and virtual classroom products, we provide
simple, reliable and cost-effective tools for remote presentations, meetings and
online events. Our software is based on a proprietary architecture and code that
finds its origins as far back as 1994, in what we believe to be the beginnings
of the Web collaboration industry. Versions of the iLinc Suite have been
translated into six languages, and it is currently available in version 7.5. Our
customers may choose from several different pricing options for the iLinc Suite,
and may receive our products on a stand-alone basis or integrated with one or a
number of our other award-winning products, depending upon their needs. Uses for
our four-product suite of Web collaboration software include online business
meetings, sales presentations, employee training sessions, product
demonstrations and technical support assistance. We sell our software solutions
to large and medium-sized corporations inside and outside of the Fortune 1000,
targeting certain vertical markets. We market our products using a direct sales
force and a distribution channel consisting of referral agents, international
and national value-added resellers (VAR's). We allow customers to choose between
purchasing a perpetual license or subscribing to a periodic license of our
products, providing for flexibility in pricing and payment methods.
PRODUCTS AND SERVICES
Web Conferencing and Web Collaboration
The iLinc Suite(TM) is a four product suite of software that addresses
the four most common business collaboration needs.
LearnLinc(TM) is an Internet-based software that is designed for
training and education of remote students. With LearnLinc, instructors and
students can collaborate and learn remotely providing a learning environment
that replicates traditional instructor-led classes. Instructors can create
courses and classes, add varied agenda items, enroll students, deliver live
instruction, and deliver content that includes audio, video, and interactive
multimedia. In combination with TestLinc(TM), LearnLinc permits users to
administer comprehensive tests, organize multiple simultaneous breakout sessions
and record, edit, play back and archive entire sessions for future use.
MeetingLinc(TM) is an online collaboration software designed to
facilitate the sharing of documents, PowerPoint(TM) presentations, graphics and
applications between meeting participants without leaving their desks.
MeetingLinc allows business professionals, government employees, and educators
to communicate more effectively and economically through interactive online
meetings using voice-over-IP technology to avoid the expense of travel and long
distance charges. MeetingLinc allows remote participants to: give presentations,
demonstrate their products and services, annotate on virtual whiteboards, edit
documents simultaneously, and take meeting participants on a Web tour. Like all
of the Web collaboration products in the suite, MeetingLinc includes integrated
voice and video conferencing services.
ConferenceLinc(TM) is a presentation software designed to deliver the
message in a one-to-many format providing professional management of Web
conferencing events. ConferenceLinc manages events such as earnings
announcements, press briefings, new product announcements, corporate internal
mass communications and external marketing events. ConferenceLinc is built on
the MeetingLinc software platform and code to combine the best interactive
features with an easy to use interface providing meaningful and measurable
results to presenters and participants alike. Its design includes features that
take the hassle out of planning, and supporting a hosted Web seminar.
ConferenceLinc includes automatic email invitations, "one-click join"
capabilities, online confirmations, update notifications, and customized
attendee registration. With ConferenceLinc, presenters may not only present
content, but may also gain audience feedback using real-time polling, live chat,
question and answer sessions, and post-event assessments. The entire
presentation is easily recordable for viewing offline and review after the show
with the recorder capturing the content and the audio, video, and participant
feedback.
SupportLinc(TM) is an online technical support and customer sales
support software designed to give customer service organizations the ability to
provide remote hands-on support for products, systems, or software applications.
SupportLinc manages the support call volume and enhances the effectiveness of
traditional telephone-based customer support systems. SupportLinc's custom
interface is designed to be simple to use so as to improve the interaction and
level of support for both customers and their technical support agents.
19
Audio Conferencing
Through its acquisition of Glyphics Communications in June 2004, the
Company now also delivers comprehensive audio conferencing solutions that help
businesses provide virtual meetings, corporate events, distance learning
programs, and daily conference calls. Our audio conferencing offering includes a
wide array of services and products that include the following:
o Audio On-Demand (no reservations needed): With pre-established
calling accounts for each user, customers can create or
participate in conference calls with no advance notice, 24/7;
o Reserved Automated: The solution for recurring calls, each
participant has a permanent number and passcode;
o Operator Assisted: For important calls, this service includes
an iLinc conference operator to host, monitor, and coordinate
the call; and,
o Online Seminars: Support for online Web presentations with
high-quality audio from iLinc.
Customers may purchase our audio conferencing products and services
without an annual contract commitment on a monthly recurring usage basis, and
often subscribe for a fixed per minute rate.
Other Products and Services
In addition to the iLinc Suite of Web conferencing products and
services and our audio conferencing products and services, we offer to our
customers an array of e-Learning and training products and services.
o Technology: We offer training software products that like
iLinc, promote online collaboration with products that
integrate with our LearnLinc software. These include TestLinc
- an assessment and quizzing tool that allows for formal
testing and evaluation of students, and i-Canvas(TM) - a
training content development software that allows
non-technical training professionals to create Web-based
training courses without programming. i-Canvas is sold on an
individual user perpetual license basis.
o Services: We also offer custom content development services
through a subcontractor relationship with Interactive Alchemy,
an entity which is primarily comprised of former employees of
the Company and which resides in the Company's corporate
office in Phoenix. Custom content services are bid on a
project-by-project basis.
o Content: We also offer a library of online courses focused
upon the training of executives on essential business topics.
Our off-the-shelf online library of content includes an online
mini-MBA program co-developed with the Tuck School of Business
at Dartmouth College. Customers subscribe for a period of time
per course, with the license providing for access over
typically one year from the date the students first access of
the course.
INDUSTRY TRENDS
We see several emerging industry trends in the Web conferencing and
audio conferencing industries that we believe make us well positioned to take
advantage of the predicted market growth. First, the industries that have
embraced Web conferencing to a large degree continue to be the financial
services sector, high technology sector and professional services sector.
According to a recent report by the analyst group Frost and Sullivan, these
three segments represented 52.2% of the total Web conferencing revenues in 2002
and will continue to be the largest single markets for Web conferencing revenue
by 2009. Frost & Sullivan has also identified Professional Service agencies as a
large adopter of the Web Conferencing from now until 2009. To that end, we now
have more than 200 professional service companies that have chosen our Web
conferencing solution as their tool of choice, including some of the larger
organizations inside the Fortune 1000.
A second notable trend is that specific features and licensing options
are becoming increasingly important to the financial services sector, high
technology and professional service markets. This has created what we believe to
be unique opportunities for iLinc. Frost & Sullivan expects that desktop
videoconferencing and voice over IP integration will be heavily utilized
features among high technology companies in the immediate future and that Web
conferencing vendors offering these functionalities within their solution will
likely find numerous successes within this vertical market. Unlike the products
offered by many of our competitors, our video and voice over IP can be throttled
20
for high bandwidth users or for low bandwidth users allowing anyone from a
dial-up connection to utilize these features. Frost & Sullivan also expects that
the financial services vertical market offers significant growth opportunities
for those Web conferencing vendors offering a behind the firewall solution. The
Company believes that it is the only carrier class Web conferencing solution
that offers both a behind the firewall solution installation combined with the
strength of its feature set as well as its use of the latest Advanced Encryption
Standard (AES) security. Prominent organizations inside the financial services
sector of the Fortune 1000 have chosen our solution based upon these features.
Third, we expect to see an increase in the demand for a single source
for audio and Web conferencing. Frost and Sullivan have noted in a separate
report on audio conferencing that the demand for integrated audio, web, and
video conferencing solutions continues to surge as end user needs for
easy-to-use, single-source solutions swell. Developing and proving a truly
converged user environment and experience, including the integration of audio,
web and video conferencing technologies is essential. With our acquisition of
Glyphic Communications we are now able to provide a single source for deeply
integrated Web, audio, video as well as voice over IP. Increasingly, the vendor
selection made for Web conferencing determines the selection made for audio
conferencing. We have already made significant progress in selling Web
conferencing products to the Glyphics customer base as well as selling audio
conferencing to our customer base. We believe that another benefit of the
integrated conferencing approach is customer retention. According to the same
Frost and Sullivan report, when Web conferencing and audio conferencing are sold
together as an integrated package there is a significant increase in retention
of the audio conferencing service. We have also found from customer surveys,
this to be true and are continuing to create incentives for our audio customers
to be Web and audio customers to drive this retention.
MARKET POSITION - DIFFERENTIATORS
We view our position in the market as the appropriate solution for the
enterprise-wide buyer in mature markets that have already adopted Web
conferencing and collaboration. Our goal is to specialize so that we might reach
the needs of target niches and be able to demonstrate specific value to these
industries beyond the competition. Our target markets include financial
services, high-tech and professional services. Frost and Sullivan noted in a
recent report that these markets combined will deliver between 50% to 60% of the
total Web conferencing market revenues this year. These vertical markets have
been the early adopters of Web and audio conferencing and have become what we
term as "mature conferencing buyers". Unlike other industries, the financial
services, high technology and professional services markets have great
familiarity with Web conferencing products and importantly, they have different
needs. In our experience, a growing number of these organizations have
recognized that because the buying decision for Web conferencing has
traditionally not been centralized, and they are using five or more different
vendors for Web or audio conferencing services and therefore not realizing the
economies of scale that consolidating to one or two vendors could provide. There
are also other important considerations revolving around Web conferencing such
as security and bandwidth availability that are inducing the buying decision for
Web and audio conferencing out of the business units and into the IT department.
We believe that our solution uniquely maps to critical IT requirements among
these mature buyers in five important distinctions.
First, we offer flexible licensing options that allow organizations to
pay a one-time license fee to install the software inside of their environment,
or organizations can contract with us annually to use our Web and audio
conferencing services through an ASP arrangement. We also offer the ability for
organizations to purchase perpetual licenses which we will then provide hosting
for in our co-location facility. We find this flexibility to be an important
differentiator for customers making an enterprise-wide decision. As Frost &
Sullivan notes, in many instances, Web conferencing is a migratory technology
(from ASP to installed software) - new users tend to first utilize Web
conferencing ASP services as they offer much more flexibility in terms of usage,
ability to utilize multiple solutions, and require less up-front investment, and
are less burdensome on enterprise resources. Therefore, a majority of new users
that adopt web conferencing prior to 2007 are expected to initially adopt an ASP
service-based solution, and then migrate to the purchase of a perpetual license.
Second, as noted earlier we provide a completely integrated Web, audio,
video and voice-over-IP conferencing solution with what we believe to be a
rich-feature set. According to Web conferencing analysts, as the industry moves
beyond the boundaries imposed by the term "web conferencing" to more of a rich
media communications environment, those vendors that are ahead of the curve in
terms of features and functionality will be around for the long-term survival.
Vendors offering a "me too" solution are not expected to be active long-term
competitors and are expected to disappear in the form of consolidation,
acquisitions, or all together exit the market because of shrinking profits.
21
Third, we offer the highest level of data security commercially
available. We believe that we are the only Tier 1 Web conferencing provider that
offers a customer hosted solution with a purchase license option and true
point-to-point security with our unique combination of AES and secure socket
layer (SSL). All information within a session can be transmitted between meeting
attendees securely without any reduction in performance.
Fourth, our solution is suitable and scalable for enterprise-wide
deployment. The iLinc Suite addresses most common needs for business
collaboration within the enterprise. We offer virtual classroom software with
our LearnLinc product, software for presentation and sales demonstrations with
MeetingLinc, customer support with SupportLinc, and software for Web casts and
marketing events with ConferenceLinc. Each of these products shares a common
interface enabling users of one product to easily understand any of our other
products. This reduces the learning curve for Web conferencing enterprise-wide
roll out and we believe increases adoption success.
Fifth, we provide what we believe to be an exceptional "total cost of
ownership" value. Our software and services are very competitively priced and
also importantly, the customer's installation of our product is a very short and
non-labor intensive process and maintenance of our software requires minimal
attention from an IT perspective.
We believe that all of these factors make our solution compelling to
our target markets, but we also recognize that in order to grow our market share
within the financial services, high technology and professional services
verticals we need to develop products that address their specific needs. To that
end, we have aligned our sales, marketing and product development efforts to
build Web and audio conferencing functionality that addresses specific pains
within each of our identified markets.
RESULTS OF OPERATIONS
We executed an agreement to acquire substantially all of the assets of
and assume certain liabilities of Glyphics Communications, Inc., a Utah based
private company. The acquisition had a stated effective date of June 1, 2004 and
was fully consummated on June 14, 2004. The Company plans to continue to pursue
the business formerly conducted by the seller on an integrated basis with its
existing Web conferencing products. (See also Note 10 above and Form 8-K/A on
file related to the Glyphics transaction dated August 13, 2004.)
The operations of the Company involve many risks, which, even through a
combination of experience, knowledge and careful evaluation, may not be
overcome. The Company also faces intense competition from other web conferencing
and audio conferencing providers. Many of our existing competitors have longer
operating histories and significantly greater financial resources than we do,
and therefore may be able to more quickly respond to changing opportunities or
customer requirements. New competitors are also likely to enter this market in
the future due to the lack of significant barrier to entry in the market share.
See "Additional Risk Factors That May Affect Our Operating Results and The
Market Price of Our Common Stock."
REVENUES FROM CONTINUING OPERATIONS
Total revenues generated from continuing operations for the three
months ended September 30, 2004 and September 30, 2003 were $2.7 million and
$1.4 million respectively, an increase of $157,000 in license revenues,
$1,121,000 in software and audio services revenues and $63,000 and maintenance
and professional services revenues. The increase is a result of the Company's
continuing expansion into the Web conferencing marketplace and has been
primarily fueled by the acquisition of the LearnLinc assets from Mentergy. In
addition, the increase was a result of an increase in audio conferencing
revenues of $981,000 for the three months ended September 30, 2004, which
included revenues of $943,000 from the Glyphics acquisition. They were no audio
conferencing revenues for the three months ended September 30, 2003.
Total revenues generated from continuing operations for the six months
ended September 30, 2004 and September 30, 2003 were $4.7 million and $2.7
million respectively, an increase of $446,000 in license revenues and $1,564,000
in software and audio services revenues and a decrease of $40,000 and
maintenance and professional services revenues. As noted above, the increase is
a result of the Company's continuing expansion into the Web conferencing
marketplace and has been primarily fueled by the acquisition of the LearnLinc
22
assets from Mentergy. In addition, audio conferencing revenues for the six
months ended September 30, 2004 were $1.3 million, which were substantially all
related to the Glyphics acquisition. There were no audio conferencing revenues
for the six months ended September 30, 2003. The decrease in maintenance and
professional services revenues was a result in the decrease in custom content
revenue of $95,000 and a decrease in maintenance on learning management software
of $15,000 offset by an increase of $80,000 in maintenance related to the
increase in LearnLinc license sales.
COST OF REVENUES FROM CONTINUING OPERATIONS
Cost of license revenue is driven by the amount of licenses sold. It
consists of royalty fees paid to third-parties on sale of certain product
licenses and costs for fulfillment and materials. Cost of license revenues for
the three months ended September 30, 2004 and September 30, 2003 were $37,000
and $77,000 respectively, a decrease of $40,000. The decrease is related to the
decrease in royalty bearing product license sales in the three months ended
September 30, 2004 as compared to September 30, 2003.
Cost of license revenues for the six months ended September 30, 2004
and September 30, 2003 were $79,000 and $94,000 respectively, a decrease of
$15,000. As noted above, the decrease is related to the decrease in royalty
bearing product license sales in the six months ended September 30, 2004 as
compared to September 30, 2003.
Cost of software and audio services revenue include salaries and
related expenses for our ASP, hosted and audio services organizations, an
overhead allocation consisting primarily of a portion of our facilities,
communications and depreciation expenses that are attributable to providing
these services, an allocation of technical support costs attributable to
providing support for these services and direct costs related to our ASP,
hosting and audio services offerings. Cost of software and audio services for
the three months ended September 30, 2004 and September 30, 2003 were $1.1
million and $125,000, respectively, an increase of $971,000. This increase is
primarily a result of the acquisition of the Glyphics audio business in June
2004. Cost associated with the audio business for the three months ended
September 30, 2004 were $881,000. They were no audio conferencing costs for the
three months ended September 30, 2003.
Cost of software and audio services for the six months ended September
30, 2004 and September 30, 2003 was $1.6 million and $266,000, respectively, an
increase of $1.3 million. This increase is primarily a result of the acquisition
of the Glyphics audio business in June 2004. Cost associated with the audio
business for the six months ended September 30, 2004 were $1.2 million. They
were no audio conferencing costs for the six months ended September 30, 2003.
Cost of maintenance and professional services revenue include an
allocation of technical support costs related to the services, an overhead
allocation consisting primarily of a portion of our facilities costs,
communications and depreciation expenses that is attributable to providing these
services and third party costs related to our custom content revenue. Cost of
maintenance and professional services for the three months ended September 30,
2004 and September 30, 2003 was $269,000 and $247,000, respectively, an increase
of $22,000. This increase is primarily attributable to the increase in third
party costs associated with our custom content revenue which increased for the
three months ended September 30, 2004 as compared to the three months ended
September 30, 2003.
Cost of maintenance and professional services for the six months ended
September 30, 2004 and September 30, 2003 was $382,000 and $448,000,
respectively, a decrease of $66,000. This decrease is primarily attributable to
the decrease in third party costs associated with custom content revenue.
Amortization of acquired developed technology consists of amortization
of acquired software technology from the Mentergy, Glyphics, and Quisic
acquisitions. Amortization of acquired technology for the three months ended
September 30, 2004 and September 30, 2003 was $125,000 and $56,000,
respectively, an increase of $69,000 which is related to the amortization of the
Glyphics technology. Amortization of acquired technology for the six months
ended September 30, 2004 and September 30, 2003 was $202,000 and $113,000,
respectively, an increase of $89,000 which is related to the amortization of the
Glyphics related technology.
23
OPERATING EXPENSES FROM CONTINUING OPERATIONS
Operating expenses consist of research and development, sales and
marketing, and general and administrative expenses. The Company incurred
operating expenses from continuing operations of $2.6 million for the three
months ended September 30, 2004, an increase of $1.5 million from $1.1 million
for the three months ended September 30, 2003. The Company incurred operating
expenses from continuing operations of $4.6 million for the six months ended
September 30, 2004, an increase of $2.4 million from $2.2 million for the six
months ended September 30, 2003.
Research and development expenses represent expenses incurred in
connection with the development of new products and new product versions and
consist primarily of salaries and benefits, communication equipment, supplies
and an overhead allocation consisting primarily of a portion of our facilities
costs, communications and depreciation expenses. Research and development
expenses from continuing operations for the three months ended September 30,
2004 and September 30, 2003 were $410,000 and $222,000, respectively, an
increase of $188,000. The increase is a result of additional expenses from the
Glyphics acquisition that included salaries and related benefits expense of
$77,000, increases in salaries and benefits of $47,000 related to an increase of
four FTE's, and third party labor costs related to the new product launch and
development support of $27,000.
Research and development expenses from continuing operations for the
three months ended September 30, 2004 and September 30, 2003 were $741,000 and
$491,000, respectively, an increase of $250,000. The increase is a result of
additional expenses from the Glyphics acquisition that included salaries and
related benefits expense of $95,000, increases in salaries and benefits of
$71,000 related to an increase of five FTE's, telephone and telecommunications
cost of $63,000 and third party labor costs related to the new product launch
and development support of $29,000 offset by reductions of salaries and benefits
of $67,000 associated with the elimination of personnel related to the Quisic
acquisition.
Sales and marketing expenses consist primarily of sales and marketing
salaries and benefits, travel, advertising, other marketing literature, and an
overhead allocation consisting primarily of a portion of our facilities costs,
communications and depreciation expenses. Sales and marketing expenses from
continuing operations were $1.3 million and $501,000 for the three months ended
September 30, 2004 and September 30, 2003, respectively, an increase of
$758,000. The increase is a result of increased salaries and related benefits of
$217,000 due to an increase in sales and marketing full-time equivalents
("FTE's") from 16 in September 2003 to 27 in September 2004 excluding Glyphics
sales positions, increases in marketing expense of $279,000 relating to
increased attendance at trade shows, marketing lead generation activities and
advertising costs and the costs associated with the Company's name change, and
costs associated with the addition of sales positions from the Glyphics
acquisition of $120,000.
Sales and marketing expenses from continuing operations were $2.3
million and $896,000 for the six months ended September 30, 2004 and September
30, 2003, respectively, an increase of $1.4 million. The increase is a result of
increases salaries and related benefits of $497,000 due to an increase in sales
and marketing FTE's, increases in marketing expense of $455,000 relating to
increased attendance at trade shows, marketing lead generation activities and
advertising costs and the costs associated with the Company's name change, and
costs associated with the addition of sales positions from the Glyphics
acquisition of $197,000.
General and administrative expenses consist of the corporate expenses
of the Company. These corporate expenses include salaries and benefits of
executive, finance and administrative personnel, rent, bad debt expense,
professional services, travel, office costs, an overhead allocation consisting
primarily of a portion of our facilities costs, communications and depreciation
expenses and other general corporate expenses. During the three months ended
September 30, 2004 and September 30, 2003, general and administrative expenses
from continuing operations were $904,000 and $414,000, respectively, an increase
of $490,000. The change in general and administrative expenses was primarily due
to increases in bad debts of $131,000, warrant cancellation costs of $71,000,
increases in accounting fees of $66,000, consulting and temporary labor costs of
$51,000, recruiting costs related to the hire of the new CFO of $35,000,
increases in investor relations of $20,000, additional board of directors fees
of $19,000.
During the six months ended September 30, 2004 and September 30, 2003,
general and administrative expenses from continuing operations were $1.6 million
and $856,000, respectively, an increase of $764,000. The change in general and
administrative expenses was primarily due to increases in bad debts of $164,000,
increases in accounting fees of $136,000, an increase in executive bonuses of
$75,000, consulting and temporary labor costs of $72,000, warrant cancellation
costs of $83,000, increases in investor relations of $56,000, recruiting costs
related to the hire of the new CFO of $35,000, additional board of directors
fees of $19,000.
24
INTEREST EXPENSE FROM CONTINUING OPERATIONS
Interest expense from continuing operations of $457,000 for the three
months ended September 30, 2004 increased by $174,000 from $282,000 for the
three months ended September 30, 2003. The increase was primarily a result of an
increase in non-cash interest expense of $64,000 relating to debt and equity
conversions of the convertible promissory notes, and additional interest of
$80,000 relating to the addition of senior notes from the private placement
offering in April 2004 and $27,000 related to debt assumed through the Glyphics
acquisition. For the three months ended September 30, 2004, total non-cash
interest expense was approximately $162,000.
Interest expense from continuing operations of $1.1 million for the six
months ended September 30, 2004 increased by $498,000 from $591,000 for the six
months ended September 30, 2003. The increase was primarily a result of an
increase in non-cash interest expense of $260,000 relating to debt and equity
conversions of the convertible promissory notes, and additional interest of
$144,000 relating to the addition of senior notes from the private placement
offering in April 2004 and $32,000 related to debt assumed through the Glyphics
acquisition. For the three months ended September 30, 2004, total non-cash
interest expense was approximately $521,000.
GAIN ON SETTLEMENT OF DEBT AND OTHER OBLIGATIONS FROM CONTINUING OPERATIONS
During the three months ended September 30, 2004, the Company
recognized a gain of $8,000 relating to the termination and lease settlement of
vacated office space in Memphis, TN. On July 23, 2004 the Company entered into a
lease settlement for $93,000 plus certain fixed assets with a net book value of
$6,000 to settle all claims related to the lease of approximately $107,000.
During the three months ended September 30, 2003, the Company
recognized a gain of $222,000 relating to the settlement of debt and other
obligations. This was offset by a loss on the conversion of shareholder notes to
common stock of $252,000. The resulting net loss for the three months ended
September 30, 2003 was $30,000. Of the $222,000 in gain recognized,
approximately $31,000 related to settlements related to the dental practice
business resulting in a net loss from continuing operations of $61,000.
During the six months ended September 30, 2004, the Company recognized
a gain of $8,000 relating to a lease settlement. As part of the acquisition of
LearnLinc from Mentergy in November of 2002, the Company assumed a lease for
computer equipment of $30,500. On June 15, 2004, the Company was notified by the
lessor that all claims and amounts due were to be settled for a final amount due
of $22,500.
During the six months ended September 30, 2003, the Company recognized
a gain of $352,000 relating to a state sales tax settlement. As part of the
acquisition of ThoughtWare in January of 2002, the Company assumed a sales and
use tax liability of $384,000. On July 29, 2003, the Company was notified by the
state taxing authorities that the amount due relating to the sales tax would be
removed from the assessment resulting in a net amount due of $32,000. As the
purchase allocation period to the acquisition was closed, the $352,000 was
recorded as other income rather than a reduction to goodwill.
INCOME TAX EXPENSE FROM CONTINUING OPERATIONS
The Company recorded no tax benefit during the three or six months
ended September 30, 2004 or 2003 because it concluded it is not likely it would
be able to recognize the tax asset created due to the lack of operating history
of its web conferencing and audio conferencing business strategy. At March 31,
2004, the Company has a net deferred tax asset of $10.7 million with a
corresponding valuation allowance. The Company's tax benefits are scheduled to
expire over a period of five to thirteen years.
RESULTS OF DISCONTINUED OPERATIONS
Effective January 1, 2004, the Company discontinued its dental practice
management services. Results of operations from this segment are presented as
discontinued operations for the fiscal years ended March 31, 2004 and 2003 in
accordance with SFAS 146 "ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES".
25
Net income from discontinued operations for the three months ended
September 30, 2004 and 2003 was $0 and $129,000, respectively. Net income from
discontinued operations for the six months ended September 30, 2004 and 2003 was
$0 and $137,000, respectively. Cash flows provided by discontinued operations
were $102,000 and $331,000 for the six months ended September 30, 2004 and 2003,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a working capital deficiency, has incurred operating
losses and has negative cash flows from continued operations. The Company
currently does not have existing working capital and does not generate positive
cash flows from operations. As a result, we may not have sufficient financial
resources to satisfy our obligations as they come due in the near term. These
matters, among others, including those more fully discussed herein, raise
substantial doubt about the Company's ability to continue as a going concern.
Furthermore, our independent registered public accountants expressed their
substantial doubt as to our ability to continue as a going concern in their
report on our 2004 and 2003 consolidated financial statements included in our
2004 annual report on Form 10-K. Our plan with regard to these matters includes
the continued development, marketing and licensing of our iLinc Suite of
products and services through both internal sales efforts and through external
channel partnerships. We plan to expand where appropriate with external growth
by acquisition, with those acquisitions possibly including providers of audio
conferencing as well as Web conferencing products and services. Although we
continue to pursue these plans, there is no assurance that the Company will be
successful in obtaining sufficient revenues from its Web collaboration and audio
conferencing products and services to generate profits or to provide adequate
cash flows to sustain our operations. Our continuation as a Company may be
dependent on our ability to either raise additional capital, continue to
increase sales and revenues, or generate positive cash flows from operations in
order to ultimately achieve profitability.
In order to increase its liquidity, the Company intends to restructure
or extend existing obligations to reduce cash outflows for debt service, seek,
if necessary, additional funding from the placement of debt or equity
securities, and invest in further marketing and sales efforts that result in the
sale of the Company's high margin software products and services. However, there
can be no assurance that the Company's plans will be achieved or that the
Company will be able to acquire additional sums.
As of September 30, 2004, the Company had a working capital deficit of
$3.0 million. Current assets included $1.1 million in cash, $2.0 million in
accounts receivable, $214,000 in prepaids and $25,000 in notes receivable.
Current liabilities consisted of $1.0 million of deferred revenue, $1.3 million
of current maturities of long-term debt and capital leases and $4.0 million in
accounts payable and accrued liabilities.
Cash used in operating activities from continuing operations was $1.8
million during the six months ended September 30, 2004 and $1.0 million during
the six months ended September 30, 2003. Cash used in operating activities
during the six months ended September 30, 2004 was primarily attributable to a
net loss of $3.3 million, increases in accounts receivable, prepaid expenses,
and deferred revenue of $371,000, $106,000, and $87,000, respectively. These
items were partially offset by increases in accounts payable and accrued
liabilities of $647,000 and non-cash expenses and revenues of $1,380,000. Cash
used in operating activities from continuing operations during the six months
ended September 30, 2003 was primarily attributable to a net loss of $587,000,
increases in accounts receivable of $363,000, decreases in deferred revenue of
$196,000 and increases in prepaid expenses of $97,000. These items were
partially offset by non-cash expenses and revenues of $317,000.
Cash used by investing activities from continuing operations was
$544,000 for the six months ended September 30, 2004 and was $130,000 for the
six months ended September 30, 2003. Cash used by investing activities for the
six months ended September 30, 2004 was due to $408,000 of acquisition related
royalty expenses, $105,000 of capital expenditures, and $35,000 of deferred
offering costs. Cash used in investing activities during the six months ended
September 30, 2003 was due to acquisition related royalty expenses of $130,000.
Cash provided by financing activities from continuing operations was
$3.0 million during the six months ended September 30, 2004, while cash provided
by financing activities from continuing operations was $985,000 during the six
months ended September 30, 2003. Cash provided in financing activities during
the six months ended September 30, 2004 was primarily due to the net proceeds of
$3.6 million related to the issuance of unsecured senior notes and common stock
of the company in April 2004, offset by repayment of debt and capital leases of
$572,000. Cash provided by financing activities during the six months ended
September 30, 2003 was primarily attributable to issuance of convertible
preferred stock of $1.3 million offset by the repayment of debt and capital
leases totaling $288,000.
26
INFORMATION RELATED TO ACQUISITIONS AND CAPITAL RAISE ACTIVITIES
We executed an agreement to acquire substantially all of the assets of
and assume certain liabilities of Glyphics Communications, Inc., a Utah based
private company. The acquisition had a stated effective date of June 1, 2004 and
was fully consummated on June 14, 2004. The purchase price, (which was expected
to total $5.568 million), is based on a multiple of the Glyphics' 2003 annual
audio conferencing business revenues (as defined in the asset purchase
agreement). The purchase price was paid with the assumption of specific
liabilities, with the balance paid using our common stock at the fixed price of
$1.05 per share. The Company plans to continue to pursue the audio conferencing
business formerly conducted by Glyphics on an integrated basis with the
Company's existing Web conferencing products. (See also Note 10 above and Form
8K/A on file related to the Glyphics transaction dated August 13, 2004.)
In October 2001, the Company issued $1.1 million of subordinated
promissory notes to the shareholders of Learning-Edge, Inc. under the terms of
the acquisition agreement. These notes bore interest at rates ranging from at
7.5% to 9.0% and were due in two equal installments on April 1, 2005 and on
October 1, 2005, respectively. The notes contained a provision that specified
that if the Company raised capital in excess of $3 million and up to $5 million
then an increasing percentage of the outstanding principal was to be repaid. As
a result of this provision and the capital raise in April of 2004 of $4.25
million, the entire outstanding balance of these notes have been fully
extinguished with cash payments of $333,000 and conversions of $583,000 of notes
into 550,633 shares of the Company's common stock.
On September 16, 2003, the Company completed its private placement of
convertible preferred stock with detachable warrants. The Company sold 30 units
at $50,000 each and raised a total of $1,500,000. Each unit consisted of 5,000
shares of convertible preferred stock, par value $0.001 and a warrant to
purchase 25,000 shares of common stock. The convertible preferred stock is
convertible into the Company's common stock at a price of $0.50 per share
(subject to adjustment in certain events, with a floor of $0.30), and the
warrants are immediately exercisable at a price of $1.50 per share with a
three-year term. Accordingly, each share of preferred stock is convertible into
20 shares of common stock and retains a $10 liquidation preference. The Company
pays an 8% dividend to holders of the convertible preferred stock, and the
dividend is cumulative. The convertible preferred stock is non-voting and
non-participating. The shares of convertible preferred stock will not be
registered under the Securities Act of 1933, as amended, and were offered in a
private placement providing exemption from registration. The placement agent was
paid a commission of $150,000 or 10% of the gross proceeds plus $45,000, which
represented a 3% non-accountable expense fee and received a warrant to purchase
3 units at the same terms of the original units. In addition, the Company paid
$17,000 in legal and accounting fees bringing the net proceeds raised to
$1,288,000. The Company used the net proceeds for general working capital, to
expand its sales and marketing activities and to retire certain acquisition
related liabilities. The cash proceeds of the private placement of convertible
preferred stock was allocated pro-rata between the relative fair values of the
preferred stock and warrants at issuance using the Black Scholes valuation model
for valuing the warrants. After allocating the proceeds between the preferred
stock and warrant, an effective conversion price was calculated for the
convertible preferred stock to determine the beneficial conversion discount for
each share. The aggregate value of the warrants and the beneficial conversion
discount of $247,000 are considered a deemed dividend in the calculation of loss
per share. During the quarter ending September 30, 2004, holders of 22,500
shares of preferred stock converted their stock into 450,000 shares of the
Company's common stock.
In February of 2004, the Company completed a private placement offering
raising capital of $500,000 that was used for general corporate purposes. Under
the terms of the offering, the Company issued unsecured subordinated convertible
notes that had a term of 24 months. The notes bore interest at the rate of 8%
per annum for the first twelve months and then 10% for the second twelve months
and required quarterly payments of interest only, with the principal due at
maturity on February 12, 2006. The holders of the notes could convert the
outstanding principal into shares of the Company's common stock at the fixed
price of $0.70 per share. At the issue date, the Company calculated a beneficial
conversion feature of the notes to be $214,286, which was to be amortized as
interest expense over the 2-year life of the debt. During the quarter ending
September 30, 2004, the holders of those notes fully converted the principal
balance of their notes into 714,285 shares of the Company's common stock and the
full amount recorded as a result of the beneficial conversion feature was
expensed in the period. The common stock issued upon conversion of these notes
was registered with the SEC and may be sold pursuant to a resale prospectus
dated May 24, 2004.
27
In April of 2004, the Company completed a private placement offering
with gross proceeds of $4.25 million that provided the Company $3.8 million of
net proceeds. Under the terms of this offering, the Company issued $3,187,500 in
unsecured senior notes and 1,634,550 shares of Common Stock of the Company. The
senior notes were issued as a series of notes pursuant to a unit purchase and
agency agreement. The senior notes are unsecured, non-convertible, and the
purchasers received no warrants. The placement agent received a commission equal
to 10% of the gross proceeds together with a warrant for the purchase of 163,455
shares of the Company's common stock at a price equal to 120% of the price paid
by investors. The senior notes bear interest at a rate of 10% per annum and
accrued interest is due and payable on a quarterly basis beginning July 15,
2004, with principal due at maturity on July 15, 2007. The senior notes are
redeemable by the Company at 100% of the principal value at any time after July
15, 2005. The notes and common stock were issued with a debt discount of
$768,269. The fair value of the warrants was estimated and used to calculate a
discount of $119,688 of which $68,130 was allocated to the notes and $51,558 was
allocated to equity. The total discount allocated to the notes of $836,399 is
being amortized to interest expense over the term of the notes which is
approximately 39 months. The senior notes are unsecured obligations of the
Company but are senior in right of payment to all existing and future
indebtedness of the Company. Individuals and entities participating in this
offering have the right to demand registration of the common stock issued
therefrom upon written notice to the Company and also have piggy-back
registration rights should the company file a registration statement before the
shares are otherwise registered.
CONTRACTUAL OBLIGATIONS
The following schedule details all of the Company's indebtedness and
the required payments related to such obligations at September 30, 2004 (in
thousands):
DUE IN DUE IN YEARS
LESS THAN DUE IN DUE IN YEAR FOUR AND DUE AFTER
TOTAL ONE YEAR YEAR TWO THREE FIVE FIVE YEARS
----------- ----------- ----------- ----------- --------- ----------
Long term debt ................... $ 9,824 $ 998 $ 8 $ 3,193 $ -- $ 5,625
Capital lease obligations ........ 505 342 163 -- -- --
Operating lease obligations ...... 1,223 586 466 171 -- --
Base salary commitments
under employment
agreements .................... 1,596 824 772 -- -- --
----------- ----------- ----------- ----------- --------- ----------
Total contractual obligations .... $ 13,148 $ 2,750 $ 1,409 $ 3,364 $ -- $ 5,625
=========== =========== =========== =========== ========= ==========
OFF BALANCE SHEET TRANSACTIONS
There are no off-balance sheet transactions, arrangements, obligations
(including contingent obligations) or other relationships of the Company with
unsolicited entities or other persons that have or may have a material effect on
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources of the Company.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. The more significant areas
requiring use of estimates relate to revenue recognition, estimates of value in
purchase price allocations, accounts receivable and notes receivable valuation
reserves, realizability of intangible assets, realizability of deferred income
tax assets, and the evaluation of contingencies and litigation. Management bases
its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. The results of such estimates
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
materially differ from these estimates under different assumptions or
conditions.
28
Our critical accounting policies and estimates are included in the
Company's annual report on Form 10-K for the year ended March 31, 2004 as filed
with the SEC.
ADDITIONAL RISK FACTORS THAT MAY AFFECT OUR OPERATING RESULTS AND THE MARKET
PRICE OF OUR COMMON STOCK
You should carefully consider the risks described below. The risks and
uncertainties described below are not the only ones we face. If any of the
following risks actually occur, our business, financial condition or results of
operations could be materially and adversely affected. In that case, the trading
price of our common stock could be adversely affected.
WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE OUR
BUSINESS.
We have a limited operating history in the Web conferencing and audio
conferencing business. While the organizations that we have acquired have been
engaged in their respective business for over five years, we only recently
acquired those assets and have undertaken to integrate their assets into our
operations at varying levels. Over the past 30 months, we have made significant
changes to our product mix and service mix, our growth strategies, our sales and
marketing plans, and other operational matters. As a result, it may be difficult
to evaluate an investment in our company. Given our recent investment in
technology, we cannot be certain that our business model and future operating
performance will yield the results that we intend. In addition, the competitive
and rapidly changing nature of the Web conferencing and audio conferencing
markets makes it difficult for us to predict future results. Our business
strategy may be unsuccessful and we may be unable to address the risks we face.
WE FACE RISKS INHERENT IN INTERNET-RELATED BUSINESSES AND MAY BE UNSUCCESSFUL IN
ADDRESSING THESE RISKS.
We face risks frequently encountered by companies in new and rapidly
evolving markets such as Web conferencing and audio conferencing. We may fail to
adequately address these risks and, as a consequence, our business may suffer.
To address these risks among others, we must successfully introduce and attract
new customers to our products and services; successfully implement our sales and
marketing strategy to generate sufficient sales and revenues to achieve or
sustain operations; foster existing relationships with our existing customers to
provide for continued or recurring business and cash flow; and, successfully
address and establish new products and technologies as new markets develop. We
may not be able to sufficiently access, address and overcome risks inherent in
our business strategy.
OUR QUARTERLY OPERATING RESULTS ARE UNCERTAIN AND MAY FLUCTUATE SIGNIFICANTLY.
Our operating results have varied significantly from quarter to quarter
and are likely to continue to fluctuate as a result of a variety of factors,
many of which we cannot control. Factors that may adversely affect our quarterly
operating results include: the size and timing of product orders; the mix of
revenue from custom services and software products; the market acceptance of our
products and services; our ability to develop and market new products in a
timely manner and the market acceptance of these new products; the timing of
revenues and expenses relating to our product sales; and, the timing of revenue
recognition. Expense levels are based, in part, on expectations as to future
revenue and to a large extent are fixed in the short term. To the extent we are
unable to predict future revenue accurately, we may be unable to adjust spending
in a timely manner to compensate for any unexpected revenue shortfall.
WE HAVE SIGNIFICANT OPERATING LOSSES, HAVE LIMITED FINANCIAL RESOURCES, AND MAY
NOT BECOME PROFITABLE.
We have incurred substantial operating losses and have limited
financial resources at our disposal. We have long-term obligations that we will
not be able to satisfy without additional debt and/or equity capital and/or
ultimately generating profits and cash flows from our Web conferencing and audio
conferencing operations. If we are unable to achieve profitability in the near
future, we will face increasing demands for capital and liquidity. We may not be
successful in raising additional debt or equity capital and may not become
profitable in the short term or not at all. As a result, we may not have
sufficient financial resources to satisfy our obligations as they come due in
the short term.
29
OUR AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT AS TO OUR ABILITY TO CONTINUE AS A
GOING CONCERN.
Our consolidated financial statements have been prepared on a basis
which assumes that we will continue as a going concern and which contemplates
the realization of our assets and the satisfaction of our liabilities and
commitments in the normal course of business. We have a significant working
capital deficiency, and have historically suffered substantial recurring losses
and negative cash flows from operations. These factors, among others, and the
limited operating history as a Web conferencing and audio conferencing company
have caused our auditors to conclude in their report that there is substantial
doubt as to our ability to continue as a going concern. Our plans with regard to
these factors include continued development, marketing and licensing of our Web
Conferencing and audio conferencing products and services through both internal
growth and acquisition. Although we continue to pursue these plans, there is no
assurance that we will be successful in obtaining sufficient revenues from our
products and services to provide adequate cash flows to sustain operations. Our
continuation is dependent on our ability to raise additional equity or debt
capital, to increase our web conferencing and audio conferencing revenues, to
generate positive cash flows from operations and to achieve profitability. The
consolidated financial statements do not include any adjustments related to the
recoverability of assets and classification of liabilities that might result
from the outcome of this uncertainty.
LISTING QUALIFICATIONS MAY NOT BE MET.
The American Stock Exchange's continued listing standards require that
the Company maintain stockholder's equity of at least $4.0 million if the
Company has losses from continuing operations and/or net losses in three of its
four most recent fiscal years. While the Company has sustained losses in three
of its four most recent fiscal years it has as of the date of this report
stockholder's equity in excess of the $4.0 million requirement. If in the
future, the Company fails to maintain a sufficient level of stockholder's equity
in compliance with those and other listing standards of the American Stock
Exchange then the Company would be required to submit a plan to the American
Stock Exchange describing how it intended to regain compliance with the
requirements.
DILUTION TO EXISTING STOCKHOLDERS IS LIKELY TO OCCUR UPON ISSUANCE OF SHARES WE
HAVE RESERVED FOR FUTURE ISSUANCE.
On September 30, 2004, 25,578,350 shares of our common stock were
issued, of which 1,432,412 were held in treasury, and 20,814,474 additional
shares of our common stock were reserved for issuance. The issuance of these
additional shares will reduce the percentage ownership of existing stockholders
in the Company. The existence of these reserved shares coupled with other
factors, such as the relatively small public float, could adversely affect
prevailing market prices for our common stock and our ability to raise capital
through an offering of equity securities.
THE LOSS OF THE SERVICES OF OUR SENIOR EXECUTIVES AND KEY PERSONNEL WOULD LIKELY
CAUSE OUR BUSINESS TO SUFFER.
Our success depends to a significant degree on the performance of our
senior management team. The loss of any of these individuals could harm our
business. We do not maintain key person life insurance for any officers or key
employees other than on the life of James M. Powers, Jr., our Chairman,
President and CEO, with that policy providing a death benefit to the Company of
$1.0 million. Our success also depends on the ability to attract, integrate,
motivate and retain additional highly skilled technical, sales and marketing,
and professional services personnel. To the extent we are unable to attract and
retain a sufficient number of additional skilled personnel, our business will
suffer.
OUR INTELLECTUAL PROPERTY MAY BECOME SUBJECT TO LEGAL CHALLENGES, UNAUTHORIZED
USE OR INFRINGEMENT, ANY OF WHICH COULD DIMINISH THE VALUE OF OUR PRODUCTS AND
SERVICES.
Our success depends in large part on our proprietary technology. If we
fail to successfully enforce our intellectual property rights, the value of
these rights, and consequently the value of our products and services to our
customers, could diminish substantially. It may be possible for third parties to
copy or otherwise obtain and use our intellectual property or trade secrets
without our authorization, and it may also be possible for third parties to
independently develop substantially equivalent intellectual property. Currently,
we do not have patent protection in place related to our products and services.
Litigation may be necessary in the future to enforce our intellectual property
rights, to protect trade secrets or to determine the validity and scope of the
proprietary rights of others. While we have not received any notice of any claim
of infringement of any of our intellectual property, from time to time we may
receive notice of claims of infringement of other parties' proprietary rights.
30
Such claims could result in costly litigation and could divert management and
technical resources. These types of claims could also delay product shipment or
require us to develop non-infringing technology or enter into royalty or
licensing agreements, which agreements, if required, may not be available on
reasonable terms, or at all.
COMPETITION IN THE WEB CONFERENCING AND AUDIO CONFERENCING SERVICES MARKET IS
INTENSE AND WE MAY BE UNABLE TO COMPETE SUCCESSFULLY, PARTICULARLY AS A RESULT
OF RECENT ANNOUNCEMENTS FROM LARGE SOFTWARE COMPANIES.
The markets for Web conferencing and audio conferencing products and
services are relatively new, rapidly evolving and intensely competitive.
Competition in our market will continue to intensify and may force us to reduce
our prices, or cause us to experience reduced sales and margins, loss of market
share and reduced acceptance of our services. Many of our competitors have
larger and more established customer bases, longer operating histories, greater
name recognition, broader service offerings, more employees and significantly
greater financial, technical, marketing, public relations and distribution
resources than we do. We expect that we will face new competition as others
enter our market to develop Web conferencing and audio conferencing services.
These current and future competitors may also offer or develop products or
services that perform better than ours. In addition, acquisitions or strategic
partnerships involving our current and potential competitors could harm us in a
number of ways.
FUTURE REGULATIONS COULD BE ENACTED THAT EITHER DIRECTLY RESTRICT OUR BUSINESS
OR INDIRECTLY IMPACT OUR BUSINESS BY LIMITING THE GROWTH OF INTERNET-BASED
BUSINESS AND SERVICES.
As commercial use of the Internet increases, federal, state and foreign
agencies could enact laws or adopt regulations covering issues such as user
privacy, content and taxation of products and services. If enacted, such laws or
regulations could limit the market for our products and services. Although they
might not apply to our business directly, we expect that laws or rules
regulating personal and consumer information could indirectly affect our
business. It is possible that such legislation or regulation could expose us to
liability which could limit the growth of our Web conferencing and audio
conferencing products and services. Such legislation or regulation could dampen
the growth in overall Web conferencing usage and decrease the Internet's
acceptance as a medium of communications and commerce.
WE DEPEND LARGELY ON ONE-TIME SALES TO GROW REVENUES.
While audio conferencing provides a more recurring revenue base, a high
percentage of our revenue is attributable to one-time purchases by our customers
rather than long term recurring web conferencing ASP type contracts. As a
result, our inability to continue to obtain new agreements and sales may result
in lower than expected revenue, and therefore, harm our ability to achieve or
sustain operations or profitability on a consistent basis, which could also
cause our stock price to decline. Further, because we face competition from
larger better-capitalized companies, we could face increased downward pricing
pressure that could cause a decrease in our gross margins.
OUR OPERATING RESULTS MAY SUFFER IF WE FAIL TO DEVELOP AND FOSTER OUR VALUE
ADDED RESELLER OR DISTRIBUTION RELATIONSHIPS.
We have an existing channel and distribution network that provides
growing revenues and contributes to our high margin software sales. These
distribution partners are not obligated to distribute our services at any
particular minimum level. As a result, we cannot accurately predict the amount
of revenue we will derive from our distribution partners in the future. The
inability of our distribution partners to sell our products to their customers
and increase their distribution of our products could result in significant
reductions in our revenue, and therefore, harm our ability to achieve or sustain
profitability on a consistent basis.
SALES IN FOREIGN JURISDICTIONS BY US AND OUR INTERNATIONAL DISTRIBUTOR NETWORK
MAY CAUSE COSTS THAT ARE NOT ANTICIPATED.
We continue to expand internationally through our value added reseller
network and OEM partners. We have limited experience in international operations
and may not be able to compete effectively in international markets. We face
certain risks inherent in conducting business internationally, such as:
31
o our inability to establish and maintain effective distribution
channels and partners;
o the varying technology standards from country to country;
o our inability to effectively protect our intellectual property
rights or the code to our software;
o our inexperience with inconsistent regulations and unexpected
changes in regulatory requirements in foreign jurisdictions;
o language and cultural differences;
o fluctuations in currency exchange rates;
o our inability to effectively collect accounts receivable; or
o our inability to manage sales and other taxes imposed by
foreign jurisdictions.
THE GROWTH OF OUR BUSINESS SUBSTANTIALLY DEPENDS ON OUR ABILITY TO SUCCESSFULLY
DEVELOP AND INTRODUCE NEW SERVICES AND FEATURES IN A TIMELY MANNER.
We acquired our Web conferencing software and business in November of
2002 and we acquired our audio conferencing business in June of 2004. With our
focus on those products and services, our growth depends on our ability to
continue to develop new features, products and services around that software and
product line. We may not successfully identify, develop and market new products
and features in a timely and cost-effective manner. If we fail to develop and
maintain market acceptance of our existing and new products to offset our
continuing development costs, then our net losses will increase and we may not
be able to achieve or sustain profitability on a consistent basis.
IF WE FAIL TO OFFER COMPETITIVE PRICING, WE MAY NOT BE ABLE TO ATTRACT AND
RETAIN CUSTOMERS.
Because the Web conferencing market is relatively new and still
evolving, the prices for these services are subject to rapid and frequent
changes. In many cases, businesses provide their services at significantly
reduced rates, for free or on a trial basis in order to win customers. Due to
competitive factors and the rapidly changing marketplace, we may be required to
significantly reduce our pricing structure, which would negatively affect our
revenue, margins and our ability to achieve or sustain profitability on a
consistent basis. We have an existing channel and distribution network that
provides growing revenues and contributes to our high margin software sales.
These distribution partners are not obligated to distribute our services at any
particular minimum level. As a result, we cannot accurately predict the amount
of revenue we will derive from our distribution partners in the future. Our
inability of our distribution partners to sell our products to their customers
and increase their distribution of our products could result in significant
reductions in our revenue, and therefore, harm our ability to achieve or sustain
profitability on a consistent basis.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes
in interest rates, equity prices and foreign currency exchange rates. Market
risk generally represents the risk of loss that may result from the potential
change in the value of a financial instrument as a result of fluctuations in
interest rates and market prices. We have not traded or otherwise bought and
sold derivatives nor do we expect to in the future. We also do not invest in
market risk sensitive instruments for trading purposes. The primary objective of
the Company's investment activity is to preserve principal while at the same
time maximizing yields without significantly increasing risk. To achieve this
objective, the Company maintains its portfolio of cash equivalents in a variety
of money market funds.
As of September 30, 2004, the carrying value of our outstanding
convertible redeemable subordinated notes was approximately $4.0 million at a
fixed interest rate of 12%. In certain circumstances, we may redeem this
long-term debt. Our other components of indebtness bear fixed interest rates of
6% to 10%. Because the interest rates on these instruments are fixed, a
hypothetical 10% change in interest rates would not have a material impact on
our financial condition, revenues or operations. Increases in interest rates
could, however, increase the interest expense associated with future borrowings,
if any. We do not hedge against interest rate increases.
32
ITEM 4. CONTROLS AND PROCEDURES
We evaluated the design and operation of our disclosure controls and
procedures as of September 30, 2004 to determine whether they are effective in
ensuring that we disclose the required information in a timely manner and in
accordance with the Securities Exchange Act of 1934, as amended, or the Exchange
Act, and the rules and forms of the Securities and Exchange Commission.
Management, including our principal executive officer and principal financial
officer, supervised and participated in the evaluation. The principal executive
officer and principal financial officer concluded, based on their review, that,
except as communicated by the Company's independent registered public
accountants to the Company's Audit Committee on November 12, 2004 and as further
described below, our disclosure controls and procedures, as defined by Exchange
Act Rules 13a-14(c) and 15d-14(c), are effective and ensure that we disclose the
required information in reports that we file under the Exchange Act and that the
filings are recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. No significant
changes were made during the quarter ended September 30, 2004 to our internal
controls over financial reporting that could significantly affect these controls
subsequent to the date of their evaluation.
A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Because of the inherent limitations in all control
systems no evaluation of controls can provide absolute assurance that all
control issues if any, within a company have been detected.
On November 12, 2004, the Company's independent registered public
accountants orally notified the Company's Audit Committee that they had
identified a material weakness regarding the Company's internal controls. The
material weakness noted was the lack of sufficient control over the sales order
and revenue recognition process. Management of the Company has informed the
Audit Committee that it is in the process of changing procedures to correct this
weakness. The Company is implementing a new procedure which requires a
documented secondary review of all sales orders to assure proper revenue
recognition and completeness of customer sales files.
33
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS OF SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our annual meeting of stockholders held on August 20, 2004 the
following matters were submitted to a vote of stockholders:
1) Election of a director:
NAME FOR WITHHELD
------------------- ------------- --------------
Kent Petzold 15,344,807 25,064
2) Approval and ratification of selection of BDO Seidman, LLP as independent
auditors for the fiscal year ended March 31, 2005:
FOR AGAINST ABSTAINED
------------------- ------------- --------------
15,324,507 44,000 1,364
ITEM 5. OTHER INFORMATION
None
34
ITEM 6. EXHIBITS
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
3.1(1) Restated Certificate of Incorporation of the Company
3.2(1) Bylaws of the Company
3.3(7) Restated Certificate of Incorporation of the Company
3.4(7) Amendment of Bylaws of the Company
3.5(8) Restated Certificate of Incorporation of the Company
3.6(14) Certificate of Designations of Series A Preferred Stock
3.7(15) Certificate of Amendment of Restated Certificate of
Incorporation of the Company
4.1(1) Form of certificate evidencing ownership of Common Stock of
the Company
4.2(1) Form of Registration Rights Agreement for Owners of Founding
Affiliated Practices
4.3(1) Registration Rights Agreement dated September 30, 1997 between
the Company and the stockholders named therein
4.4(2) Form of Stockholders' Agreement for Owners of Affiliated
Practices
4.5(3) Form of Indenture from the Company to U.S. Trust Company of
Texas, N.A., as Trustee relating to the Convertible Debt
Securities
4.6(7) Form of certificate evidencing ownership of Common Stock of
the Company
4.7(8) Form of Convertible Redeemable Subordinated Note
4.8(8) Form of Redeemable Warrant (2002 Private Placement Offering)
4.9(14) Form of Redeemable Warrant (2003 Private Placement Offering)
+10.1(1) The Company's 1997 Stock Compensation Plan
+10.9(7) Employment Agreement dated November 12, 2000 between the
Company and James M. Powers, Jr.
+10.11(7) Employment Agreement dated February 15, 2001 between the
Company and James Dunn, Jr.
10.14(9) Plan of Reorganization and Agreement of Merger by and among
the Company, Edge Acquisition Subsidiary, Inc. and the
Stockholders of Learning-Edge, Inc.
10.15(10) Plan of Reorganization and Agreement of Merger by and among
the Company, TW Acquisition Subsidiary, Inc., ThoughtWare
Technologies, Inc. and the Series B Preferred Stockholder of
ThoughtWare Technologies, Inc.
10.16(11) Asset Purchase Agreement by and among the Company, and Quisic
Corporation. Common Stock Purchase Agreement by and between
the Company, Investor Growth Capital Limited, A Guernsey
Corporation and Investor Group, L.P., A Guernsey Limited
Partnership and Leeds Equity Partners III, L.P.
10.16(12) Asset Purchase Agreement by and among the Company, and
Mentergy, Inc. and its wholly-owned subsidiaries, LearnLinc
Corp and Gilat-Allen Communications, Inc.
10.17(14) Subcontractor Agreement between the Company and Interactive
Alchemy, Inc.
+10.18(17) Employment Agreement dated January 6, 2004 between the Company
and Nathan Cocozza
10.19(17) Note Purchase Agreement dated February 12, 2004
10.20(17) Unit Purchase and Agency Agreement dated April 19, 2004
between the Company and Cerberus Financial, Inc.
10.21(17) Placement Agency Agreement dated March 10, 2004 between the
Company and Peacock, Hislop, Staley, and Given, Inc.
10.22(16) Asset Purchase Agreement and Plan of Reorganization by and
between the Company and Glyphics Communications, Inc.
+10.23(18) Employment Agreement dated June 1, 2004 between the Company
and Gary L. Moulton
+10.24(18) Employment Agreement dated July 19, 2004 between the Company
and John S. Hodgson
14.1(18) Code of Ethics
16(13) Letter re Change in Certifying Accountant
++31.1 Chief Executive Officer Section 302 Certification
++31.2 Principal Financial Officer Section 302 Certification
++32.1 Chief Executive Officer Section 906 Certification
++32.2 Principal Financial Officer Section 906 Certification
35
----------
(1) Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (No. 333-37633), and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement
on Form S-4 (No. 333-78535), and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Registration Statement
on Form S-4 (No. 333-64665), and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 1998.
(5) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 1998.
(6) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended March 31, 2000.
(7) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended March 31, 2001.
(8) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended March 31, 2002.
(9) Previously filed as an exhibit to the Company's Form 8-K filed October
16, 2001.
(10) Previously filed as an exhibit to the Company's Form 8-K filed January
30, 2002
(11) Previously filed as an exhibit to the Company's Form 8-K filed July 2,
2002.
(12) Previously filed as an exhibit to the Company's Form 8-K filed
December 20, 2002.
(13) Previously filed as an exhibit to the Company's Form 8-K filed April
3, 2003.
(14) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 2003.
(15) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended December 31, 2003.
(16) Previously filed as an exhibit to the Company's Form 8-K filed June
14, 2004.
(17) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended March 31, 2004.
(18) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 2004.
+ Management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to the requirements of Item 15
of Form 10-K.
++ Furnished herewith as an Exhibit
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant, iLinc Communications, Inc., has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ILINC COMMUNICATIONS, INC.
Dated: November 18, 2004
By: /s/ James M. Powers, Jr.
-------------------------------------------
Chairman of the Board, President and Chief
Executive Officer
By: /s/ John S. Hodgson
-------------------------------------------
Senior Vice President & Chief Financial Officer
37