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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 DECEMBER 31, 2005
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 February 14, 2006 was 27,182,623 net of shares held in
treasury.
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FORM 10-Q REPORT INDEX
PART I--FINANCIAL INFORMATION PAGE
----
Item 1--Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of December
31, 2005 and audited Balance Sheets as of March 31, 2005.... 4
Unaudited Condensed Consolidated Statements of Operations for
the Three and Nine Months Ended December 31, 2005 and 2004...5
Unaudited Condensed Consolidated Statement of Changes in
Shareholders' Equity for the Nine Months Ended
December 31, 2005........................................... 6
Unaudited Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended December 31, 2005 and 2004............ 7
Notes to Unaudited Condensed Consolidated Financial
Statements.................................................. 8
Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................22
Item 3-- Quantitative and Qualitative Disclosures about Market Risk..40
Item 4--Controls and Procedures......................................40
PART II--OTHER INFORMATION
Item 1--Legal Proceedings............................................41
Item 2--Change in Securities and Use of Proceeds.....................41
Item 3--Defaults of Senior Securities................................41
Item 4--Submission of Matters to a Vote of Security Holders..........41
Item 5--Other Information............................................41
Item 6--Exhibits.....................................................41
Signatures...........................................................44
Certifications.......................................................45
2
FORWARD-LOOKING STATEMENTS
Unless the context requires otherwise, references in this document to
"iLinc Communications," "iLinc," the "Company," "we," "us," and "our" refer to
iLinc Communications, Inc.
Statements contained in this Quarterly 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. 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; integrate current and
emerging technologies; control our expenses; control changes in our customer
base; control changes in our employee headcount; 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 other risks discussed herein (see Item 2 "Management's
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 Securities and Exchange
Commission (the "SEC") that attempt to advise interested parties of certain
risks and factors that may affect our business. Our reports are available free
of charge as soon as reasonably practicable after such material is
electronically filed with the SEC and may be obtained either from the SEC at
their Web site located at www.sec.gov, or through our Web site located at
www.ilinc.com.
iLinc, iLinc Communications, iLinc Suite, MeetingLinc, LearnLinc,
ConferenceLinc, SupportLinc, iLinc On-Demand, EventPlus, WebPresenter, Glyphics,
Quisic, iCanvas, and Thoughtware and their respective logos are the service
marks, trademarks or registered trademarks of iLinc Communications, Inc. All
other company names and products may be trademarks of the respective companies.
3
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ILINC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, MARCH 31,
2005 2005
-------------- --------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 618 $ 532
Accounts receivable, net of allowance for doubtful accounts of $123 and $84,
respectively.................................................................... 1,520 1,949
Note receivable.................................................................. 17 25
Prepaid and other current assets................................................. 187 69
-------------- --------------
Total current assets........................................................... 2,342 2,575
Property and equipment, net ........................................................ 566 1,221
Goodwill............................................................................ 11,086 10,797
Intangible assets, net.............................................................. 1,892 2,504
Other assets........................................................................ 12 18
Assets of discontinued operations................................................... -- 114
-------------- --------------
Total assets................................................................... $ 15,898 $ 17,229
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt................................................ $ 670 $ 885
Accounts payable trade........................................................... 1,203 1,771
Accrued liabilities.............................................................. 2,324 2,960
Current portion of capital lease liabilities..................................... 118 196
Deferred revenue................................................................. 864 1,014
-------------- --------------
Total current liabilities...................................................... 5,179 6,826
Long term debt, less current maturities, net of discount of $1,604 and $2,120,
respectively.................................................................. 6,468 6,702
Capital lease liabilities, less current maturities.................................. -- 31
-------------- --------------
Total liabilities.............................................................. 11,647 13,559
-------------- --------------
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value 10,000,000 shares authorized, Series A 127,500
shares issued and outstanding, liquidation preference of $1,275,000 and Series
B, 70,000 shares issued and outstanding, liquidation preference of $700,000.... -- --
Common stock, $.001 par value 100,000,000 shares authorized, 28,615,035 and
25,577,287 issued, respectively................................................ 29 26
Additional paid-in capital....................................................... 44,098 42,175
Accumulated deficit.............................................................. (38,468) (37,123)
Less: 1,432,412 treasury shares at cost......................................... (1,408) (1,408)
-------------- --------------
Total shareholders' equity..................................................... 4,251 3,670
-------------- --------------
Total liabilities and shareholders' equity..................................... $ 15,898 $ 17,229
============== ==============
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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- ----------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Revenues
Software Licenses ............................................ $ 850 $ 708 $ 2,123 $ 2,343
Software and audio services .................................. 1,747 1,330 5,158 3,461
Maintenance and professional services ........................ 677 530 1,671 1,469
--------- --------- --------- ---------
Total revenues ........................................... 3,274 2,568 8,952 7,273
--------- --------- --------- ---------
Cost of revenues
Software Licenses ............................................ 40 67 72 146
Software and audio services .................................. 959 1,096 2,838 2,716
Maintenance and professional services ........................ 237 217 535 599
Amortization of acquired developed technology ................ 82 123 309 325
--------- --------- --------- ---------
Total cost of revenues ................................... 1,318 1,503 3,754 3,786
--------- --------- --------- ---------
Gross profit .................................................... 1,956 1,065 5,198 3,487
--------- --------- --------- ---------
Operating expenses
Research and development ..................................... 351 418 1,055 1,159
Sales and marketing .......................................... 701 893 2,255 3,174
General and administrative ................................... 485 501 1,615 2,121
--------- --------- --------- ---------
Total operating expenses ................................. 1,537 1,812 4,925 6,454
--------- --------- --------- ---------
Income/(loss) from operations .................................. 419 (747) 273 (2,967)
Interest expense ............................................. (246) (263) (773) (849)
Amortization of beneficial debt conversion ................... (213) (162) (705) (665)
--------- --------- --------- ---------
Total interest expense ................................... (459) (425) (1,478) (1,514)
Debt conversion (expense) gain, net .......................... -- 13 (287) 35
Interest income and other .................................... 177 -- 171 29
Gain on sale of assets ....................................... -- -- 40 --
--------- --------- --------- ---------
Income/(loss) from continuing operations before income taxes . 137 (1,159) (1,281) (4,417)
Income taxes ................................................. -- -- -- --
--------- --------- --------- ---------
Income/(loss) from continuing operations ........................ 137 (1,159) (1,281) (4,417)
Income from discontinued operations ............................ 70 15 82 15
--------- --------- --------- ---------
Net income/(loss) .............................................. $ 207 $ (1,144) $ (1,199) $ (4,402)
Series A and B preferred stock dividends ....................... (40) (26) (91) (81)
Imputed preferred stock dividends .............................. -- -- (55) --
--------- --------- --------- ---------
Income/(loss) available to common shareholders ................. $ 167 $ (1,170) $ (1,345) $ (4,483)
========= ========= ========= =========
Income/(loss) per common share, basic and diluted
From continuing operations ................................... $ 0.01 $ (0.05) $ (0.05) $ (0.20)
From discontinued operations ................................. -- -- -- --
--------- --------- --------- ---------
Net income/loss per common share ......................... $ 0.01 $ (0.05) $ (0.05) $ (0.20)
========= ========= ========= =========
Number of shares used in calculation of income/loss per share:
Basic ....................................................... 27,114 24,146 25,705 22,858
========= ========= ========= =========
Diluted ..................................................... 27,115 24,146 25,705 22,858
========= ========= ========= =========
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
(SERIES A & B) COMMON STOCK ADDITIONAL TOTAL
---------------------- --------------------- PAID - IN ACCUMULATED TREASURY SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY
--------- ---------- --------- --------- --------- --------- --------- ---------
Balances, April 1, 2005 ..... 127 $ -- 25,577 $ 26 $ 42,175 $(37,123) $ (1,408) $ 3,670
Warrant grant ............... -- -- -- -- 6 -- -- 6
Series B preferred stock
dividends ................... -- -- -- -- -- (13) -- (13)
Vesting of restricted
stock grant ................. -- -- -- -- 30 -- -- 30
Series A preferred stock
dividends ................ -- -- -- -- -- (78) -- (78)
Warrant exercise ............ -- -- 164 1 47 -- -- 48
Issuance of Series B
preferred stock in
private placement from
debt conversion ........... 55 -- -- -- 550 -- -- 550
Issuance of Series B
preferred stock in
private placement ......... 15 -- -- -- 150 -- -- 150
Imputed preferred stock
dividend .................... -- -- -- -- 55 (55) -- --
Conversion of 2002
convertible redeemable
subordinated notes ........ -- -- 1,971 2 531 -- -- 533
Conversion expense
associated with
conversion of 2002
convertible redeemable
subordinated notes to
common stock .............. -- -- -- -- 338 -- -- 338
Conversion of 2004 senior
unsecured promissory
notes ..................... -- -- 903 -- 225 -- -- 225
Gain on conversion of 2004
senior unsecured
promissory notes to
common stock .............. -- -- -- -- (9) -- -- (9)
Net loss .................... -- -- -- -- -- (1,199) -- (1,199)
--------- ---------- --------- --------- --------- --------- --------- ---------
Balances, December 31, 2005.. 197 $ -- 28,615 $ 29 $ 44,098 $(38,468) $(1,408) $ 4,251
========= ========== ========= ========= ========= ========= ========= =========
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)
NINE MONTHS ENDED
DECEMBER 31,
----------------------
2005 2004
-------- --------
Net cash provided by (used in) operating activities ............ $ 385 $(2,377)
-------- --------
Cash flows from investing activities:
Capital expenditures ........................................ (52) (111)
Acquisitions, net of cash acquired .......................... (4) (399)
Acquisition, royalty earn-out payment to Mentergy ........... (100) --
Proceeds from sale of software .............................. 20 --
Deferred acquisitions costs ................................. -- (35)
Repayment of notes receivable ............................... 3 --
-------- --------
Cash acquired in acquisition ................................ -- 4
-------- --------
Net cash used in investing activities
(133) (541)
-------- --------
Cash flows from financing activities:
Proceeds from 2004 senior unsecured notes ................... -- 4,250
Proceeds from issuance of Series B preferred stock .......... 150 --
Series A and Series B preferred stock dividends ............. (91) (82)
Proceeds from exercise of stock options ..................... -- 81
Proceeds from exercise of warrants .......................... 41 --
Repayment of long-term debt ................................. (215) (464)
Repayment of capital lease liabilities ...................... (109) (275)
Financing costs incurred .................................... (28) (668)
-------- --------
Net cash (used in) provided by financing activities..... (252) 2,842
-------- --------
Cash flows from continuing operations .......................... -- (76)
Cash flows from discontinued operations ........................ 86 202
-------- --------
Net change in cash and cash equivalents ................ 86 126
Cash and cash equivalents, beginning of period ................. 532 292
-------- --------
Cash and cash equivalents, end of period ....................... $ 618 $ 418
======== ========
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. The Company develops and sells software that provides
real-time collaboration and training using Web-based tools. The Company's 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 its Web collaboration, conferencing and
virtual classroom products, the Company provides reliable and cost-effective
tools for remote instruction, presentations, meetings and online events. The
Company's software is based on a proprietary architecture and code that finds
its origins as far back as 1994, in what the Company believes 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
8.0. The Company's customers may choose from several different pricing options
for the iLinc Suite, and may receive its products on a stand-alone basis or
integrated with one or a number of its other award-winning products, depending
upon the customers' needs. Uses for the iLinc Suite of Web collaboration
software include online instruction, business meetings, sales presentations,
training sessions, product demonstrations and technical support assistance. The
Company sells its software solutions to large and medium-sized corporations
inside and outside of the Fortune 1000. The Company markets its products using a
direct sales force and a distribution channel consisting of agents and value
added resellers. The Company allows customers to choose between purchasing a
perpetual license or subscribing to a term license to its products, providing
for flexibility among many ownership or rental model options.
The Company maintains corporate headquarters in Phoenix, Arizona and
has occupied that 14,000 square foot Class A facility since the Company's
inception in 1998. The Phoenix lease began in 1998 and has a term of 10 years.
The Phoenix office can accommodate up to 85 employees and is fully equipped with
up-to-date computer equipment and server facilities. The Company also maintains
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. The Company also
maintains offices in Springville, Utah, occupying a 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 audio
conferencing operator complex and sales organizations within its 6,122 square
feet. The Springville lease began in 2003 and has a term of five years. The
Springville offices can accommodate up to 100 employees and are fully equipped
with up-to-date computer equipment. This facility also provides a fully
redundant co-location and server facility for all audio conferencing services
and all hosted Web conferencing services.
The Company began operations in March of 1998. Its formation included
the simultaneous rollup of fifty private businesses and an initial public
offering. The Company's initial goals included providing training enhancement
services over the Internet using a browser based system. In 2002 the Company
began shifting its focus away from that legacy business, turning toward its
current focus of Web conferencing and audio conferencing. The Company changed
its 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
December 31, 2005 and 2004.
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, 2005, as filed with the SEC.
8
2. BASIS OF PRESENTATION
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 suffered in the past substantial
recurring losses and negative cash flows from operations. These matters, among
others, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plan with regard to these matters include continued
development, marketing, and licensing of its Web conferencing and audio
conferencing products and services through both internal growth from its sales
efforts and external growth by acquisition. The Company has converted some of
its debt into equity and may convert additional amounts of its debt into equity
that would lessen the burden of principal repayment and reduce interest expense.
In combination with debt reductions through conversion to equity, the Company
may also raise additional capital through a combination of equity financings or
debt financings. A portion of the Company's plans to address cash Flow includes
reductions in overhead or the negotiation of payables. Although management
continues to pursue these plans, there is no assurance that the Company will be
successful. The condensed consolidated financial statements do not include any
adjustments related to the outcome of this uncertainty.
During the year ended March 31, 2004, the Company discontinued its
legacy practice management services segment. Accordingly, the Company has
reflected these operations as discontinued and has reclassified the prior year
consolidated financial statements to conform to such presentation. Discontinued
operations are discussed further in Note 12.
3. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements of the Company include
the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
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 AND RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board ("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 condensed
consolidated financial position or results of operations.
In December 2004, FASB issued SFAS No. 123R, SHARE-BASED PAYMENT. Under
SFAS 123R, companies will no longer be able to account for share-based
compensation transactions using the intrinsic method in accordance with APB 25.
Instead, companies will be required to account for such transactions using a
fair-value method and to recognize the expense over the service period. SFAS
123R will be effective for periods beginning after April 1, 2006 and allows for
9
several alternative transition methods. The Company expects to adopt SFAS 123R
in its first quarter of fiscal 2007 on a prospective basis, which will require
recognition of compensation expense for all stock option or other equity-based
awards that vest or become exercisable after the effective date. The Company is
currently assessing the impact of SFAS 123R on its share-based compensation
programs, however, it expects that the requirement to expense stock options and
other equity interests that have been or will be granted to employees will
increase its operating expenses and result in lower earnings per share.
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:
NINE MONTHS ENDED DECEMBER 31,
--------------------------------------
2005 2004
------------------ -------------------
Risk free interest rate 3.89% - 4.30% 4.19% - 4.71%
Dividend yield 0% 0%
Volatility factors of the expected
market price of the Company's
common stock 67% - 89% 73% - 90%
Weighted-average expected life of
Options 10 years 10 years
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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2005 2004 2005 2004
-------- -------- -------- --------
Net income/(loss) available to common
shareholders, as reported ........... $ 167 $(1,170) $(1,345) $(4,483)
Plus: Stock-based employee
compensation expense included in
reported net income/(loss) ....... 10 10 30 30
Less: Total stock-based employee
compensation expense determined
using fair value based method .... (32) (79) (140) (258)
-------- -------- -------- --------
Pro forma net income/(loss) ......... $ 145 $(1,239) $(1,455) $(4,711)
======== ======== ======== ========
Income/(loss) per share:
Basic and diluted - as reported ..... $ 0.01 $ (0.05) $ (0.05) $ (0.20)
======== ======== ======== ========
Basic and diluted - pro forma ....... $ 0.01 $ (0.05) $ (0.06) $ (0.21)
======== ======== ======== ========
RECLASSIFICATIONS
Certain prior year balances in the condensed consolidated financial
statements have been reclassified to conform to the fiscal 2006 presentation.
4. INCOME/LOSS PER SHARE
Basic income/loss per share is computed by dividing net income/loss
available to common stockholders by the weighted-average number of common shares
outstanding for each reporting period presented. Diluted income/loss per share
is computed similar to basic loss per share while giving effect to all potential
dilutive common stock equivalents that were outstanding during each reporting
period. For the nine months ending December 31, 2005 and 2004, options and
warrants to purchase 5,298,792 and 10,461,512 shares of common stock,
respectively, were excluded from the computation of diluted loss per share
because of their anti-dilutive effect. Additionally, for the nine months ending
December 31, 2005 and 2004, Series A and Series B preferred stock and debt
convertible into 10,450,000 and 8,175,000 shares of common stock, respectively,
10
were excluded from the computation of diluted loss per share because inclusion
of such would be antidilutive. Furthermore, a restricted stock grant issued in
2001 under the Company's stock compensation plan of 450,000 shares has been
excluded from the earnings per share calculations since the Restricted Stock
Grant is not vested. Lastly, shares of its common stock currently not reflected
as issued and outstanding totaling 704,839, relating to the Glyphics acquisition
held in escrow pending determination of indemnity claims - (see Note 11) and
500,000 relating to the Quisic acquisition held in escrow pending determination
of indemnity claims have been excluded from the computation of earnings per
share.
5. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill consisted of the following:
DECEMBER 31, MARCH 31,
2005 2005
------------ ----------
(AUDITED)
(IN THOUSANDS)
Goodwill................................................................. $ 11,086 $ 10,797
========== ==========
The changes in the carrying amount of the goodwill for nine months
ended December 31, 2005 (IN THOUSANDS):
Balance, March 31, 2005.................................................... $ 10,797
Mentergy acquisition, royalty accrual................................... 280
Glyphics acquisition.................................................... 9
----------
Balance, December 31, 2005................................................. $ 11,086
==========
Intangible assets consisted of the following:
-----------------------------------------------------------------
DECEMBER 31, 2005
-----------------------------------------------------------------
WEIGHTED
AVERAGE
REMAINING GROSS CARRYING ACCUMULATED
LIVES AMOUNT AMORTIZATION NET
-----------------------------------------------------------------
(YEARS) (IN THOUSANDS)
AMORTIZED INTANGIBLE ASSETS:
Deferred financing costs 5.33 $ 1,084 $ (455) $ 629
Purchased software 1.42 1,481 (1,100) 381
Customer relationships 4.42 1,230 (348) 882
----------------------------------------------------
$ 3,795 $ (1,903) $ 1,892
====================================================
-----------------------------------------------------------------
MARCH 31, 2005 (AUDITED)
-----------------------------------------------------------------
WEIGHTED
AVERAGE
REMAINING GROSS CARRYING ACCUMULATED
LIVES AMOUNT AMORTIZATION NET
-----------------------------------------------------------------
(YEARS) (IN THOUSANDS)
AMORTIZED INTANGIBLE ASSETS:
Deferred financing costs 5.84 $ 1,113 $ (329) $ 784
Purchased software 1.92 1,481 (792) 689
Customer relationships 4.46 1,230 (199) 1,031
----------------------------------------------------
$ 3,824 $ (1,320) $ 2,504
====================================================
11
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following;
DECEMBER 31, MARCH 31,
2005 2005
---------- ----------
(AUDITED)
(IN THOUSANDS)
Accrued state sales tax................................................. $ 180 $ 119
Accrued interest........................................................ 331 241
Amounts related to acquisitions......................................... 67 765
Accrued salaries and related benefits................................... 363 422
Royalty payable to third party providers................................ 1,113 1,000
Amount payable to subcontractors........................................ -- 59
Deferred rent liability................................................. 34 54
Liabilities from discontinued operations................................ 153 263
Other................................................................... 83 37
---------- ----------
Total accrued liabilities............................................ $ 2,324 $ 2,960
========== ==========
7. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31, MARCH 31,
2005 2005
---------- ----------
(AUDITED)
(IN THOUSANDS)
2002 Convertible redeemable unsecured subordinated notes................ $ 5,100 $ 5,625
2004 Senior unsecured promissory notes.................................. 2,962 3,187
1998 IPO unsecured notes payable........................................ 228 282
Other unsecured notes................................................... 452 613
---------- ----------
8,742 9,707
Less: Current portion of long-term debt................................. (670) (885)
Discount....................................................... (981) (1,349)
Beneficial conversion feature.................................. (623) (771)
---------- ----------
Long-term debt, net of current portion.................................. $ 6,468 $ 6,702
========== ==========
In March 2002, the Company completed a private placement offering (the
"2002 Convertible Note Offering") that provided gross proceeds of $5,775,000.
Under the terms of the 2002 Convertible Note Offering, the Company issued notes
and warrants to purchase 5,775,000 shares of the Company's common stock. These
notes bear interest at the rate of 12% per annum and require quarterly interest
payments, with the principal due at maturity on March 29, 2012. The note holders
may convert their principal into shares of the Company's common stock at the
fixed price of $1.00 per share. The Company may force conversion of these notes
into shares of the Company's common stock at the fixed conversion price of
$1.00, if at any time the 20 trading day average closing price of the Company's
common stock exceeds $3.00 per share. These notes are unsecured and subordinated
to any present or future indebtedness without consent of the holder. Those
warrants expired on March 29, 2005 without exercise. The exercise price of the
warrants was $3.00 per share. 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 as a component of interest expense of
unsecured convertible redeemable subordinated notes 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 a note, any
remaining discount associated with the beneficial conversion feature of the
converted notes will be expensed in full at the time of conversion. The common
stock underlying these notes was registered with the SEC and may be sold if
converted into common stock pursuant to a resale prospectus dated May 24, 2004.
During fiscal 2004, holders with a principal balance totaling $150,000 converted
their notes into 150,000 shares of the Company's common stock at a price of
12
$1.00 per share. Since April 1, 2005 holders with a principal balance of
$525,000 have converted their notes and $7,652 of accrued interest into
1,971,088 shares of the Company's common stock at a price of $0.25, $0.26 and
$0.30 per share. Since the actual conversion price for the convertible debt was
less than the fixed conversion price of $1.00, the Company recorded conversion
expense of $338,000 for the period ending December 31, 2005. As a result of the
conversions since April 1, 2005, the Company accelerated the amortization of the
deferred offering costs and the discount and beneficial conversion feature
associated with the debt by expensing $50,000 and $137,000, respectively at the
time of conversion.
In April of 2004, the Company completed a private placement offering of
unsecured senior notes (the "2004 Senior Note Offering") that provided gross
proceeds of $4.25 million. Under the terms of the 2004 Senior Note Offering, the
Company issued $3,187,000 in unsecured senior notes and 1,634,550 shares of the
Company's common stock. The senior notes were issued as a series of notes
pursuant to a unit purchase and agency agreement. The senior notes are
unsecured. 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 $768,000. The fair
value of the warrants was estimated and used to calculate a discount of $119,000
of which $68,000 was allocated to the notes and $51,000 was allocated to equity.
The total discount allocated to the notes of $836,000 is being amortized as a
component of 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. The common stock issued in the 2004 Senior Note Offering was registered
with the SEC pursuant to a resale prospectus dated August 2, 2005. Effective
August 1, 2005, holders with a principal balance totaling $225,000 converted
their senior notes and accrued interest of $800 into 903,205 shares of the
Company's common stock at a price of $0.25 per share. Since the actual
conversion price for the debt was greater than the market value of the stock at
the date of conversion, the Company recorded a gain on conversion of $9,000 for
the period ended December 31, 2005. As a result of the conversions since April
1, 2005, the Company accelerated the amortization of the deferred offering costs
and the discount and beneficial conversion feature associated with the debt by
expensing $10,000 and $35,000, respectively at the time of conversion. On
November 9, 2005, placement agent warrants originally issued with an exercise
price of $0.78 per common share were converted to 163,455 common shares at an
exercise price of $0.25 per share, in which the Company received $41,000 in
cash. The transaction resulted in an increase in deferred offering costs of
$7,000 and an adjustment to additional paid-in capital of $7,000.
In connection with the Company's initial public offering (IPO) in March
of 1998, the Company issued notes to certain shareholders who had provided
capital prior to the IPO. These notes were originally due in April of 2005 and
required quarterly payments of interest only at the rate of 10%. During the
first quarter of fiscal 2006, many of the noteholders agreed to extend the
maturity date and accept installment payments that are due during the year ended
March 31, 2006. The outstanding principal balance on these notes is $228,000 as
of December 31, 2005. The Company has agreed to make installment payments
totaling $228,000. As of December 31, 2005, the Company owed installment
payments of $154,000 on those IPO Notes, with no claims of default by the
holders of the IPO notes, other than RTT Investments in the amount of $68,250.
In connection with the Company's acquisition of Glyphics
Communications, the Company assumed $753,000 in loan obligations and the unpaid
balance of $445,000 is due within this fiscal year and is included in short term
debt. The rates of interest on these notes range from 6.0% to 9.0% per annum. In
June 2005, the Company extended the payment terms on one loan with a principal
balance of $138,000 through September 30, 2005. The balance of the loan was paid
on October 4, 2005. The loan was guaranteed by Gary Moulton, the Company's
senior vice president of audio services, as well as a shareholder of the
Company, both of whom were formerly owners of Glyphics. In January 2005, in
connection with the restructuring of the payments, the Company issued a warrant
for 50,000 shares with an exercise price of $0.55. The warrant expires in
January 2007. The fair value of the warrant of $8,000 was estimated using the
Black-Scholes pricing model with the following assumptions: contractual and
expected life of two years, volatility of 72%, dividend yield of 0%, and a
13
risk-free rate of 3.1%. In June 2005, in connection with the restructuring of
the payments, the Company issued a warrant for 50,000 shares to the Glyphics
shareholder with an exercise price of $0.32. The warrant expires in June 2007.
The fair value of the warrant of $6,500 was estimated using the Black-Scholes
pricing model with the following assumptions: contractual and expected life of
two years, volatility of 71%, dividend yield of 0%, and a risk-free rate of
3.6%.
The aggregate maturities of long-term debt excluding capital leases for
each of the next five years subsequent to December 31, 2005 were as follows (IN
THOUSANDS):
Fiscal Year Amount
----------- ------
2006............................................................... $ 670
2007............................................................... 2,968
2008............................................................... 2
2009............................................................... 2
2010............................................................... --
Thereafter......................................................... 5,100
-----------
$ 8,742
===========
8. INCOME TAX EXPENSE FROM CONTINUING OPERATIONS
The Company disclosed no tax benefit on its Condensed Consolidated
Statement of Operations during the nine months ended December 31, 2005 or 2004
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. Accordingly, since we are reporting a net loss for
the nine months ended December 31, 2005, we have not recorded a tax liability
for the net income reported for the three months ended December 31, 2005. At
December 31, 2005 and March 31, 2005, the Company has net deferred tax assets of
$12.2 million and $11.7 million, respectively, with corresponding valuation
allowances. The Company's tax assets are scheduled to expire over a period of
five to thirteen years.
9. STOCK OPTION PLANS AND WARRANTS
The Company grants stock options under its Stock Compensation Plan (the
"Plan"). On August 19, 2005, shareholders voted to increase the number of
authorized shares available for issue under the Plan to 5,500,000. 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. Additional Pro Forma disclosures as if the
Company recognized stock-based compensation at the fair value of the options are
presented below. The Compensation Committee of the Board of Directors is
authorized to issue shares of common stock to officers and employees in the form
of restricted stock awards, incentive stock options and nonqualified stock
options.
There were 2,651,128 options granted under the Plan, at December 31,
2005. 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 options vest at varying rates over a one to five year period.
14
Following is a summary of the status of the Company's stock options as
of December 31, 2005:
WEIGHTED
NUMBER OF AVERAGE WEIGHTED AVERAGE
HARES UNDERLYING EXERCISE FAIR-VALUE OF
S OPTIONS PRICES OPTIONS GRANTED
------------------- ------------- ---------------------
Outstanding at March 31, 2005................... 2,438,018 $1.32
Granted......................................... 772,500 0.29 $0.19
=====================
Exercised....................................... -- --
Forfeited....................................... (559,390) 1.06
Expired......................................... -- --
------------------- -------------
Outstanding at December 31, 2005................ 2,651,128 $1.07
=================== =============
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE AVERAGE
NUMBER OF EXERCISE REMAINING CONTRACTUAL NUMBER OF EXERCISE
EXERCISE PRICE SHARES PRICE LIFE (YEARS) SHARES PRICE
---------------------- -------------- ------------- --------------------------- ------------- -------------
$ 0.01 - $ 0.99 2,025,702 $0.51 7.33 1,338,935 $ 0.57
$ 1.00 - $ 1.99 104,125 $1.61 5.03 95,625 $ 1.66
$ 2.00 - $ 2.99 430,000 $2.22 3.52 430,000 $ 2.22
$ 3.00 - $ 8.50 91,301 $7.69 2.65 91,301 $ 7.69
-------------- -------------
2,651,128 1,955,861
============== =============
In December 2001, the Company, under the initiative of the Compensation
Committee with the approval of the Board of Directors, issued its Chief
Executive Officer an incentive stock grant under the Company's stock
compensation plan of 450,000 restricted shares of the Company's common stock as
a means to retain and incentivize the chief executive officer. The shares fully
vest after 10 years from the date of grant. The 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 vesting period. The 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
In connection with the restricted stock grant, the Company loaned the
chief executive officer $179,000 to fund the immediate tax consequences of the
grant. The Company recognized a $179,000 charge to income at the date of grant.
15
WARRANTS
The following table summarizes information about stock purchase
warrants outstanding at December 31, 2005:
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
--------------------------------------------------- ------------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE AVERAGE
NUMBER OF EXERCISE REMAINING CONTRACTUAL NUMBER OF EXERCISE
EXERCISE PRICE SHARES PRICE LIFE (YEARS) SHARES PRICE
--------------------- -------------- ------------ ----------------------- --------------- --------------
$ 0.32 -$ 0.32 50,000 $ 0.32 1.44 50,000 $ 0.32
$ 0.40 -$ 0.40 250,000 $ 0.40 0.88 250,000 $ 0.40
$ 0.42 -$ 0.42 543,182 $ 0.42 5.64 543,182 $ 0.42
$ 0.44 -$ 0.44 132,972 $ 0.44 5.70 132,972 $ 0.44
$ 0.50 -$ 0.50 700,000 $ 0.50 2.75 700,000 $ 0.50
$ 0.55 -$ 0.55 50,000 $ 0.55 1.01 50,000 $ 0.55
$ 1.50 -$ 1.50 921,510 $ 1.50 1.64 921,510 $ 1.50
-------------- --------------
2,647,664 2,647,664
============== ==============
On November 19, 2003, the Company issued a warrant to purchase 250,000
shares of common stock to an advisor of the Company in exchange for certain
advisory and consulting services pursuant to a written advisory agreement that
will be provided to the Company over a three-year contractual period. The
warrants are exercisable for shares of the Company's common stock at a price of
$0.40. The warrants were originally valued using the Black-Scholes model to
calculate a fair value of $0.73 per share at March 31, 2004. A portion of the
fair value of the warrants totaling $20,000 was expensed during fiscal 2004,
with the remaining value of the warrants totaling $90,000 expensed during fiscal
2005.
On November 9, 2005, placement agent warrants originally issued with an
exercise price of $0.78 per common share were converted to 163,455 common shares
at an exercise price of $0.25 per share, in which the Company received $41,000
in cash. The transaction resulted in an increase in deferred offering costs of
$7,000 and an adjustment to additional paid-in capital of $7,000.
10. 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, 2005. During
the nine-month period ended December 31, 2005, the following changes occurred
with respect to certain of the Company's commitments and contingencies:
ROYALTY AGREEMENTS
In conjunction with the acquisition of certain assets from Mentergy,
Inc. ("Mentergy"), the Company agreed to provide a royalty earn-out payment that
is due upon collection of cash received from the sales of its Web conferencing
software. The royalty earn-out was originally equal to 20% for all revenues
collected from the sale of that Web conferencing software over a three-year
period beginning 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
negotiating a settlement with one of the original participants in the Mentergy
transaction during fiscal 2005, the royalty has been reduced to 18.7%. The
Company accounts for any such amounts collected as additional purchase
consideration in accordance with EITF 95-8: ACCOUNTING FOR CONTINGENT
CONSIDERATION PAID TO THE SHAREHOLDERS OF AN ACQUIRED ENTERPRISE IN A PURCHASE
BUSINESS COMBINATION at the time such amounts are accrued as revenue. The
Company has accrued potential Mentergy royalties totaling $1,043,000 and
$872,000 as of December 31, 2005 and March 31, 2005, respectively (the "Royalty
Accrual Amount"). In the prior year, the royalty was calculated on the accrual
basis for consistency with the Company's revenue recognition policies. Since the
royalty agreement term ended on November 4, 2005 the obligation at December 31,
2005 has been adjusted to reflect amounts due on the collection of cash received
on the sales of web conferencing software through November 4, 2005. On October
16
10, 2005, Mentergy and the Company executed a payment agreement that provides,
notwithstanding the termination of the royalty accrual, negotiated payment terms
that would require an initial payment of $100,000 within 15 days of approval of
the agreement followed by 12 level installment payments of $76,212 plus interest
per month and a balloon payment for the entire remaining balance due on November
15, 2006, but with the accrual of additional royalties terminating as originally
intended on November 4, 2005. In December 2005 the Company paid $100,000 to
Mentergy in accordance with the payment agreement.
LITIGATION
On June 14, 2002, the Company acquired the assets of Quisic.
Subsequently, on November 4, 2002, two former employees of Quisic (Mr.
Weathersby their former CEO and Mr. Alper their former CIO), filed a lawsuit in
the Superior Court of the State of California styled George B. Weathersby, et
al. vs. Quisic, 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 is found liable, and
then only to the extent the plaintiffs prove their successor liability claim
against the Company. Through arbitration, the claims of Alper against all of the
defendants were dismissed. The Company only acquired certain assets of Quisic 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 large sums to the Plaintiff against
defendant Quisic, and then the court determined that the Company is a successor
to Quisic, then the impact is likely to be material to the Company. The claims
by Mr. Weathersby against Quisic remain with the trial proceeding in the
discovery phase.
On August 12, 2005, John Thayer d/b/a RTT Investments, an IPO note
holder, filed a lawsuit to collect on that IPO note and subsequent modification
agreement. Mr. Thayer alleges default of the note among other claims. Mr. Thayer
is seeking payment of the note in the amount of $68,250. The Company believes
that the plaintiff's note collection claim may be valid, but is subject to
defense or offset and that the remaining claims are without merit and intends to
vigorously defend the suit. The Company continues to accrue interest at the rate
provided in the RTT Investments IPO note and the note obligation remains as an
accrued liability of the Company as of the date of this report.
11. BUSINESS COMBINATIONS
GLYPHICS CORPORATION
The Company executed an agreement to acquire substantially all of the
assets of and assume certain liabilities of Glyphics, a Utah based, private
company that is a provider of comprehensive audio conferencing products and
services. The acquisition had a stated effective date of June 1, 2004 and was
fully consummated on June 14, 2004. The purchase price of $5.229 million was
based on a multiple of the Glyphics' 2003 annual audited net 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 the Company's common stock at the fixed price of $1.05 per share. In
exchange for the assets received, the Company assumed $2.466 million in debt and
issued 2.8 million shares of its common stock at the date of acquisition. 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: (a) shortfalls in the
audited audio conferencing revenues earned by the Company as compared to the
audited audio conferencing business revenues of Glyphics, (b) the
representations and warranties made by Glyphics' and its shareholders in the
asset purchase agreement, and (c) 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 March 31, 2005, the Company had accrued
certain liabilities in excess of those scheduled and therefore, will be making a
claim against those escrow shares, but the performance revenue target had been
met. The shares were registered with the SEC pursuant to a resale prospectus
dated August 2, 2005.
17
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
Assumed liabilities........................................... 2,466
------------
Total purchase price....................................... $ 5,229
============
The purchase price may change due to the ultimate resolution of
purchase agreement contingencies and the potential recoveries against the shares
held in escrow, if any. At December 31, 2005, the Company believes it will
recover approximately 369,000 shares held in escrow due to the assumption of
additional liabilities of $351,000 greater than scheduled in the purchase
agreement.
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. 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 purchase price may change due to the ultimate
resolution of charges against the escrow account, if any. 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................................................ $ 618
Property and equipment........................................ 1,609
Goodwill ..................................................... 998
Identifiable intangible assets ............................... 2,004
Current liabilities........................................... (1,356)
Notes payable................................................. (753)
Capital leases................................................ (357)
Common stock.................................................. (3)
Additional paid-in capital.................................... (2,760)
---------------
Total $ --
===============
18
Operating results of Glyphics are included in the accompanying
statement of operations for the nine- month period ending December 31, 2005 and
for the nine-month period ending December 31, 2004. 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 the nine months ended December 31, 2004, 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.
NINE MONTHS
ENDED
DECEMBER 31,
2004
-----------------
PRO FORMA
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
Revenues...................................................... $ 7,810
Loss from continuing operations............................... $ (3,197)
Net loss from continuing operations.......................... $ (4,658)
Loss per basic and diluted share from continuing operations... (0.20)
Weighted average shares outstanding:
Basic and diluted......................................... 23,484
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.
As part of the Glyphics acquisition, the Company recorded estimates of
assumed liabilities that might necessitate payment to certain Glyphics vendors.
After further review and confirmation from certain of those Glyphics vendors,
the Company determined during the three months ended September 30, 2005 and the
three months ended December 31, 2005, that those liabilities would not be
realized. Therefore, $250,000 and $106,000 were recorded as a one-time
elimination of the liabilities and a corresponding reduction in cost of software
and audio services revenues was recorded in the second and third quarters of
fiscal 2006, respectively. In addition, $7,000 in consulting fees and $81,000 in
tax liabilities were recorded as a one-time elimination of those liabilities and
a corresponding reduction in general and administrative expenses during the
second and third quarter of fiscal 2006, respectively.
The Company was able to negotiate settlements with the relevant vendors
of certain of the assumed liabilities from the Glyphics. As a result,
liabilities of $167,000 were eliminated and the corresponding reduction in costs
was recorded as other income as a one-time reduction in costs for the three
months ended December 31, 2005.
12. DISCONTINUED OPERATIONS
Effective January 1, 2004, the Company discontinued its practice
management services segment. In accordance with SFAS 144 ACCOUNTING FOR
IMPAIRMENT ON DISPOSAL OF LONG-LIVED ASSETS, the Company has restated its
historical results to reflect its practice management service business segment
as a discontinued operation.
The Company collected the total outstanding principal on a note
receivable in the amount of $65,000 that arose as a part of its discontinued
operations, which was fully reserved at March 31, 2005 and was reported as
income from discontinued operations at December 31, 2005.
A summary of the results from discontinued operations for the nine
months ending December 31, 2005 and 2004 are as follows:
19
Three months ended Nine months ended
December 31, December 31,
2005 2004 2005 2004
----- ----- ----- -----
(IN THOUSANDS) (IN THOUSANDS)
Net revenue .............................. $ -- $ -- $ -- $ --
Operating expenses ....................... (5) -- (17) --
----- ----- ----- -----
Income from operations ................... 5 -- 17 --
Gain on debt settlement .................. 65 15 65 15
Tax expense .............................. -- -- -- --
----- ----- ----- -----
Net income from discontinued operations... $ 70 $ 15 $ 82 $ 15
===== ===== ===== =====
There were no assets related to the Company's discontinued operations
on the books that were not fully reserved as of December 31, 2005. Liabilities
of $153,000 and $263,000 related to discontinued operations were included in
Accounts Payable and Accrued Liabilities at December 31, 2005 and March 31,
2005, respectively.
13. CAPITAL RAISE ACTIVITIES
On September 16, 2003, we completed our private placement of
convertible Series A preferred stock with detachable warrants. We sold 30 units
at $50,000 each and raised a total of $1,500,000. Each unit consisted of 5,000
shares of convertible Series A preferred stock, par value $0.001 and a warrant
to purchase 25,000 shares of common stock. The convertible Series A preferred
stock is convertible into our common stock at a price of $0.50 per share, and
the warrants are immediately exercisable at a price of $1.50 per share with a
three-year term. Accordingly, each share of Series A preferred stock is
convertible into 20 shares of common stock and retains a $10 liquidation
preference. We pay an 8% dividend to holders of the convertible Series A
preferred stock, and the dividend is cumulative. The convertible Series A
preferred stock is non-voting and non-participating. The shares of convertible
Series A 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 cash proceeds of the private placement of convertible
Series A preferred stock was allocated pro rata between the relative fair values
of the Series A preferred stock and warrants at issuance using the Black-Scholes
valuation model for valuing the warrants. 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 2005 fiscal year,
holders of 22,500 shares of Series A preferred stock converted those shares into
450,000 shares of our common stock. The underlying common stock that would be
issued upon conversion of the Series A preferred stock and upon exercise of the
associated warrants have been registered with the SEC and may be sold pursuant
to a resale prospectus dated May 24, 2004.
On September 30, 2005, the Company executed definitive agreements with
nine investors to issue 70,000 unregistered shares of its Series B Preferred
Stock, par value $0.001 (the "Preferred Stock") and warrants to purchase 700,000
shares of its common stock (the "Warrants") in a private transaction that was
exempt from registration under Section 4(2) of the Securities Act of 1933. Of
the total Preferred Stock issued, 15,000 shares of Preferred Stock with Warrants
to purchase 150,000 shares of common stock were issued to four individuals in
exchange for their cash investment of $150,000; 15,000 shares of Preferred Stock
with Warrants to purchase 150,000 shares of common stock were issued to two
vendors in exchange for an offset of their accounts payable balance in the
amount of $150,000; and 40,000 shares of Preferred Stock with Warrants to
purchase 400,000 shares of common stock (effective August 29, 2005 as previously
disclosed on Form 8-K dated September 2, 2005) were issued to three
institutional investors in exchange for the offset of accrued liabilities in the
amount of $400,000 that arose from the Quisic acquisition. The Company recorded
a gain in debt conversion of $50,000 associated with this transaction. The
Preferred Stock bears an 8% dividend, was sold using a deemed $10.00 per share
issue price, and is convertible into 2,800,000 shares of the Company's common
stock using a conversion price of $0.25 per share. The Warrants that are
exercisable at an exercise price equal to $0.50 per share expire on the third
anniversary of the issue date of September 30, 2005.
20
Other capital raise activities and warrant exercises are discussed
further in Notes 7 and 9, respectively.
14. RELATED PARTY TRANSACTIONS
On July 21, 2005, James L. Dunn, Jr., the Company's CFO, purchased a
note from one of the IPO Note holders. The note had a principal balance of
$8,375 and was purchased at a discount. Mr. Dunn extended the term of the note
that was then due until April 1, 2006. On September 30, 2005, the father of
James L. Dunn Jr. invested in the Company's Series B Preferred Stock Offering
and acquired 2,500 shares of iLinc Communications' Series B Preferred Stock and
a Warrant to purchase 25,000 shares of the Company's common stock. The warrant
is exercisable immediately at an exercise price of $0.50 and expires on
September 30, 2008. Mr. James L. Dunn, Jr. has no direct and beneficial interest
in his father's investment.
On July 31, 2005, the Company exchanged a convertible promissory note
that had been issued in March of 2002 to Peldawn, LLC, of which Mr. Dan
Robinson, a member of the Company's Board of Directors, is a partner. The note
had an original principal balance of $25,000 and was originally convertible at
$1.00 per share. As part of the Company's plan to decrease debt and increase
shareholders' equity, in combination with holders of $525,000 principal balance
of like debt, the note including principal and accrued interest was exchanged
using a price of $0.30 per share into 84,183 shares of the Company's common
stock, the Conversion price was above the fair market value of the Company's
common stock on the date of conversion and was on the same terms as like
holders.
On August 16, 2005, Dr. James Powers, the Company's CEO, and his wife,
exchanged convertible promissory notes that had been issued in March 2002. The
notes had an original balance of $50,000 and were originally convertible at
$1.00 per share. As part of the Company's plan to decrease debt and increase
shareholders' equity, in combination with holders of $525,000 principal balance
of like debt, the notes were converted at a price of $0.26 per share into
192,308 shares of the Company's common stock. The conversion price was above the
market value of the Company's common stock on the date of the conversion and was
on the same terms as like holders.
On September 30, 2005, Mr. Kent Petzold, a member of the Company's
Board of Directors, invested in the Company's Series B Preferred Stock offering
and acquired 5,000 shares of iLinc Communications Series B Preferred Stock and a
Warrant exercisable for 50,000 shares of the Company's common stock. Mr. Petzold
paid $50,000 in the aggregate for such securities on the same terms as all other
investors in the offering. The Warrant is immediately exercisable at an exercise
price of $0.50 and expires on September 30, 2008.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENTS CONTAINED IN THIS QUARTERLY 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. 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; INTEGRATE CURRENT AND
EMERGING TECHNOLOGIES; CONTROL OUR EXPENSES; CONTROL CHANGES IN OUR CUSTOMER
BASE; CONTROL CHANGES IN OUR EMPLOYEE HEADCOUNT; 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 OTHER RISKS DISCUSSED HEREIN (SEE ITEM 2 "MANAGEMENT'S
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 SECURITIES AND EXCHANGE
COMMISSION (THE "SEC") THAT ATTEMPT TO ADVISE INTERESTED PARTIES OF CERTAIN
RISKS AND FACTORS THAT MAY AFFECT OUR BUSINESS. OUR REPORTS ARE AVAILABLE FREE
OF CHARGE AS SOON AS REASONABLY PRACTICABLE AFTER SUCH MATERIAL IS
ELECTRONICALLY FILED WITH THE SEC AND MAY BE OBTAINED EITHER FROM THE SEC AT
THEIR WEB SITE LOCATED AT WWW.SEC.GOV, OR THROUGH OUR WEB SITE LOCATED AT
WWW.ILINC.COM.
--------------
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
reliable, and cost-effective tools for remote instruction, 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 8.0. 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 of the iLinc Suite include online instruction, 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 agents and value added resellers.
We allow customers to choose between purchasing a perpetual license or
subscribing to a term license to our products, providing for flexibility in
pricing and payment methods.
PRODUCTS AND SERVICES
WEB CONFERENCING AND WEB COLLABORATION
The iLinc Suite is a four-product suite of software that addresses the
four most common business collaboration needs.
22
LearnLinc 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 an enhanced learning environment that
replicates and surpasses 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, 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 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 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 earning
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 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.
Our Web collaboration software is sold on a perpetual license or
periodic license basis. A customer may choose to acquire a one-time perpetual
license (the "Purchase Model") or may rent our software on an annual basis on
either a per seat or per minute basis (the "ASP Model"). Should they choose to
acquire the software using the Purchase Model, then they may either elect to
host our software behind their own firewall or they may choose to have iLinc
host it for them, depending upon their preferences, budget and IT capabilities.
Customers who select the Purchase Model, whether hosted by iLinc or the
customer, may also subscribe for ongoing customer support and maintenance
services, using a support and maintenance contract with terms from one to five
years. The maintenance and support fee charged is between 15% to 18% of the
purchase license fee that is paid for the perpetual licenses and varies
depending upon the length of the support agreement. If a customer chooses to
have iLinc host their Purchase Model licenses, then the customer is charged a
hosting fee equal to 10% of the purchase license fee that was paid for the
perpetual license. Those customers who qualify for the iLinc Unlimited site
license may subscribe to an unlimited use license. The initial iLinc Unlimited
license fee is determined based upon the number of employees within the
customer's organization, or other factors. The annual maintenance and support
fees and hosting fees associated with an iLinc Unlimited license are then based
upon a fixed rate per seat license that is active on each annual anniversary of
the iLinc Unlimited license agreement. Customers may expand the number of active
seats available to them at any time with a corresponding increase in annual
maintenance and hosting fees being charged.
Customers choosing the ASP Model pay a per seat (concurrent connection)
on either a per month or per year basis depending upon the length and term of
the subscription agreement. Hosting and maintenance are included as a part of
the monthly or annual rental fees. Customers may also obtain Web conferencing
23
and audio conferencing on a per minute basis using the iLinc On-Demand product.
Those choosing the iLinc On-Demand product pay on a monthly basis typically
without contractual commitment.
AUDIO CONFERENCING
Through our acquisition of Glyphics that was effective June 1, 2004, we
now also deliver 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
products:
o AUDIO ON-DEMAND (NO RESERVATIONS NEEDED): The pre-established
calling accounts for each user through which you 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 online Web presentation 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 products and services, we offer to
our customers an array of e-Learning and training products and services. We
offer training software products that like iLinc, promote online collaboration
with products that are integrated in the iLinc Suite. These products include:
TestLinc which is an assessment and quizzing tool that allows for formal testing
and evaluation of students and i-Canvas which is a training content development
software that allows non-technical training professionals to create Web-based
training courses without needing specialized programming skills. i-Canvas is
sold on an individual user perpetual license basis. We offer custom content
development services through subcontractor relationships. We also offer a
library of online courses that is an online mini-MBA program co-developed with
the Tuck School of Business at Dartmouth College.
INDUSTRY TRENDS
Industry analyst Frost and Sullivan in their recent World Web
Conferencing Market report separates the Web Conferencing vendor community into
distinct groups that include: service providers ("Service Providers") and
software providers ("Software Providers"). The difference between Service
Providers and Software Providers is that the Service Providers only offer Web
conferencing as an ASP service or rental model basis. However, Software
Providers offer Web conferencing as a solution that can be purchased and owned
by customers (whether the software is installed internally by customers or
hosted by the software provider). iLinc is one of the few top tier providers
that effectively competes in both the Service Provider and Software Provider
markets. While we also offer our iLinc Suite as an ASP or per minute service the
predominate licensing arrangement selected by our customer base remains the
Purchase Model, making us one of the leaders in the Software Provider market.
Although our major competitors offer only a rental license as a Service
Provider (including WebEx, Microsoft Live Meeting, and Raindance), the Web
conferencing software market is the faster growing segment, representing about
$227 million of the current Web conferencing market. A Frost and Sullivan
forecast projects a 40% Compound Annual Growth Rate ("CAGR") between 2002 and
2010 (as compared with the service provider market which is projected to grow at
a 22% CAGR for the same time period). The Software Provider market based upon
its higher growth rate is expected to outgrow the Service Provider market by the
end of 2009.
24
As with many technologies that achieve mainstream success, the decision
to purchase Web conferencing is shifting from individual departments to an
organization-wide decision. Several factors are driving this shift, including
the need for organizations to centralize on one vendor instead of having several
different vendors for Web or audio conferencing services for different parts of
the organization. The requirements of the overall organization are often
distinctly different from the purchase requirements of a particular department,
such as sales or marketing. To successfully sell to the market as it continues
to mature, vendors need to be able to provide solutions that can scale and can
meet customer needs at any point of their adoption cycle. Whether their specific
organization is just beginning to use Web conferencing in one part of the
organization or if they are ready to deploy an enterprise-wide solution, iLinc
offers just that solution.
Another important trend in the industry is the convergence of
communication technologies such as audio and Web conferencing and the increase
in demand for a single source for both of these capabilities. Frost and Sullivan
has 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
providing a truly converged user environment and experience, including the
integration of audio, Web and video conferencing technologies is essential. With
the addition of audio conferencing capabilities, we have been able to provide a
single source for deeply integrated Web, audio, video as well as Voice-over IP.
Increasingly, the option a vendor chooses for Web conferencing determines their
selection for audio conferencing. iLinc has already made significant progress in
selling audio conferencing to the iLinc customer base and we actively cross sell
all of our products and services to all customers. 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 are continuing to
create incentives for our audio customers to be both Web and audio customers to
drive this retention.
MARKET POSITION - DIFFERENTIATORS
We view our position in the market as the best solution for the
enterprise-wide buyer that has already adopted Web conferencing, as well as
organizations that believe their usage of Web conferencing will grow quickly. As
mentioned earlier, a growing number of these organizations are using four 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
for these services can provide. There are also other important considerations
revolving around Web conferencing such as security and bandwidth availability
that are forcing 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
areas.
First, we offer WEB CONFERENCING SOFTWARE WITH FLEXIBLE LICENSING
OPTIONS that allows organizations to pay a one-time license fee to install the
software inside of their environment, or to purchase perpetual licenses and have
those licenses hosted in our co-location facility. We find this flexibility to
be an important differentiator to address the needs of customers that are ready
to make an enterprise-wide decision as well as customers that think their usage
may grow throughout their organization. This licensing structure also enables us
to maintain a consistent revenue stream of smaller sized purchases while also
winning larger enterprise-wide deals that help substantially increase revenue
growth.
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.
Third, we offer the HIGHEST LEVEL OF DATA SECURITY commercially
available. We believe that we are the only 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 Advanced Encryption
Standard ("AES") and secure socket layer (SSL). All information within a session
can be transmitted between meeting attendees securely without any reduction in
performance. This aspect of our software has been extremely attractive to
government, military, and financial organizations as well as to the companies
25
that supply to these entities. We also believe that this solution combined with
other aspects of our software enables us to be a more reliable solution than our
Web conferencing software competitors. Our customers report that they are able
to get more people into Web conferencing session regardless of whether they are
connecting users from directly inside of a network or outside of a network.
Importantly, the iLinc software also works in locked-down environment and is
very successful getting through firewalls.
Fourth, our solution is SUITABLE AND SCALABLE FOR ENTERPRISE-WIDE
DEPLOYMENT. The iLinc Suite contains four modes that address the most common
needs for business collaboration within the enterprise. We offer virtual
classroom software with our LearnLinc mode, presentation and sales demonstration
capabilities with MeetingLinc, customer support with SupportLinc, and a mode for
Web casts and marketing events with ConferenceLinc. Each of these modes shares a
common interface enabling users of one mode to easily understand any of our
other modes. This reduces the learning curve for Web conferencing
enterprise-wide roll out and we believe increases adoption success. All users
can have access to all four modes of the suite. This is an important
differentiation because our competition typically charges separate licensing
fees for the use of separate modes. Giving users access to the full suite
supports the natural migration of Web conferencing usage from department to
department. Each of the modes has functionality built specifically for a
particular type of activity. The most comprehensive feature set is included in
LearnLinc, which we believe to be one the best virtual classroom training tools
on the market. Industry analyst Bersin and Associates recently noted LearnLinc
was "The first virtual classroom technology ever developed and still a
technology leader today" in its May 2005 study.
Fifth, we provide what we believe to be an EXCEPTIONAL "TOTAL COST OF
OWNERSHIP" VALUE. Our software and services are competitively priced, but unlike
our competitors, a customer's installation of our product is a very short and
non-labor intensive process. Maintenance of our software also requires minimal
attention from an IT perspective. Most of our Web conferencing software
competitors require very complex and costly implementations.
We believe that all of these factors make our solution compelling to
organizations that have already adopted the practice of Web conferencing as a
best practice as well as companies that are just starting to use Web
conferencing, but anticipate that their usage will grow quickly. We recognize
that in order to grow our market share we need to develop products that are easy
to implement and that scale with our customer needs.
RESULTS OF OPERATIONS
In June of 2004, we executed an agreement to acquire substantially all
of the assets of and assume certain scheduled 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. (See
Note 11 above and Form 8-K/A on file related to the Glyphics transaction dated
August 13, 2004.) See also "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 December 31, 2005 and December 31, 2004 were $3.3 million and $2.6
million, respectively, an overall increase of $706,000. This increase was the
result of an increase of $142,000 in software license revenues and $417,000 in
software and audio services revenues, combined with an increase of $147,000 in
maintenance and professional services revenues. The overall increase was
primarily the result of the planned growth in license revenues and audio
services revenues from the Glyphics acquisition in the three months ended
December 31, 2005 compared to the three months ended December 31, 2004, in
combination with a small decrease in custom content development revenue. For the
three months ended December 31, 2005 software license revenues were 26%,
software and audio service revenues were 53% and maintenance and professional
services revenues were 21% of total revenues, as compared to 27% for software
license revenues, 52% for software and audio services revenues, and 21% for
maintenance and professional services revenues for the same three months ended
December 31, 2004. We expect software license revenue to become a larger
percentage of total revenues as total revenues increase given our focus on the
software Purchase Model, with a proportionate increase in maintenance and
professional services revenues.
Total revenues generated from continuing operations for the nine months
ended December 31, 2005 and December 31, 2004 were $9.0 million and $7.3
million, respectively, an overall increase of $1.7 million. This increase was
the result of a decrease of $220,000 in software license revenues, an increase
of $1.7 million in software and audio services revenues in combination with an
26
increase of $202,000 in maintenance and professional services revenues. The
overall increase was primarily the result of the inclusion of audio services
revenue from the Glyphics acquisition for the full nine months ended December
31, 2005 compared to seven months of audio services revenue in the nine months
ended December 31, 2004. For the nine months ended December 31, 2005 software
license revenues were 24%, software and audio service revenues were 57% and
maintenance and professional services revenues were 19% of total revenues, as
compared to 32% for software license revenues, 48% for software and audio
services revenues, and 20% for maintenance and professional services revenues
for the same nine months ended December 31, 2004. These changes in product mix
were primarily due to the inclusion of a full nine months of software and audio
conferencing revenues resulting from the Glyphics acquisition.
COST OF REVENUES FROM CONTINUING OPERATIONS
The cost of software license revenues varies and is a function of the
number of software licenses sold within the period. It consists primarily of
royalty fees paid to third parties on sale of certain off-the-shelf products and
the near negligible allocated costs for fulfillment and materials from the sale
of the iLinc Suite of software on a Purchase Model basis. Cost of software
license revenues for the three months ended December 31, 2005 and December 31,
2004 was $40,000 and $67,000, respectively, a decrease of $27,000 that was due
to a reduction in the number of off-the-shelf sales made and therefore a
corresponding reduction in the royalty due from those sales. Cost of software
license revenues for the nine months ended December 31, 2005 and December 31,
2004 was $72,000 and $146,000, respectively, a decrease of $74,000 that was due
to a reduction in the number of off-the-shelf sales made and therefore a
corresponding reduction in the royalty due from those sales. Cost of software
license revenues will remain a small fraction of software license revenues
because the remaining royalty due is associated only with our off-the-shelf
courses.
Cost of software and audio services revenues uses a fully allocated
overhead method that includes an allocation of salaries and allocable expenses
resulting from the delivery of our hosted Web conferencing services, salaries
and allocable expenses resulting from the delivery of our audio services
organization including telephone operators, allocated facilities costs,
allocated technical support costs for support services, together with direct
telecommunication expenses for long distance and local dial tone connectivity,
and finally allocable depreciation and amortization expenses that are
attributable to providing these services. Cost of software and audio services
revenues for the three months ended December 31, 2005 and December 31, 2004 was
$959,000 and $1.1 million, respectively, a decrease of $137,000. This decrease
was the result of a reduction in outside agent commissions of $40,000 and a
reduction in royalties to off-the-shelf providers of $49,000. Additionally, as
part of the Glyphics acquisition, we recorded estimates of assumed liabilities
that might necessitate payment to certain Glyphics vendors. After further review
and confirmation from certain of those Glyphics vendors, the Company determined
that those liabilities would not be realized and therefore the liabilities were
eliminated and a corresponding reduction of the expense was recorded as a
one-time reduction in costs. Therefore, approximately $106,000 of the reduction
in cost of revenues for the three months ended December 31, 2005 was as a result
of this one-time liability elimination. This decrease was partially offset as
the result of an increase in telecommunications and network costs of
approximately $61,000. Cost of software and audio services revenues for the nine
months ended December 31, 2005 and December 31, 2004 was $2.8 million and $2.7
million, respectively, an increase of $122,000. This increase was the result of
higher telecommunications and network costs, and higher personnel and
depreciation expense as a result of including the Glyphics audio business for
the full nine months ended December 31, 2005 compared to seven months in the
nine months ended December 31, 2004 in combination with one time Glyphics'
liability eliminations of $356,000 and a reduction in royalties to off-the-shelf
providers of $160,000 in the nine months ended December 31, 2005.
Cost of maintenance and professional services revenues includes an
allocation of technical support personnel and facilities costs allocable to
those services revenues, consisting primarily of a portion of our facilities
costs, communications and depreciation expense. The largest and most variable
component of this cost is the percentage of revenues fee paid to our third party
custom content subcontractor that provides custom content services that
contribute to custom content revenues. This third party subcontractor cost
varies directly with custom content revenues, while the remaining portion of the
cost of maintenance and professional services revenues remains relatively fixed.
The cost of maintenance and professional services revenues for the three months
27
ended December 31, 2005 and December 31, 2004 was $237,000 and $217,000,
respectively, an increase of $20,000. The increase was primarily the result of a
change in the level of custom content services provided and the resulting
percentage costs paid to that third party subcontractor. The cost of maintenance
and professional services revenues for the nine months ended December 31, 2005
and December 31, 2004 was $535,000 and $599,000, respectively, a decrease of
$64,000 that was primarily a change in the level of custom content services
provided and the resulting percentage costs paid to that third party
subcontractor.
Amortization of acquired developed technology consists of amortization
of software and identified intangible technology that was acquired in the
Quisic, Mentergy and Glyphics acquisitions. Amortization of acquired technology
for the three months ended December 31, 2005 and December 31, 2004 was $82,000
and $123,000, respectively, a decrease of $41,000. The decrease was related
primarily to full and final amortization of the software associated with the
Quisic acquisition in May of 2005 and the LearnLinc acquisition in October 2005.
Amortization of acquired technology for the nine months ended December 31, 2005
and December 31, 2004 was $309,000 and $325,000, respectively, a decrease of
$16,000 which was related primarily to the net of the inclusion of amortization
of the software associated with the Glyphics acquisition in June of 2004 and the
full and final amortization of the software associated with the Quisic
acquisition in May of 2005 and the LearnLinc acquisition in October of 2005.
GROSS PROFIT MARGIN
Gross profit from continuing operations for the three months ended
December 31, 2005 and December 31, 2004 was $2.0 million and $1.1 million,
respectively, an overall increase of $891,000. The increase was a result of an
overall increase in total revenues of $706,000. Gross profit from continuing
operations for the nine months ended December 31, 2005 and December 31, 2004 was
$5.2 million and $3.5 million, respectively, an overall increase of $1.7
million. The increase was a result of an overall increase in total revenues of
$1.7 million. We expect to see continuing gains in gross profit margin as a
result of continued emphasis on the sale of the iLinc Suite on a Purchase
License basis on both a concurrent seat and iLinc Unlimited site license basis.
In any given period should custom content revenues rise then we would expect a
proportional increase in the cost of maintenance and professional services and a
corresponding decrease in gross profit margin which would not be an indication
of the potential profitability of the core iLinc Web and audio conferencing
business.
OPERATING EXPENSES FROM CONTINUING OPERATIONS
In August of 2005, we announced the implementation of an
organization-wide overhead reduction program. We began to see the savings in the
September and December quarters that were a result of the implementation of that
plan. We expect continued savings to be realized in the subsequent quarters from
both this cost reduction program and our efforts with debt to equity
conversions, but at a lesser rate due to the high level of fixed costs.
Total operating expenses consist of research and development expenses,
sales and marketing expenses, and general and administrative expenses. We
incurred total operating expenses from continuing operations for the three
months ended December 31, 2005 and December 31, 2004 of $1.5 million and $1.8
million, respectively, a decrease of $275,000. The decrease was the result of
that overhead reduction program providing overall savings of $67,000 in research
and development expenses, $192,000 in sales and marketing expenses and $16,000
in general and administrative expenses. Total operating expenses for the nine
month ended December 31, 2005 and December 31, 2004 were $4.9 million and $6.5
million, respectively, a decrease of $1.5 million. The decrease was primarily
the result of the overhead reduction providing savings of $104,000 in research
and development expenses, $919,000 in sales and marketing expenses and $506,000
in general and administrative expenses.
Research and development expenses represent expenses incurred in
connection with the development of new software products, new software product
versions and the development of other eLearning services. Those costs consist
primarily of salaries and benefits, telecommunication allocations, rent
allocations, computer equipment allocation and allocated depreciation and
amortization expense. Research and development expenses from continuing
operations for the three months ended December 31, 2005 and December 31, 2004
were $351,000 and $418,000, respectively, a decrease of $67,000. The decrease
was a result of an overall decrease of $83,000 in salaries and benefits which
was slightly offset by an increase in contract labor of $23,000 and a reduction
of $6,000 in allocated telecommunication costs that were attributed to
management's overall cost reduction program that was implemented in August of
2005, and which resulted in expenses remaining relatively flat as compared to
28
the second quarter of fiscal 2006. Research and development expenses from
continuing operations for the nine months ended December 31, 2005 and December
31, 2004 were $1.1 million and $1.2 million, respectively, a decrease of
$104,000. The slight decrease was a result of an overall decrease of $17,000 in
salaries and benefits which was slightly offset by an increase in contract labor
of $21,000 and a reduction of $53,000 in allocated telecommunication costs, a
reduction of $17,000 in computer-related expenses, and a reduction of $36,000 in
allocated facility and depreciation costs that were the result of management's
overall cost reduction program that was implemented in August of 2005.
Sales and marketing expenses consist primarily of sales and marketing
salaries and benefits, and also include allocated travel and entertainment
costs, allocated advertising, and other marketing expenses. Sales and marketing
expense from continuing operations for the three months ended December 31, 2005
and December 31, 2004 was $701,000 and $893,000, respectively, a decrease of
$192,000. The decrease was a result of an overall decrease of $130,000 in
salaries and benefits, a reduction of $45,000 in marketing expenditures, an
increase of $8,000 in consulting fees related to marketing efforts, and a
reduction of $25,000 in overhead allocations for facilities costs. This
reduction in overall overhead is the direct result of management's cost
reduction program that was implemented in August of 2005, the effects of which
resulted in continued savings in the third quarter of fiscal 2006. We expect to
see slight declines in the coming quarter but not as dramatic a decline as we
continue to invest in sales and marketing activities that we hope will lead to
like gains in software license revenues and software and audio services
revenues. Sales and marketing expense from continuing operations for the nine
months ended December 31, 2005 and December 31, 2004 was $2.3 million and $3.2
million, respectively, a decrease of $919,000. The decrease was a result of an
overall decrease of $454,000 in salaries and benefits, a reduction of $344,000
in marketing expenditures, a reduction of $43,000 in travel and entertainment
costs and a reduction of $36,000 in general allocated costs like contract labor,
recruiting of sales staff, and general facilities costs. The cost reductions
over the nine month period were primarily accomplished during the six month
period ended December 31, 2005 as a part of our overall cost reduction program
implemented in August of 2005, with the exception of marketing expenses which
were reduced in the first half of the six month period ended September 30, 2005
as we focused on internal campaigns to existing customers and less on
recruitment of new software license customers.
General and administrative expenses consist of company-wide expenses
that are not directly related to research and development or sales and
marketing, with the bulk of those general and administrative expenses comprised
of executive salaries, rent and the costs associated with being a public company
like accounting and legal costs. General and administrative expenses from
continuing operations for the three months ended December 31, 2005 and December
31, 2004 were $485,000 and $501,000, respectively, a decrease of $16,000. The
decrease was primarily the result of a reduction in tax liabilities of $93,000,
of which $81,000 related to the release of a tax liability that was recorded as
an estimate as part of the Glyphics acquisition. After further review and
confirmation from the tax authority, the Company determined that the tax
liability would not be realized and therefore the liability was eliminated and a
corresponding reduction of the expense was recorded as a one-time reduction in
costs. For the three month period, the decrease was also a result of a decrease
in salaries and benefits to executive and other administrative staff of $4,000,
a decrease of $20,000 in contract labor and a decrease of $24,000 in accounting
fees. The overall decrease was offset by an increase in legal costs of $20,000,
an increase in investor relations expenses of $30,000, an increase in bad debt
expenses of $34,000 and an increase in consulting fees of $35,000. General and
administrative expenses from continuing operations for the nine months ended
December 31, 2005 and December 31, 2004 were $1.6 million and $2.1 million,
respectively, a decrease of $506,000. This decrease included a decrease in
salaries and benefits to executives and other administrative staff of $135,000,
a decrease of $46,000 in recruiting fees, a decrease of $179,000 in accounting
fees, and a reduction in costs associated with premises of $149,000, primarily
offset by an increase in legal costs of $17,000, a decrease in investor
relations expenses of $47,000, an overall increase in bad debt expenses of
$54,000 and a decrease in other taxes of $85,000 over the nine month period. The
cost reductions over the nine month period were primarily accomplished during
the three month period ended September 30, 2005 as a part of the overall cost
reduction program although these costs remained relatively flat in the third
quarter 2006 as compared with the second quarter of 2006, with the exception of
accounting and investor relation expenses that were reduced as a result of
changes in our outside auditor and investor relation programs in the first half
of this fiscal year.
EARNINGS FROM OPERATIONS
In August of 2005, we announced the implementation of an overall
overhead reduction program. We began to see the savings that were a result of
the implementation of that plan in the September quarter. As a continued result
of that plan, we posted earnings from operations of $419,000 for the three
months ended December 31, 2005 as compared to a loss from operations of $747,000
29
for the three months ended December 31, 2004, a positive change of $1.2 million.
This change was primarily the result of overall cost savings of $185,000 in cost
of revenues and $275,000 in operating expenses and increases due to gains in
revenues of $706,000. As revenues continue to rise and our cost containment
program continues to have an impact we expect continued improvement in earnings
from operations. In addition, approximately $106,000 of the reduction in cost of
sales and $81,000 of the reduction in operating expenses for the three months
ended December 31, 2005 was as a result of a one-time liability elimination
related to the Glyphics acquisition as discussed above. We posted income from
operations for the nine months ended December 31, 2005 of $273,000 and a loss
from operations for the nine months ended December 31, 2004 of $3.0 million, a
positive change of $3.2 million. The cost reductions over the nine-month period
were primarily accomplished during the three-month period ended September 30,
2005 as a part of our overall cost reduction program that was implemented for
the most part in August of 2005. These cost reductions were maintained in the
three-month period ended December 31, 2005.
INTEREST EXPENSE AND EXPENSE FROM DEBT CONVERSION
In order to clearly identify the difference between the interest
expense that is paid in cash on our outstanding debt and the non-cash interest
expense associated with the beneficial conversion features and conversion of our
debt we have segregated and itemized those expenses.
Interest expense from continuing operations paid on outstanding debt
instruments for the three months ended December 31, 2005 and December 31, 2004
was $246,000 and $263,000, respectively, a decrease of $17,000 primarily as a
result of debt conversions during the second quarter of fiscal 2006. We incurred
non-cash interest expense for the three months ended December 31, 2005 and
December 31, 2004 of $213,000 and $162,000, respectively, an increase of
$51,000. Interest expense from continuing operations paid on outstanding debt
instruments for the nine months ended December 31, 2005 and December 31, 2004
was $773,000 and $849,000, respectively, a decrease of $76,000 as a result of
debt conversions mostly occurring in the quarter ending September 30, 2005. We
incurred non-cash interest expense for the nine months ended December 31, 2005
and December 31, 2004 of $705,000 and $665,000, respectively, an increase of
$40,000.
INTEREST INCOME AND OTHER
As part of the Glyphics acquisition, we recorded estimates of assumed
liabilities that might necessitate payment to certain Glyphics vendors. The
Company was able to negotiate settlements with certain of those vendors. As a
result, the liabilities were eliminated and the corresponding reduction in costs
of $167,000 was recorded as other income as a one-time reduction in costs for
the three months ended December 31, 2005.
GAIN ON THE SALES OF ASSETS
We recorded gains on the sale of assets for the nine months ended
December 31, 2005 and December 31, 2004, in the amount of $40,000 and $0,
respectively, resulting from the sale to an existing partner of a portion of our
off-the-shelf course library that we had acquired in the Quisic acquisition, in
which we received $20,000 in cash and issued a note receivable for $20,000.
INCOME TAX EXPENSE FROM CONTINUING OPERATIONS
We disclosed no tax benefit on our Condensed Consolidated Statement of
Operations during the three months and the nine months ended December 31, 2005
or 2004, respectively because we concluded that it was not likely that we would
be able to recognize the tax asset available to us due to the lack of operating
history in the Web conferencing and audio conferencing markets. Accordingly,
since we are reporting a net loss for the nine months ended December 31, 2005,
we have not recorded a tax expense for the net income reported for the three
months ended December 31, 2005. At December 31, 2005 and March 31, 2005, we have
net deferred tax assets of $12.2 million and $11.7 million, respectively, with
corresponding valuation allowances. Our tax assets are scheduled to expire over
a period of five to thirteen years.
30
RESULTS OF DISCONTINUED OPERATIONS
Effective January 1, 2004, we discontinued our practice management
services. Results of operations from this segment are presented as discontinued
operations for the nine months ended December 31, 2005 and 2004 in accordance
with SFAS 146 ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES.
Net income from discontinued operations for the three months ended
December 31, 2005 and 2004 was $70,000 and $15,000, respectively. Net income
from discontinued operations for the nine months ended December 31, 2005 and
2004 was $82,000 and $15,000, respectively.
Cash flows provided by discontinued operations were $86,000 and
$202,000 for the nine months ended December 31, 2005 and 2004, respectively.
The Company collected the total outstanding principal on a note
receivable in the amount of $65,000 that arose as a part of its discontinued
operations.
LIQUIDITY AND CAPITAL RESOURCES
We have a working capital deficiency and have only recently posted
earnings from operations and net income. We currently do not have existing
working capital and had not until recently generated 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 our limited operating history as a provider of Web and audio
conferencing have caused our auditors to conclude in their report on our
consolidated financial statements at and for the year ending March 31, 2005 that
there is doubt about our ability to continue as a going concern. Our plan with
regard to these matters includes the continued development, marketing and
licensing of our 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
direct and indirect providers of audio conferencing as well as Web conferencing
products and services. Although we continue to pursue these plans, there is no
assurance that we will continue to be successful in obtaining sufficient
revenues from our Web and audio conferencing products and services to continue
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 maintain profitability.
In order to increase our liquidity, we intend 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 our
high margin software products and services. However, there can be no assurance
that our plans will be achieved or that we will be able to acquire additional
sums.
As of December 31, 2005, and March 31, 2005, we had a working capital
deficit of $2.8 million and $4.3 million, a positive change of $1.4 million.
Current assets included $618,000 in cash, $1.5 million in accounts receivable,
and $187,000 in prepaid expenses. Current liabilities consisted of $864,000 of
deferred revenue, $788,000 of current maturities of long-term debt and capital
leases and $1.2 million in accounts payable and $2.3 million of accrued
liabilities.
Cash provided by operating activities from continuing operations was
$385,000 during the nine months ended December 31, 2005 and cash used in
operating activities was $2.4 million during the nine months ended December 31,
2004. Cash provided by operating activities from continuing operations during
the nine months ended December 31, 2005 was primarily attributable to a net loss
of $1.3 million, decreases in accounts payable of $671,000, increases in prepaid
expenses of $118,000, and decreases in deferred revenue of $150,000. These items
were partially offset by non-cash expenses and revenues of $2.3 million and
decreases in accounts receivable of $340,000. Cash used in operating activities
during the nine months ended December 31, 2004 was primarily attributable to a
net loss of $4.4 million, increases in accounts receivable and prepaid expenses
of $334,000 and $60,000, respectively and a decrease in deferred revenue of
$26,000. These items were partially offset by increases in accounts payable and
accrued liabilities of $470,000 and non-cash expenses and revenues of $2.0
million.
31
Cash used in investing activities from continuing operations was
$133,000 for the nine months ended December 31, 2005, while cash used in
investing activities from continuing operations was $541,000 for the nine months
ended December 31, 2004. Cash used in investing activities during the nine
months ended December 31, 2005 was due to capital expenditures of $52,000,
payment on the Mentergy royalty earn-out of $100,000 and acquisition related
expenses of $4,000 partially offset by $20,000 in proceeds from the sale of
software and by $3,000 in collection on notes receivable. Cash used by investing
activities for the nine months ended December 31, 2004 was due to $399,000 of
acquisition related royalty expenses, $111,000 of capital expenditures, and
$35,000 of deferred offering costs.
Cash used in financing activities from continuing operations was
$252,000 during the nine months ended December 31, 2005, while cash provided by
financing activities from continuing operations was $2.8 million during the nine
months ended December 31, 2004. Cash used in financing activities during the
nine months ended December 31, 2005 was attributable to the repayment of debt
and capital leases totaling $324,000, payment of preferred dividends of $91,000,
and financing costs of $28,000, offset by $150,000 in proceeds from the issuance
of Series B preferred stock and $41,000 proceeds from the exercise of
outstanding warrants. Cash provided in financing activities during the nine
months ended December 31, 2004 was primarily due to proceeds of $3.6 million
related to the issuance of unsecured senior notes net of financing costs
incurred and common stock of the Company in April 2004, offset by repayment of
debt and capital leases of $739,000.
INFORMATION RELATED TO ACQUISITIONS AND CAPITAL RAISE ACTIVITIES
In connection with our initial public offering (IPO) in March of 1998,
we issued notes to certain shareholders who had provided capital prior to the
IPO. These notes were originally due in April of 2005 and required quarterly
payments of interest only at the rate of 10%. During the first quarter of fiscal
2006, many of the noteholders agreed to extend the maturity date and accept
installment payments that are due during the year ended March 31, 2006. The
outstanding principal balance on these notes is $228,000 as of December 31,
2005. The Company has agreed to make installment payments totaling $228,000. As
of December 31, 2005, the Company owed installment payments of $154,000 on those
IPO Notes, with no claims of default by the holders of the IPO notes, other than
RTT Investments.
In March 2002, we completed a private placement offering (the "2002
Convertible Note Offering") that provided gross proceeds of $5,775,000. Under
the terms of the 2002 Convertible Note Offering, we issued notes and warrants to
purchase 5,775,000 shares of our common stock. These notes bear interest at the
rate of 12% per annum and require quarterly interest payments, with the
principal due at maturity on March 29, 2012. The note holders may convert their
principal into shares of our common stock at the fixed price of $1.00 per share.
We may force conversion of these notes into shares of our common stock at the
fixed conversion price of $1.00, if at any time the 20 trading day average
closing price of our common stock exceeds $3.00 per share. These notes are
unsecured and subordinated to any present or future indebtedness without consent
of the holder. Those warrants expired on March 29, 2005 without exercise. The
exercise price of the warrants was $3.00 per share. 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 as a
component of interest expense of unsecured convertible redeemable subordinated
notes 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 a note, any remaining discount associated with the beneficial
conversion feature of the converted notes will be expensed in full at the time
of conversion. The common stock underlying these notes was registered with the
SEC and may be sold if converted into common stock pursuant to a resale
prospectus dated May 24, 2004. During fiscal 2004, holders with a principal
balance totaling $150,000 converted their notes into 150,000 shares of our
common stock at a price of $1.00 per share. Since April 1, 2005 holders with a
principal balance of $525,000 have converted their notes and $7,652 of accrued
interest into 1,971,088 shares of the Company's common stock at a price of
$0.25, $0.26 and $0.30 per share. Since the actual conversion price for the
convertible debt was less than the fixed conversion price of $1.00, the Company
recorded conversion expense of $338,000 for the nine-month period ending
December 31, 2005. As a result of the conversions since April 1, 2005, the
Company accelerated the amortization of the deferred offering costs and the
discount and beneficial conversion feature associated with the debt by expensing
$50,000 and $137,000, respectively at the time of conversion.
32
On September 16, 2003, we completed our private placement of
convertible Series A preferred stock with detachable warrants. We sold 30 units
at $50,000 each and raised a total of $1,500,000. Each unit consisted of 5,000
shares of convertible Series A preferred stock, par value $0.001 and a warrant
to purchase 25,000 shares of common stock. The convertible Series A preferred
stock is convertible into our common stock at a price of $0.50 per share, and
the warrants are immediately exercisable at a price of $1.50 per share with a
three-year term. Accordingly, each share of Series A preferred stock is
convertible into 20 shares of common stock and retains a $10 liquidation
preference. We pay an 8% dividend to holders of the convertible Series A
preferred stock, and the dividend is cumulative. The convertible Series A
preferred stock is non-voting and non-participating. The shares of convertible
Series A 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 cash proceeds of the private placement of convertible
Series A preferred stock was allocated pro rata between the relative fair values
of the Series A preferred stock and warrants at issuance using the Black-Scholes
valuation model for valuing the warrants. 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 2005 fiscal year,
holders of 22,500 shares of Series A preferred stock converted those shares into
450,000 shares of our common stock. The underlying common stock that would be
issued upon conversion of the Series A preferred stock and upon exercise of the
associated warrants have been registered with the SEC and may be sold pursuant
to a resale prospectus dated May 24, 2004.
In April of 2004, we completed a private placement offering of
unsecured senior notes (the "2004 Senior Note Offering") that provided gross
proceeds of $4.25 million. Under the terms of the 2004 Senior Note Offering, we
issued $3,187,000 in unsecured senior notes and 1,634,550 shares of our common
stock. The senior notes were issued as a series of notes pursuant to a unit
purchase and agency agreement. The senior notes are unsecured. 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 our 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 us 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 $768,000. The fair value of the warrants was estimated and used
to calculate a discount of $119,000 of which $68,000 was allocated to the notes
and $51,000 was allocated to equity. The total discount allocated to the notes
of $836,000 is being amortized as a component of 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 our
existing and future indebtedness. The common stock issued in the 2004 Senior
Note Offering was registered with the SEC pursuant to a resale prospectus dated
August 2, 2005. Effective August 1, 2005, holders with a principal balance
totaling $225,000 converted their senior notes and accrued interest of $800 into
903,205 shares of our common stock at a price of $0.25 per share. Since the
actual conversion price for the debt was greater than the market value of the
stock at the date of conversion, the Company recorded a gain on conversion of
$9,000 for the period ended December 31, 2005. Effective November 9, 2005, the
placement agent exercised warrants for 163,455 shares of our common stock at a
price of $0.25 per share, in which the Company received $41,000 in cash. The
transaction resulted in an increase in deferred offering costs of $7,000 and an
adjustment to additional paid-in capital of $7,000.
The Company executed an agreement to acquire substantially all of the
assets of and assume certain liabilities of Glyphics, a Utah based, private
company that is a provider of comprehensive audio conferencing products and
services. The acquisition had a stated effective date of June 1, 2004 and was
fully consummated on June 14, 2004. The purchase price of $5.229 million was
based on a multiple of the Glyphics' 2003 annual audited net 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 the Company's common stock at the fixed price of $1.05 per share. In
exchange for the assets received, the Company assumed $2.466 million in debt and
issued 2.8 million shares of its common stock at the date of acquisition. 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: (a) shortfalls in the
audited audio conferencing revenues earned by the Company as compared to the
audited audio conferencing business revenues of Glyphics, (b) the
representations and warranties made by Glyphics' and its shareholders in the
asset purchase agreement, and (c) 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.
33
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 March 31, 2005, the Company had accrued certain liabilities in excess of
those scheduled and therefore, will likely be making a claim against those
escrow shares, but the performance revenue target had been met. The shares were
registered with the SEC pursuant to a resale prospectus dated August 2, 2005.
On September 30, 2005, we executed definitive agreements with nine
investors to issue 70,000 unregistered shares of our Series B Preferred Stock,
par value $0.001 (the "Preferred Stock") and warrants to purchase 700,000 shares
of our common stock (the "Warrants") in a private transaction that was exempt
from registration under Section 4(2) of the Securities Act of 1933. Of the total
Preferred Stock issued, 15,000 shares of Preferred Stock with Warrants to
purchase 150,000 shares of common stock were issued to four individuals in
exchange for their cash investment of $150,000; 15,000 shares of Preferred Stock
with Warrants to purchase 150,000 shares of common stock were issued to two
vendors in exchange for an offset of their accounts payable balance in the
amount of $150,000; and 40,000 shares of Preferred Stock with Warrants to
purchase 400,000 shares of common stock (effective August 29, 2005 as previously
disclosed on Form 8-K dated September 2, 2005) were issued to three
institutional investors in exchange for the offset of accrued liabilities in the
amount of $400,000 that arose from the Quisic acquisition. The Company recorded
a gain in debt conversion of $50,000 associated with this transaction. The
Preferred Stock bears an 8% dividend, was sold using a deemed $10.00 per share
issue price, and is convertible into 2,800,000 shares of our common stock using
a conversion price of $0.25 per share. The Warrants that are exercisable at an
exercise price equal to $0.50 per share expire on the third anniversary of the
issue date of September 30, 2005.
CONTRACTUAL OBLIGATIONS
The following schedule details all of our indebtedness and the required
payments related to such obligations at December 31, 2005 (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 obligations .... $ 8,742 $ 670 $ 2,968 $ 2 $ 2 $ 5,100
Capital lease obligations ..... 118 118 -- -- -- --
Interest expense .............. 4,307 933 773 612 1,224 765
Operating lease obligations ... 858 608 250 -- -- --
Base salary commitments
under employment
agreements ................. 810 435 375 -- -- --
-------------------------------------------------------------------------------
Total contractual obligations . $14,835 $ 2,764 $ 4,366 $ 614 $ 1,226 $ 5,865
===============================================================================
OFF BALANCE SHEET TRANSACTIONS
We have no off-balance sheet transactions, arrangements, obligations
(including contingent obligations) or other relationships with unsolicited
entities or other persons that have or may have a material effect on our
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these condensed consolidated
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,
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
34
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.
Our critical accounting policies and estimates are included in our
annual report on Form 10-K for the year ended March 31, 2005 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. Since the acquisition of these businesses, we have
made significant changes to our product mix and service mix, our growth
strategies, our sales and marketing plans, and other operational matters. 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 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 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; the timing of revenues and expenses relating to our product
sales; and, revenue recognition rules. 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 LIMITED FINANCIAL RESOURCES AND MAY NOT REMAIN 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 remain profitable, we will face
increasing demands for capital. We may not be successful in raising additional
debt or equity capital and may not remain profitable. As a result, we may not
have sufficient financial resources to satisfy our obligations as they come due
in the short term.
35
OUR AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT AS TO OUR ABILITY TO CONTINUE AS A
GOING CONCERN.
Our condensed 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, 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 and the obtainment of additional
capital. 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 condensed
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
we maintain stockholders' equity of at least $4.0 million if we have losses from
continuing operations and/or net losses in three of our four most recent fiscal
years. We have sustained losses in three of our four most recent fiscal years
and therefore must maintain stockholders' equity of at least $4.0 million. If
now or in the future, we fail to maintain a sufficient level of stockholders'
equity in compliance with those and other listing standards of the American
Stock Exchange then we would be required to submit a plan to the American Stock
Exchange describing how we intended to regain compliance with the requirements.
DILUTION TO EXISTING STOCKHOLDERS WILL OCCUR UPON ISSUANCE OF SHARES WE HAVE
RESERVED FOR FUTURE ISSUANCE.
On December 31, 2005, 28,615,035 shares of our common stock were
issued, of which 1,432,412 were held in treasury, and 17,151,292 additional
shares of our common stock were reserved for issuance in the form of warrants,
convertible notes and convertible preferred stock. The issuance of these
additional shares will reduce the percentage ownership of our existing
stockholders. 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,
36
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.
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 WHICH MAKE OUR REVENUES
DIFFICULT TO PREDICT.
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, 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. Additionally, our sales cycle
varies depending on the size and type of customer considering a purchase.
Potential customers frequently need to obtain approvals from multiple decision
makers within their company and may evaluate competing products and services
before deciding to use our services. Our sales cycle, which can range from
several weeks to several months or more, combined with the license purchase
model makes it difficult to predict future quarterly revenues.
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
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 or
unwillingness 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.
37
SALES IN FOREIGN JURISDICTIONS BY US AND OUR INTERNATIONAL DISTRIBUTOR NETWORK
MAY RESULT IN UNANTICIPATED COSTS.
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:
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. 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.
IF WE ARE UNABLE TO COMPLETE OUR ASSESSMENT AS TO THE ADEQUACY OF OUR INTERNAL
CONTROLS OVER FINANCIAL REPORTING AS REQUIRED BY SECTION 404 OF THE
SARBANES-OXLEY ACT OF 2002, INVESTORS COULD LOSE CONFIDENCE IN THE RELIABILITY
OF OUR FINANCIAL STATEMENTS, WHICH COULD RESULT IN A DECREASE IN THE VALUE OF
OUR COMMON STOCK.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the
Securities and Exchange Commission adopted rules requiring public companies to
include in their annual reports on Form 10-K for fiscal years ending after July
15, 2007 a report of management on their company's internal control over
financial reporting, including management's assessment of the effectiveness of
their company's internal control over financial reporting as of the company's
fiscal year end. In addition, the accounting firm auditing a public company's
financial statements must also attest to and report on management's assessment
of the effectiveness of the company's internal control over financial reporting
as well as the operating effectiveness of the company's internal controls. There
is a risk that we may not comply with all of its requirements. If we do not
timely complete our assessment or if our internal controls are not designed or
operating effectively as required by Section 404, our accounting firm may either
disclaim an opinion as it is related to management's assessment of the
effectiveness of its internal controls or may issue a qualified opinion on the
38
effectiveness of our internal controls. If our accounting firm disclaims its
opinion or qualifies its opinion as to the effectiveness of our internal
controls, then investors may lose confidence in the reliability of our financial
statements, which could cause the market price of our common stock to decline.
WE ARE EXPOSED TO RISKS RELATING TO THE EFFECTIVENESS OF OUR INTERNAL CONTROLS
On August 11, 2004, our independent registered public accountants
orally notified our Audit Committee that they had identified significant
deficiencies regarding our internal controls. The deficiencies noted were lack
of sufficient management oversight over and the proper segregation of duties of
the accounting department. On November 12, 2004, our independent registered
public accountants orally notified our Audit Committee that they had identified
a material weakness regarding our internal controls. The material weakness noted
was the lack of sufficient control over the sales order and revenue recognition
process. Our management evaluated the design and operation of our disclosure
controls and procedures as of December 31, 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 our disclosure controls and procedures, as defined by Exchange Act
Rules 13a-14(c) and 15d-14(c), were not effective as of December 31, 2004.
Following the August 11, 2004 notification regarding significant
deficiencies in accounting controls related to management oversight and proper
segregation of duties in the accounting department, we took the following
actions:
o We hired a new CFO and a new controller replacing the
interim-CFO and replacing the VP of Finance;
o We hired a new A/P clerk and added a dedicated A/R clerk to
supplement the accounting staff, further segregating functions
to the extent possible in a small organization;
o We restructured the roles of the new controller in combination
with a change in the reporting procedures for the A/P clerk
and A/R clerk to strengthen the reporting structures and
internal control procedures;
o We implemented new sign-off procedures for sales agreements to
require multiple party sign-off from both the sales and
finance departments; and
o We added to our CRM software the ability to gain access to
view sales contracts and recorded purchase information in that
system as well as the accounting systems.
In response to the November 12, 2004 notification regarding the
material weakness regarding our internal controls, we implemented steps to
prevent failure to communicate changes in standard forms of customer contracts
in the future and strengthen our internal controls related to contract
management and its impact on revenue recognition. We have put procedures into
place to prevent modification of our standard form of software license
agreements without due and proper notice to all parties, including our
accounting group. Other steps to correct and prevent this material weakness in
the future include:
o New controls over the modification of electronic contracts
adding limited password protection;
o The electronic receipt of contracts from customers directly to
both the sales and accounting groups simultaneously;
o The numbering of contracts and order forms to provide a
stronger audit trail;
o The electronic storage of all customers' contracts providing
real-time access;
o The notification of the accounting department by the sales or
legal departments should modification of license agreements
occur; and
o Remedial training of the sales group on the impact of changes
to the software license agreement.
o A further segregation of duties was also implemented to better
control contract workflow as follows:
o A supervisor from the sales team must approve all
sales orders before they are accepted by the sales
department, and a supervisor from the accounting
group must approve all orders that exceed $10,000
before they are accepted as a valid sale of the
company;
o An order processing clerk verifies that the
appropriate customer and Company authorizations have
been obtained;
o The approved sales order is transmitted to the
customer service department for order fulfillment;
39
o Notification of fulfillment of the order is sent to
both the sales and accounting departments; and
o Before revenue is recognized on any sales order, the
controller verifies that the sales order was properly
approved by the customer and the Company, verifies
that changes, if any, to the standard license
agreement have been properly documented in writing
and in the customer's electronic file and thereafter
records revenue based upon the approved and verified
documentation.
We believe that the steps we have taken adequately address the
significant deficiencies and material weaknesses identified by our independent
registered public accountants. However, we may experience control deficiencies
or weaknesses in the future, which could adversely impact the accuracy and
timeliness of our future financial reporting as well as reports and filings we
make with the SEC.
WE MAY ACQUIRE OTHER BUSINESSES THAT COULD NEGATIVELY AFFECT OUR OPERATIONS AND
FINANCIAL RESULTS AND DILUTE EXISTING STOCKHOLDERS.
We may pursue additional business relationships through acquisitions
which may not be successful. We may have to devote substantial time and
resources in order to complete acquisitions and we therefore may not realize the
benefits of those acquisitions. Further, these potential acquisitions entail
risks, uncertainties and potential disruptions to our business. For example, we
may not be able to successfully integrate a company's operations, technologies,
products and services, information systems, and personnel into our business.
These risks could harm our operating results and could adversely affect
prevailing market prices for our common stock.
OUR CURRENT STOCK COMPENSATION EXPENSE NEGATIVELY IMPACTS OUR EARNINGS, AND WHEN
WE ARE REQUIRED TO REPORT THE FAIR VALUE OF EMPLOYEE STOCK OPTIONS AS AN EXPENSE
IN CONJUNCTION WITH THE NEW ACCOUNTING STANDARDS, OUR EARNINGS WILL BE ADVERSELY
AFFECTED, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE.
Under our current accounting practice, stock compensation expense is
recorded on the date of the grant only if the current market price of the
underlying stock exceeds the exercise price. Beginning with the fiscal quarter
beginning April 1, 2006, we will be required to report all employee stock
options as an expense based on a change in the accounting standards and our
earnings will be negatively impacted, which could adversely affect prevailing
market prices for our common stock and increase our anticipated net losses.
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.
We provide our products and services to customers in the United States,
Europe and elsewhere throughout the world. Sales are predominately made in U.S.
Dollars, however, we have sold products that were payable in Euros and Canadian
Dollars. A strengthening of the U.S. Dollar could make our products and services
less competitive in foreign markets.
The primary objective of our investment activity is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, we maintain our portfolio of cash
equivalents in a variety of money market funds.
As of December 31, 2005, the carrying value of our outstanding
convertible redeemable subordinated notes and unsecured senior notes was
approximately $8.3 million at fixed interest rates of 10% to 12%. In certain
circumstances, we may redeem this long-term debt. Our other components of
indebtedness of $452,000 bear interest rates of 6% to 26.99%. Increases in
interest rates could increase the interest expense associated with future
borrowings, if any. We do not hedge against interest rate increases.
ITEM 4. CONTROLS AND PROCEDURES
We evaluated the design and operation of our disclosure controls and
procedures as of December 31, 2005 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, and the rules
40
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 our disclosure controls
and procedures, as defined by Exchange Act Rules 13a-15(e) and 15d-15(e), are
effective and ensure that (i) 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 and (ii) information required
to be disclosed in reports that we file under the Exchange Act is accumulated
and communicated to our management, including our principal executive officer
and principal financial officer, to allow timely decisions regarding required
disclosure.
Our disclosure and control systems are designed to provide reasonable
assurance of achieving their objectives, and our principal executive officer and
principal financial officer have concluded that our disclosure controls and
procedures provide reasonable assurance of achieving their objectives. However,
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.
During the third quarter ended December 31, 2005, no changes were made
to our internal controls over financial reporting that materially affected or
were reasonably likely to materially affect these controls subsequent to the
date of their evaluation.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS OF SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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
41
3.8 Revised Certificate of Designations of Series B Preferred Stock
4.1(1) Form of certificate evidencing ownership of Common Stock of the
Company
4.6(7) Form of certificate evidencing ownership of Common Stock of the
Company
4.7(8) Form of Convertible Redeemable Subordinated Note
4.9(14) Form of Redeemable Warrant (2003 Private Placement Offering)
*10.1(20) The Company's amended and restated stock compensation plan
*10.9(7) Employment Agreement dated November 12, 2000 between the Company and
James M. Powers, Jr.
+*10.11(19) Employment Agreement dated February 15, 2001 between the Company and
James L. Dunn, Jr. with Amendments
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 between the Company
and certain creditors
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
*10.25(19) Employment Agreement dated March 14, 2005 between the Company and
David Iannini
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
-----------------
(1) Previously filed as an exhibit to iLinc's Registration Statement on
Form S-1 (No. 333-37633), and incorporated herein by reference.
(2) Previously filed as an exhibit to iLinc's Registration Statement on
Form S-4 (No. 333-78535), and incorporated herein by reference.
(3) Previously filed as an exhibit to iLinc's Registration Statement on
Form S-4 (No. 333-64665), and incorporated herein by reference.
(4) Previously filed as an exhibit to iLinc's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1998.
(5) Previously filed as an exhibit to iLinc's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1998.
(6) Previously filed as an exhibit to iLinc's Annual Report on Form 10-K
for the year ended March 31, 2000.
(7) Previously filed as an exhibit to iLinc's Annual Report on Form 10-K
for the year ended March 31, 2001.
(8) Previously filed as an exhibit to iLinc's Annual Report on Form 10-K
for the year ended March 31, 2002.
(9) Previously filed as an exhibit to iLinc's Form 8-K filed October 16,
2001.
(10) Previously filed as an exhibit to iLinc's Form 8-K filed January 30,
2002.
(11) Previously filed as an exhibit to iLinc's Form 8-K filed July 2, 2002.
42
(12) Previously filed as an exhibit to iLinc's Form 8-K filed December 20,
2002.
(13) Previously filed as an exhibit to iLinc's Form 8-K filed April 3, 2003.
(14) Previously filed as an exhibit to iLinc's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 2003.
(15) Previously filed as an exhibit to iLinc's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 2003.
(16) Previously filed as an exhibit to iLinc's Form 8-K filed June 14, 2004.
(17) Previously filed as an exhibit to iLinc's Annual Report on Form 10-K
for the year ended March 31, 2004.
(18) Previously filed as an exhibit to iLinc's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 2004.
(19) Previously filed as an exhibit to iLinc's Annual Report on Form 10-K
for the year ended March 31, 2005.
(20) Previously filed as an exhibit to iLinc's Annual Proxy Statement dated
July 14, 2005.
* 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
43
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: February 14, 2006
By: /s/ James M. Powers, Jr.
------------------------------------------
Chairman of the Board, President and Chief
Executive Officer
By: /s/ James L. Dunn, Jr.
------------------------------------------
Senior Vice President & Chief Financial Officer
44