UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. (20549)
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
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 001-13725
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)
--------------
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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 a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of "large accelerated filer", "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
The number of shares of Common Stock of the Registrant, par value $.001
per share, outstanding at October 31, 2008 was 34,692,077 net of shares held in
treasury.
FORM 10-Q REPORT INDEX
PART I--FINANCIAL INFORMATION PAGE
----
Item 1--Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2008 and
March 31, 2008........................................................................ 4
Unaudited Condensed Consolidated Statements of Operations for the Three and Six
Months Ended September 30, 2008 and 2007.............................................. 5
Unaudited Condensed Consolidated Statements of Cash Flows for the Six
Months Ended September 30, 2008 and 2007.............................................. 6
Notes to Unaudited Condensed Consolidated Financial Statements........................ 7
Item 2--Management's Discussion and Analysis of Financial Condition and Results of Operations. 18
Item 3--Quantitative and Qualitative Disclosures about Market Risk............................ 30
Item 4T--Controls and Procedures.............................................................. 30
PART II--OTHER INFORMATION
Item 1--Legal Proceedings..................................................................... 32
Item 1A--Risk Factors......................................................................... 32
Item 2--Unregistered Sales of Equity Securities and Use of Proceeds........................... 35
Item 3--Defaults of Senior Securities......................................................... 35
Item 4--Submission of Matters to a Vote of Security Holders................................... 35
Item 5--Other Information..................................................................... 35
Item 6--Exhibits.............................................................................. 36
Signatures.................................................................................... 37
2
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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. and its consolidated subsidiaries.
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. 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, market demand for our
products and services, our ability to attract and retain customers and channel
partners, our ability to expand our technological infrastructure to meet the
demand from our customers, our ability to recruit and retain qualified
employees, the ability of channel partners to successfully resell our products,
the status of the overall economy, the strength of competitive offerings, the
pricing pressures created by market forces and the risks discussed herein (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Risk Factors"). All forward-looking statements included in this
report are based on information available to us as of the date hereof. We
expressly disclaim any obligation or undertaking to release publicly any updates
or revisions to any forward-looking statements contained herein, to reflect any
change in our expectations or in events, conditions or circumstances on which
any such statement is based. Readers are urged to carefully review and consider
the various disclosures made in this report and in our other reports filed with
the SEC that attempt to advise interested parties of certain risks and factors
that may affect our business. 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 through our Web site located at www.iLinc.com.
iLinc, iLinc Communications, iLinc Suite, MeetingLinc, LearnLinc,
ConferenceLinc, SupportLinc, EventPlus, iLinc On-Demand, iReduce, iLinc Green
Meter, iLinc Enterprise, iLinc Essentials and its logos are trademarks or
registered trademarks of iLinc Communications, Inc. All other company names and
products may be trademarks of their respective companies.
3
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ILINC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, MARCH 31,
2008 2008
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 538 $ 669
Certificates of deposit ........................................................... 2,778 373
Accounts receivable, net of allowance for doubtful accounts of $25 and $30 at
September 30 and March 31, 2008, respectively ................................... 818 627
Other receivables.................................................................. 128 --
Prepaid expenses and other current assets ......................................... 223 272
Assets related to discontinued operations ......................................... -- 3,145
-------- --------
Total current assets ............................................................ 4,485 5,086
Property and equipment, net .......................................................... 499 566
Goodwill ............................................................................. 9,229 9,520
Intangible assets, net ............................................................... 706 869
Other receivables .................................................................... 100 --
Other assets ......................................................................... 14 14
-------- --------
Total assets .................................................................... $ 15,033 $ 16,055
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt ................................................. $ 96 $ 95
Accounts payable trade ............................................................ 468 612
Accrued liabilities ............................................................... 849 751
Current portion of capital lease liabilities ...................................... 128 120
Deferred revenue .................................................................. 1,294 1,507
Liabilities related to discontinued operations .................................... 89 778
-------- --------
Total current liabilities ....................................................... 2,924 3,863
Long term debt, less current maturities, net of discount and beneficial conversion
feature of $690 and $791, at September 30 and March 31, 2008, respectively ....... 7,595 7,535
Capital lease liabilities, less current maturities ................................... 190 256
Deferred tax liability ............................................................... 427 384
-------- --------
Total liabilities ............................................................... 11,136 12,038
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock series A & B, 10,000,000 shares authorized:
Series A preferred stock, $.001 par value,75,000 and 105,000 shares issued and
outstanding, liquidation preference of $750,000 and $1,050,000 at September 30
and March 31, 2008, respectively .................................................. -- --
Series B preferred stock, $.001 par value, 55,000 shares issued and outstanding,
liquidation preference of $550,000 at September 30 and March 31, 2008,
respectively ...................................................................... -- --
Common stock, $.001 par value 100,000,000 shares authorized, 34,840,777 and
35,456,228 issued at September 30 and March 31, 2008, respectively ................ 34 35
Additional paid-in capital ........................................................ 45,289 46,498
Accumulated deficit ............................................................... (41,280) (41,108)
Less: 148,700 and 1,432,412 treasury shares at cost at September 30 and March
31, 2008, respectively .......................................................... (146) (1,408)
-------- --------
Total shareholders' equity ...................................................... 3,897 4,017
-------- --------
Total liabilities and shareholders' equity ...................................... $ 15,033 $ 16,055
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
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iLINC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2008 2007 2008 2007
-------- -------- -------- --------
Revenues
Software licenses ................................................. $ 335 $ 1,218 $ 920 $ 2,370
Subscription services ............................................. 528 440 997 951
Software maintenance, hosting and other services .................. 716 931 1,582 1,786
-------- -------- -------- --------
Total revenues ................................................ 1,579 2,589 3,499 5,107
-------- -------- -------- --------
Cost of revenues
Software licenses ................................................. 16 -- 61 67
Subscription services ............................................. 74 78 140 181
Software maintenance, hosting and other services .................. 81 240 208 451
Amortization of technology ........................................ 52 52 105 52
-------- -------- -------- --------
Total cost of revenues ........................................ 223 370 514 751
-------- -------- -------- --------
Gross profit......................................................... 1,356 2,219 2,985 4,356
-------- -------- -------- --------
Operating expenses
Research and development .......................................... 558 547 1,089 909
Sales and marketing ............................................... 941 1,279 1,841 2,451
General and administrative ........................................ 647 579 1,260 1,242
-------- -------- -------- --------
Total operating expenses ...................................... 2,146 2,405 4,190 4,602
-------- -------- -------- --------
Loss from operations ................................................. (790) (186) (1,205) (246)
Interest expense ..................................................... (259) (263) (517) (519)
Amortization of beneficial debt conversion ........................... (79) (81) (158) (162)
-------- -------- -------- --------
Total interest expense ........................................ (338) (344) (675) (681)
Interest income (charges) and other .................................. 16 6 19 --
Warrant expense ...................................................... (7) -- (7) (21)
-------- -------- -------- --------
Loss from continuing operations before income taxes .................. (1,119) (524) (1,868) (948)
Income taxes ......................................................... (22) (22) (43) (43)
-------- -------- -------- --------
Loss from continuing operations ...................................... (1,141) (546) (1,911) (991)
(Loss) income from discontinued operations .......................... (182) 307 1,794 830
-------- -------- -------- --------
Net loss ............................................................ (1,323) (239) (117) (161)
Series A and B preferred stock dividends .......................... (26) (34) (55) (69)
-------- -------- -------- --------
Loss available to common shareholders ............................... $ (1,349) $ (273) $ (172) $ (230)
======== ======== ======== ========
(Loss) income per common share, basic and diluted
From continuing operations ........................................ $ (0.03) $ (0.02) $ (0.06) $ (0.03)
From discontinued operations ...................................... (0.01) 0.01 0.05 0.02
-------- -------- -------- --------
Net loss per common share .................................... $ (0.04) $ (0.01) $ (0.01) $ (0.01)
======== ======== ======== ========
Number of shares used in calculation of loss (income) per share:
Basic............................................................. 34,647 33,724 34,452 33,655
======== ======== ======== ========
Diluted .......................................................... 34,647 33,724 34,452 33,655
======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
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ILINC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
SEPTEMBER 30,
---------------------
2008 2007
------- -------
Net cash used in operating activities ............................ $(1,833) $ (154)
------- -------
Cash flows from investing activities:
Investment in certificate of deposit .......................... (2,405) (12)
Capital expenditures .......................................... (56) (110)
Capitalization of software development costs .................. -- (263)
Repayment of note receivable .................................. -- 14
------- -------
Net cash used in investing activities .................... (2,461) (371)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock ........................ -- --
Series A and B preferred stock dividends ...................... (56) (70)
Stock issuance expense ........................................ -- --
Proceeds from exercise of stock options ....................... -- 19
Repayment of long-term debt ................................... (40) (83)
Repayment of capital lease liabilities ........................ (58) (24)
------- -------
Net cash used in financing activities .................... (154) (158)
------- -------
Cash flows from continuing operations ............................ (4,448) (683)
Net cash flows (used in) provided by operating activities from
discontinued operations ....................................... (646) 749
Net cash flows provided by (used in) investing activities from
discontinued operations ....................................... 4,963 (2)
------- -------
Net change in cash and cash equivalents .................. (131) 64
Cash and cash equivalents, beginning of period ................... 669 1,057
------- -------
Cash and cash equivalents, end of period ......................... $ 538 $ 1,121
======= =======
Supplemental Schedule of Noncash Investing and Financing Activities
SIX MONTHS ENDED
SEPTEMBER 30,
--------------------
2008 2007
------- -------
Other receivables from sale of Audio and Event business .......... $ 1,081 $ --
Fair value of warrants recorded as prepaid ....................... (54) (19)
Addition of assets under capital leases .......................... -- 109
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
|
6
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 software and services. The Company's
four-product iLinc Suite, comprised of LearnLinc, MeetingLinc, ConferenceLinc,
and SupportLinc, is an award winning virtual classroom, Web conferencing and
collaboration suite of software. 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 conferencing industry.
Versions of the iLinc Suite have been translated into six languages, and it is
currently available in version 10. The Company's customers may choose from
several different pricing and licensing options for the iLinc Suite depending
upon their needs. Uses for the four-product suite of Web collaboration software
include online business meetings, sales presentations, training sessions,
product demonstrations and technical support assistance. The Company markets its
products using a direct sales force and an indirect distribution channel
consisting of agents, value added resellers and OEM partners. The Company allows
its customers to choose between purchasing a perpetual license and subscribing
to a term license. The Company's revenues are a mixture of high margin perpetual
and subscription licenses of software, monthly recurring revenues from
subscription licenses, as well as annual maintenance, hosting and support
agreements and other products and services.
The Company maintains corporate headquarters in Phoenix, Arizona and
has occupied that 9,100 square foot Class A facility since the Company's
inception in 1998. The Phoenix lease requires a monthly rent and operating
expenses of approximately $25,000 and will expire on February 28, 2012. 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 New York lease requires a monthly rent and operating expenses of
approximately $4,000 and it expires on June 30, 2009.
The Company began operations in March of 1998 in a different industry,
with its formation including the simultaneous rollup of fifty private businesses
and a simultaneous initial public offering. 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
does not purport it 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 to fairly state the results for the interim
periods ended September 30, 2008 and 2007.
Fiscal operating results for interim periods are not necessarily
indicative of the results for a full year. 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, 2008, as filed with the SEC and available for free on the Company's Web
site.
2. ASSETS AND LIABILITIES RELATED TO DISCONTINUED OPERATIONS
On April 28, 2008, the Company entered into an Asset Purchase Agreement
(the "Audio Conferencing Agreement") with American Teleconferencing Services
Ltd. (the "Purchaser"), a subsidiary of Premiere Global Services, Inc. The Audio
Conferencing Agreement provided for the sale by the Company of a majority of its
audio conferencing assets. The closing of the transaction occurred on May 2,
2008. On the closing date, the Purchaser paid the Company $3.3 million, with an
additional payment of $833,000 to be paid within ten days of the transition date
of July 25, 2008 as defined in the Audio Conferencing Agreement. The transition
payment of $833,000 was received on August 8, 2008. As further consideration,
the Purchaser will tender on or before June 1, 2009 an earn-out payment, if any,
which is the product of 1.25 times the amount that the Purchaser earns in
revenue from the acquired customer accounts in excess of $2.7 million during the
first twelve months after closing. Additionally, on May 13, 2008, the Purchaser
7
paid $558,000 for the Company's identified audio conferencing accounts
receivable that was less than 90 days old, and paid in August 2008 103%, or
$27,000 of the accounts receivable collected from those audio conferencing
accounts in excess of the initial payment. The total sales price including the
sales of the accounts receivable was $4.7 million and the resulting gain on sale
of $1.8 million has been recorded.
On June 30, 2008, the Company entered into an Asset Purchase Agreement
(the "Events Business Agreement") with Conference Plus, Inc. The Events Business
Agreement provided for the sale by the Company of the assets related to the
Events portion of its audio conferencing business (the "Events Business"). On
the closing date, the Purchaser paid the Company $175,000, with additional
monthly earn-out payments equal to the greater of: (a) twenty-five percent of
the revenue derived by Purchaser from the Event Business or (b) $10,000 for each
of the twenty-four months after the closing date. The minimum monthly amount due
of $10,000 per month has been recorded, the balance of which was $120,000 in
Other Receivables - Current, and $100,000 in Other Receivables in Noncurrent at
September 30, 2008. The Company recorded an additional $8,000 in other
receivables - current as of September 30, 2008.The proceeds received as a result
of the sale as of September 30, 2008 were $215,000 with a total receivable
balance of $228,000. The gain on sale of $128,000 resulting from the transaction
has been recorded, which included an additional $28,000 in revenues related to
discontinued operations in excess of the minimum monthly earn-outs for the three
months ending September 30, 2008.
The Company sold both its audio conferencing and Events Business assets
due to continued price pressure for the market's perception of a commoditized
product in regards to audio conferencing, and as a result the Company
experienced continued margin contraction. The Company sold these assets to
provide cash to enable it to focus on its Web conferencing product.
Therefore, pursuant to the criteria established by SFAS No. 144,
ACCOUNTING FOR THE IMPAIRMENT OF DISPOSAL OF LONG-LIVED ASSETS, the Company has
determined that all of its audio conferencing operations and related assets and
liabilities should be classified as assets and liabilities "related to
discontinued operations" as of September 30, 2008 and March 31, 2008 and, the
Company's results of operations related to its audio conferencing business for
the three and six months ended September 30, 2008 and 2007 have been
reclassified as income from discontinued operations.
A summary of the assets and liabilities of the audio conferencing
business are as follows:
------------------------------
SEPTEMBER 30, MARCH 31,
-------------- --------------
2008 2008
-------------- --------------
(IN THOUSANDS)
Assets:
Accounts receivable................................. $ -- $ 834
Property and equipment, net......................... -- 192
Goodwill............................................ -- 1,686
Intangible assets, net.............................. -- 433
-------------- --------------
Assets - related to discontinued operations......... $ -- $ 3,145
============== ==============
Liabilities:
Accounts payable.................................... $ 84 $ 611
Accrued liabilities................................. 5 167
-------------- --------------
Liabilities - related to discontinued operations.... $ 89 $ 778
============== ==============
8
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A summary of the results from discontinued operations for the three and
six months ended September 30, 2008 and 2007 are as follows:
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2008 2007 2008 2007
------------------- ----------------
Audio services revenues ................................ $ -- $1,315 $ 641 $2,921
Cost of audio services revenues ........................ 104 878 678 1,795
------------------- ----------------
Gross profit ........................................... (104) 437 (37) 1,126
Operating expenses ..................................... 77 130 106 282
------------------- ----------------
Loss/income from discontinued operations ............... (181) 307 (143) 844
Interest expense ....................................... -- -- -- (14)
Loss/gain on sale of Audio Conferencing and Events
Businesses ........................................... (1) -- 1,937 --
------------------- ----------------
Net loss/income from discontinued operations ........... $ (182) $ 307 $1,794 $ 830
=================== ================
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There was no tax effect within the discontinued operations.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RECLASSIFICATION OF PREVIOUSLY REPORTED FIGURES
The consolidated statements of operations for the three and six months
ended September 30, 2008 and 2007 include reclassification of revenues and cost
of revenues derived from subscription and hosting services and audio services.
Hosting services have been reclassified to Software Maintenance, Hosting and
Other Services Revenues and cost of revenues from Subscription Services. These
sources were combined in the prior year's financial statements and have been
retroactively reclassified for comparative purposes. All audio services revenues
and cost of revenues, as well as audio services operating expenses have been
reclassified as discontinued operations.
PRINCIPLES OF CONSOLIDATION
The 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.
CERTIFICATE OF DEPOSIT
The Company holds certificates of deposit at a financial institution.
These certificates have a maturity of five months from the date of acquisition,
which preclude them from being accounted for as cash equivalents.
9
CUSTOMER CONCENTRATIONS
Accounts receivable balances for three customers totaled approximately
12%, 9% and 9%, respectively, at September 30, 2008 and accounts receivable
balances for two customers totaled approximately 18% and 14% of the total
balance outstanding at March 31, 2008.
STOCK-BASED COMPENSATION
Prior to April 1, 2006, the Company accounted for share-based
compensation using the intrinsic value method prescribed by APB 25, and related
interpretations and elected the disclosure option of SFAS No. 123 as amended by
SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - COMPENSATION AND
DISCLOSURE. Under the prior method, the Company measured compensation expense
for stock options as the excess, if any, of the estimated fair market value of
the Company's stock at the date of grant over the exercise price and provided
pro forma disclosure of net income and earnings per share in the notes to the
financial statements.
LOSS/INCOME PER SHARE
Basic loss/income per share are computed by dividing net loss/income
available to common shareholders by the weighted-average number of common shares
outstanding for each reporting period presented. Diluted loss/income per share
is computed similar to basic loss/income per share while giving effect to all
potential dilutive common stock equivalents that were outstanding during each
reporting period. For the three and six months ended September 30, 2008 options
and warrants to purchase 4,795,131 shares of common stock were excluded from the
computation of diluted earnings per share because of their anti-dilutive effect.
For the three and six months ended September 30, 2007, options and warrants to
purchase 5,223,999 shares of common stock were excluded from the computation of
diluted earnings per share because of their anti-dilutive effect.
Additionally, for the three and six months ended September 30, 2008 and
2007, preferred stock and debt convertible into 8,800,000 and 9,580,000 shares
of common stock, respectively, were excluded from the computation of diluted
loss/income per share because inclusion of such would be anti-dilutive.
Furthermore, restricted stock grants of 1,250,000 and 450,000 shares have been
excluded from the loss/income per share calculations for the three and six
months ended September 30, 2008 and 2007, respectively because the measurement
date stock price exceeds the average stock price for all periods presented.
4. GOODWILL AND INTANGIBLE ASSETS, NET
The balance of goodwill was $9,520,000 at March 31, 2008 and $9,229,000
at September 30, 2008. The change in the carrying amount of goodwill was a
result of reallocation of goodwill based on the analysis performed for the audio
sale. As a result of the sale of the Company's audio conferencing assets,
$1,686,000 of goodwill, which was previously classified in assets related to
discontinued operations plus an additional $291,000 of goodwill reallocated to
discontinued operations, resulting from the goodwill analysis, was included in
the calculation of gain on sale of the audio conferencing and events business
for the six months ended September 30, 2008.
Intangible assets consisted of the following:
10
SEPTEMBER 30, 2008
-----------------------------------------------------------------
WEIGHTED
AVERAGE
REMAINING GROSS CARRYING ACCUMULATED
LIVES AMOUNT AMORTIZATION NET
-----------------------------------------------------------------
(YEARS) (IN THOUSANDS)
AMORTIZED INTANGIBLE ASSETS:
Deferred financing costs 3.14 $ 919 $ (581) $ 338
Purchased software 0.00 675 (675) --
Customer relationship 0.00 32 (32) --
Capitalized software development costs 1.75 630 (262) 368
----------------------------------------------------
$ 2,256 $ (1,550) $ 706
====================================================
MARCH 31, 2008
-----------------------------------------------------------------
WEIGHTED
AVERAGE
REMAINING GROSS CARRYING ACCUMULATED
LIVES AMOUNT AMORTIZATION NET
-----------------------------------------------------------------
(YEARS) (IN THOUSANDS)
AMORTIZED INTANGIBLE ASSETS:
Deferred financing costs 3.61 $ 919 $ (523) $ 396
Purchased software 0.00 675 (675) --
Customer relationships 0.00 32 (32) --
Capitalized software development costs 2.25 630 (157) 473
----------------------------------------------------
$ 2,256 $ (1,387) $ 869
====================================================
CAPITALIZATION OF SOFTWARE DEVELOPMENT COSTS
In May of 2006, the Company began production of version 9 of its Web
conferencing software. In accordance with SFAS No. 86, ACCOUNTING FOR THE COSTS
OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED, the Company began
capitalizing certain direct and indirect software development costs that
included expenses related to employee payroll costs, consultant fees, dedicated
computer hardware costs and specialized software license costs associated with
this project, since technological feasibility was achieved in May 2006. Version
9 was completed and released to customers in June 2007 and at that time the
accrued balance of software development costs totaled $630,000. The Company did
not capitalize software development costs for the three and six months ended
September 30, 2008. The Company capitalized $0 and $263,000 of software
development costs for the three and six months ended September 30, 2007. The
Company began amortization of these capitalized software development costs,
using the straight-line amortization over a three year period beginning July 1,
2007. As of September 30, 2008 and March 31, 2008, the net unamortized
capitalized direct and indirect software development costs were $368,000 and
$473,000, respectively.
5. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
SEPTEMBER 30, MARCH 31,
2008 2008
--------------- ---------------
(IN THOUSANDS)
Accrued state sales tax.................................................$ 45 $ 46
Accrued interest payable................................................ 266 265
Amount payable to subcontractor......................................... -- 113
Accrued salaries and related benefits................................... 509 294
Other................................................................... 29 33
--------------- ---------------
Total accrued liabilities............................................$ 849 $ 751
=============== ===============
11
|
6. LONG-TERM DEBT
Long-term debt consisted of the following:
SEPTEMBER 30, MARCH 31,
2008 2008
--------------- ---------------
(IN THOUSANDS)
Due 2012, 2002 Convertible redeemable unsecured subordinated notes....... $ 5,100 $ 5,100
Due 2010, 2004 Senior unsecured notes..................................... 2,962 2,962
Notes payable............................................................. 319 359
-------------- -------------
8,381 8,421
Less: Current portion of long-term debt................................... (96) (95)
Discount......................................................... (345) (396)
Beneficial conversion feature.................................... (345) (395)
-------------- -------------
Long-term debt, net of current portion....................................$ 7,595 $ 7,535
============== =============
In connection with a previous acquisition, the Company assumed an
unsecured credit line with an original principal balance of $400,000. On April
1, 2007, the note with a principal balance of $398,000 was modified to provide
for fixed payments of principal, due in 60 equal monthly installments plus
variable interest, with the final payment due April 1, 2012. The note had a
principal balance of $299,000 and $336,000 at September 30, 2008 and March 31,
2008, respectively.
The aggregate maturities of long-term debt excluding capital leases for
each of the next five years subsequent to September 30, 2008 are as follows (IN
THOUSANDS):
2009................................................................................... $ 96
2010................................................................................... 3,044
2011................................................................................... 89
2012................................................................................... 5,152
2013................................................................................... --
Thereafter............................................................................. --
----------
$ 8,381
==========
|
7. CAPITALIZATION
PREFERRED STOCK
During the six months ended September 30, 2008, holders of 30,000
shares of Series A preferred stock converted their shares to 600,000 shares of
common stock. During the three and six months ended September 30, 2007, holders
of 10,000 shares of Series A preferred stock converted their shares to 200,000
share of common stock. The conversions of the Preferred Stock was in accordance
with the terms of the Preferred Stock agreement and increased the number of
share outstanding by 600,000 and 200,000 at September 30, 2008 and 2007,
respectively.
TREASURY STOCK
In August 2008, the Company retired 1.3 million shares of treasury
stock with a cost of $1.3 million. The transaction resulted in a reduction of
common stock and treasury stock outstanding at September 30, 2008.
8. INCOME TAX EXPENSE FROM CONTINUING OPERATIONS
The Company recorded income tax expense of $22,000 and $43,000 for the
three and six months ended September 30, 2008 and 2007, respectively. The
deferred income tax expense resulted from the recognition of the deferred income
tax liability related to the tax deductible goodwill recognized on the Company's
purchase of the assets from Quisic and LearnLinc. The Company has recorded a
valuation allowance for its deferred tax assets due to the historical lack of
profitable operating history. In the event that the Company determines that it
12
will be more likely than not that the Company will derive profitability and
corresponding taxable income, then it will realize a portion of its fully
reserved deferred tax asset. Upon such determination and corresponding
realization, an adjustment to the deferred tax asset would increase net income
through recording a tax benefit in the period when such a determination is made.
The Company does not believe that recognition is likely before the end of fiscal
year 2009.
The Company adopted FIN 48 as of April 1, 2007. The adoption of FIN 48
has not had an impact on the Company's financial position or results of
operations for the six months ended September 30, 2008. The Company has no
unrecognized tax benefits, as described in FIN 48, as of September 30, 2008.
It is the Company's policy to recognize interest and penalties related
to unrecognized tax benefits as a component of income tax expense. There is no
interest or penalties accrued as of September 30, 2008. Furthermore, there were
no interest or penalties recorded during the six months ended September 30,
2008.
The Company is subject to income tax examinations for U.S. Federal
income taxes and state income taxes from fiscal 2005 forward. As of September
30, 2008, the Company is not undergoing any U.S. Federal or state tax audits.
The Company does not anticipate that total unrecognized tax benefits will
significantly change prior to March 31, 2009.
There was no current income tax expense for the three and six months
ended September 30, 2008 and 2007 because net operating loss carry-forwards were
utilized to eliminate taxable income and the payment of any federal income tax.
9. STOCK OPTION PLANS AND WARRANTS
The Company grants stock options under its amended and restated Stock
Compensation Plan (the "Plan"). The Company calculates the fair value of options
on the day of grant and amortizes the fair value over the vesting period. Under
the Plan, the Company is authorized to issue up to 5,500,000 shares of common
stock to directors, officers and employees in the form of stock options and
stock awards.
There were stock options and stock awards representing 4,897,467 shares
outstanding under the Plan at September 30, 2008. The Compensation Committee of
the Board of Directors administers the Plan. Stock options granted to employees
have a contractual term of ten 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.
The Company estimates the fair value of stock options granted using the
Black-Scholes option valuation model approach. The Company amortizes the fair
value on a straight-line basis. All options are amortized over the requisite
service periods of the awards, which are generally the vesting periods. The
expected term of the options granted represents the period of time that they are
outstanding. Management estimated the expected term of the options granted based
on the period of time the options will be outstanding. Management has determined
that there were no meaningful differences in option exercise activity based on
the demographics tested. The Company estimates the volatility of its options at
the date of grant based on the historic volatility of its common stock for the
period of time that is commensurate to the options' expected life. The Company
bases the risk-free interest rate that it uses in the Black-Scholes option
valuation model on the implied yield in effect at the time of the option grant
on U.S. Treasury bond issues with equivalent remaining terms. The Company has
never paid a cash dividend on its common stock and does not anticipate paying
any cash dividends in the foreseeable future. Consequently, the Company uses an
expected dividend yield of zero in the Black-Scholes option valuation model.
SFAS 123R requires the Company to estimate forfeitures at the time of grant and
revise those estimates in subsequent periods if actual forfeitures differ from
those estimates. The Company uses historical data to estimate pre-vesting option
forfeitures and record shared-based compensation expense only for those awards
that are expected to vest.
In accordance with SFAS 123R, the Company recognized $63,000 and
$106,000 of compensation expense related to vesting of stock option awards and
restricted stock grants in the three and six months ended September 30, 2008.
The Company recognized $59,000 and $95,000 of compensation expense related to
stock options and vesting of stock grants in the three and six months ended
September 30, 2007. The following table summarizes stock-based compensation
expense related to employee stock options and vesting of employee stock grants
under SFAS 123R for the three and six months ended September 30, 2008 and 2007,
which was allocated as follows (in thousands except per share amounts).
13
----------------------------------------------
THREE THREE SIX SIX
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 2008 30, 2007 30, 2008 30, 2007
----------------------------------------------
Stock-based compensation expense included:
Cost of sales..................................................... $ 1 $ 1 $ 2 $ 2
Research and development.......................................... 6 5 11 8
Sales and marketing............................................... 7 13 16 27
General and administrative........................................ 32 27 43 32
Discontinued operations........................................... 1 3 3 6
----------------------------------------------
Total 47 49 75 75
Stock-based compensation expense related to employee stock grants
included in general and administrative costs...................... 16 10 31 20
----------------------------------------------
Stock-based compensation expense related to employee stock options 63 59 106 95
and employee stock grants included in income from operations.......
Tax benefit......................................................... -- -- -- --
----------------------------------------------
Stock-based compensation expense related to employee stock options
and employee stock grants, net of tax............................. $ 63 $ 59 $ 106 $ 95
==============================================
Decrease in basic earnings per share................................ $ -- $ -- $ -- $ --
Decrease in diluted earnings per share.............................. $ -- $ -- $ -- $ --
As stock-based compensation expense recognized in the Consolidated
Statements of Operations for the three and six months ended September 30, 2008
and 2007 is based on options ultimately expected to vest, it has been reduced
for expected forfeitures.
The Company calculates the value of each employee stock option,
estimated on the date of grant, using the Black-Scholes model in accordance with
SFAS 123R. The weighted average fair value of employee stock options granted
during the six months ended September 30, 2008 and 2007 was $0.18 per share and
$0.62 per share, respectively, using the following weighted-average assumptions:
2008 2007
---- ----
Risk free interest rate 3.0% - 3.3% 4.3.% - 5.0%
Dividend yield 0% 0%
Volatility factors of the expected
market price of the Company's
common stock 90% - 91% 90% - 102%
Weighted-average expected life of
options 5 years 5 - 10 years
Stock option activity for the six months ended September 30, 2008 was
as follows:
WEIGHTED
AVERAGE
WEIGHTED CONTRACTUAL AGGREGATE
SHARES SUBJECT TO AVERAGE LIFE INTRINSIC VALUE
OPTIONS EXERCISE PRICE (IN YEARS) (IN THOUSANDS)
------- -------------- ---------- --------------
Options outstanding at April 1, 2008.......... 3,757,764 $0.63
Options granted............................ 343,500 $0.25
Options exercised.......................... -- $0.00
Options forfeited and expired.............. (453,797) $0.72
---------------------
Options outstanding at September 30, 2008..... 3,647,467 $0.58 6.71 $ 0
---------------------
Options exercisable at September 30, 2008..... 2,444,680 $0.69 5.46 $ 0
---------------------
14
|
The aggregate intrinsic value in the table above represents total
pretax intrinsic value (the difference between the Company's closing stock price
on September 30, 2008 and the exercise price, multiplied by the number of
in-the-money options) that would have been received by the option holders had
all option holders exercised their options on September 30, 2008. During the six
months ended September 30, 2008, no options were exercised by employees of the
Company. The Company issues new shares of common stock upon the exercise of
stock options. At September 30, 2008, 343,510 shares were available for future
grants under the Plan. At September 30, 2008, the Company had approximately
$552,000 of total unrecognized compensation expense, net of estimated
forfeitures, related to stock options and restricted stock grants that will be
recognized over the weighted average period of 5.23 years.
The following table summarizes information about stock options
outstanding at September 30, 2008:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE AVERAGE
NUMBER OF EXERCISE REMAINING CONTRACTUAL NUMBER OF EXERCISE
SHARES PRICE LIFE (YEARS) SHARES PRICE
-------------- ------------- --------------------------- ------------- -------------
$ 0.23 - $ 0.39 1,374,781 $ 0.27 9.1 527,760 $ 0.26
$ 0.40 - $ 0.60 1,445,130 $ 0.50 5.6 1,215,274 $ 0.49
$ 0.61 - $ 0.92 550,458 $ 0.71 6.4 424,548 $ 0.71
$ 1.00 - $ 1.94 102,125 $ 1.62 2.2 102,125 $ 1.62
$ 6.00 - $ 6.13 174,973 $ 2.71 1.0 174,973 $ 2.71
-------------- -------------
3,647,467 2,444,680
============== =============
WARRANTS
The following table summarizes information about stock purchase
warrants outstanding at September 30, 2008:
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
--------------------------------------------------- ------------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE AVERAGE
NUMBER OF EXERCISE REMAINING CONTRACTUAL NUMBER OF EXERCISE
SHARES PRICE LIFE (YEARS) SHARES PRICE
-------------- ------------- --------------------------- ------------- -------------
$ 0.32 - $ 0.32 50,000 $ 0.32 0.5 50,000 $ 0.32
$ 0.40 -$ 0.40 50,000 $ 0.40 0.5 50,000 $ 0.40
$ 0.42 -$ 0.42 543,182 $ 0.42 2.7 543,182 $ 0.42
$ 0.44 -$ 0.44 132,972 $ 0.44 1.9 132,972 $ 0.44
$ 0.55 -$ 0.55 50,000 $ 0.55 0.5 50,000 $ 0.55
$ 0.66 -$ 0.66 150,000 $ 0.66 1.3 150,000 $ 0.66
$ 1.50 -$ 1.50 171,510 $ 1.50 2.3 171,510 $ 1.50
-------------- --------------
1,147,664 1,147,664
============== ==============
|
On July 1, 2006, the Company issued a warrant for up to 1,000,000
shares of the Company's common stock, par value $0.001 per share, with an
exercise price of $0.55 per share to an agent of the Company in connection with
an agent agreement effective June 30, 2006. The warrant expires on July 1,
2011. In accordance with EITF 96-18, ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE
ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING,
GOODS AND SERVICES, the Company recorded a prepaid asset and corresponding
additional paid-in capital of $70,000 as the fair value of the 1,000,000 shares
at September 30, 2008 using the Black-Scholes pricing model with the following
assumptions: contractual and expected life of 2.75 years, volatility of 89.1%,
dividend yield of 0% and a risk-free rate of 2.0%. On April 25, 2008, the
Company extended the timeframe on meeting the first vesting provision, which
originally expired on July 1, 2008 by an additional twelve months to July 1,
2009. The warrant is subject to vesting provisions based on net collected
revenue targets achieved through the agent and certain value added resellers
over a five year period. As of September 30, 2008, none of the revenue targets
had been achieved; however, the Company believes that the revenue targets for
the first benchmark will be achieved and began expensing the warrants in the
quarter ended September 30, 2008. Therefore, $7,000 of warrant expense was
recorded in the fiscal year.
15
In January 2005, in connection with the restructuring of the payments
on loan obligations due in connection with the acquisition of Glyphics, the
Company issued a warrant for 50,000 shares with an exercise price of $0.55 to
Dr. John D. Rhodes, III. The loan was guaranteed by Dr. Rhodes. The warrant was
set to expire 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 risk-free rate of 3.1%. In June 2005, in connection with the
restructuring of the payments and his continuing personal guarantee, the Company
issued an additional warrant for 50,000 shares to Dr. Rhodes with an exercise
price of $0.32. The warrant was set to expire 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%. On April
1, 2006 in connection with the restructuring of the payments and his continuing
personal guarantee, the Company issued an additional warrant to Dr. Rhodes for
50,000 shares with an exercise price of $0.40. The warrant expires in April
2009. The fair value of the warrant of $15,000 was estimated using the
Black-Scholes pricing model with the following assumptions: contractual and
expected life of three years, volatility of 125%, dividend yield of 0% and a
risk-free rate of 4.83%. In April 2006, the expiration dates of the warrants
that had been issued in 2005 were extended to March 31, 2009. Based on an
analysis using the Black-Scholes pricing model, no adjustment was made to the
fair value of the two extended warrants. On April 1, 2007 in connection with the
restructuring of the payments and his continuing personal guarantee, the Company
issued an additional warrant for 50,000 shares to Dr. Rhodes with an exercise
price of $0.66. The warrant expires in April 2010. The fair value of the warrant
of $21,000 was estimated using the Black-Scholes pricing model with the
following assumptions: contractual and expected life of three years, volatility
of 101%, dividend yield of 0% and a risk-free rate of 4.54%.
10. COMMITMENTS AND CONTINGENCIES
The Company is subject to various commitments and contingencies as
described in Note 12 to the consolidated financial statements in the Company's
Annual Report on Form 10-K as of and for the year ended March 31, 2008. During
the six-month period ended September 30, 2008, the following occurred with
respect to certain of the Company's commitments and contingencies:
LEASE COMMITMENTS
The Company used operating and capital leases to finance property and
equipment acquisitions. Currently, the Company has capital leases for office
furniture, computer hardware and software ranging in terms from 3 to 5 years.
The capital leases bear interest at varying rates ranging from 10.0% to 14.0%
and require monthly payments. The Company's operating leases primarily consist
of premise leases for the Phoenix and New York locations.
Assets recorded under capital leases at September 30, 2008 consisted of
the following (IN THOUSANDS):
Cost............................................................$ 452
Less: accumulated depreciation.................................. (190)
----------------
Total...........................................................$ 262
================
|
Future minimum lease payments under capital leases and non-cancelable
operating leases with initial or remaining terms of one or more years consisted
of the following at September 30, 2008 (IN THOUSANDS):
CAPITAL OPERATING
------- ---------
2009................................................... $ 159 $ 414
2010................................................... 128 376
2011................................................... 47 382
2012................................................... 38 159
2013................................................... -- --
Thereafter............................................. -- --
---------- -----------
Total minimum obligations.............................. 372 $ 1,331
===========
Less: amount representing interest..................... (54)
----------
Present value of minimum obligations................... 318
Less: current portion.................................. (128)
----------
Long-term obligation at September 30, 2008............. $ 190
==========
|
16
The Company's lease on its Phoenix, Arizona location expires on
February 28, 2012. The Phoenix lease requires a monthly rent and operating
expense of approximately $25,000. The Company's lease on its New York location
expires on June 30, 2009 and requires a monthly rent and operating expenses of
approximately $4,000.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Mr. Powers, Mr.
Dunn, and Mr. Moulton. Mr. Dunn and Mr. Powers are officers and Mr. Powers is
also Chairman of the Board of Directors. Mr. Moulton's employment was terminated
without cause as a result of the audio conferencing sale effective in fiscal
2009 upon transition of the audio business. Each of these agreements provides
for an annual base salary in an amount not less than the initial specified
amount and entitles the employee to participate in all of the Company's
compensation plans. Each agreement establishes a base annual salary and provides
the eligibility for an annual award of bonuses based on the management incentive
compensation plan (as adopted and amended by the Compensation Committee of the
Board of Directors from year to year), and is subject to the right of the
Company to terminate their respective employment at any time without cause. Mr.
Powers' and Mr. Dunn's employment agreements provide for continuous employment
for a one-year term that renews automatically unless otherwise terminated. Mr.
Dunn's employment agreement permits Mr. Dunn to work outside the corporate
offices, and Mr. Dunn relocated to Houston in June of 2005. Under each of the
employment agreements, if the Company terminates the employee's employment
without cause (as therein defined), Mr. Powers and Mr. Dunn will be entitled to
a payment equal to 12 months' salary. In accordance with his employment
agreement, Mr. Moulton was paid a lump sum payment equal to 12 months' salary in
August 2008. Additionally, Mr. Powers' and Mr. Dunn's employment agreements
provide for a severance payment equal to one (1) year's compensation in the
event of termination of employment following a "change in control" of the
Company (as defined therein) except that should Mr. Dunn obtain employment with
the successor organization in a comparable position, then the Company shall not
be responsible for the severance payment. Each of the foregoing agreements also
contains a covenant limiting competition with iLinc for one year following
termination of employment. The aggregate potential payment under such agreements
would be $415,000 as of September 30, 2008.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited condensed consolidated financial statements and related notes thereto
presented in this quarterly report and the audited consolidated financial
statements and related notes thereto included in our Annual Report filed on Form
10-K for the year ended March 31, 2008.
COMPANY OVERVIEW
Headquartered in Phoenix, Arizona, iLinc Communications, Inc., a
Delaware Corporation, is a leading provider of Web conferencing software and
services. We develop and sell software that provides real-time collaboration.
Our four-product iLinc Suite, comprised of LearnLinc, MeetingLinc,
ConferenceLinc and SupportLinc, is an award winning suite that includes a
virtual classroom, meeting, webinar and support tool. With our Web
collaboration, conferencing and virtual classroom products, we provide what we
believe to be simple, reliable and cost effective tools for remote
presentations, meetings and online events. Our software is based on a
proprietary architecture and code that finds its origins as far back as 1994, in
what we believe to be the beginnings of the Web conferencing industry. Versions
of the iLinc Suite have been translated into six languages, and it is currently
available in version 10. Our customers may choose from several different pricing
and licensing options for the iLinc software or iLinc service depending upon
their needs. We sell our software solutions to large corporations inside and
outside of the Fortune 1000 as well as small to medium size businesses (SMB) and
individuals. We market our products using a direct sales force and an indirect
distribution channel. Our indirect sales channel consists of agents,
distributors, value added resellers and OEM partners. We allow customers to
choose between purchasing a perpetual license and subscribing to a term license.
Our revenues are a mixture of high margin perpetual and subscription licenses of
software, monthly recurring revenues from subscription licenses as well as
annual maintenance, hosting and support agreements.
PRODUCTS AND SERVICES
WEB CONFERENCING
The iLinc Suite is a four-product suite of software that addresses the
most common business collaboration needs.
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 earnings
announcements, press briefings, new product announcements, corporate internal
mass communications and external marketing events. ConferenceLinc is built on
the MeetingLinc software platform and code to combine the best interactive
features with an easy-to-use interface providing meaningful and measurable
results to presenters and participants alike. Its design includes features that
take the hassle out of planning and supporting a hosted Web seminar.
ConferenceLinc includes automatic email invitations, "one-click join"
capabilities, online confirmations, update notifications and customized attendee
18
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 a periodic basis on
either a per-seat, per-month or per-minute basis (the "Subscription 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 and software upgrade services, using a support and maintenance
contract with terms from one to five years. The annual maintenance and support
fee charged is initially based upon a percentage of the purchase price that
varies between 12% and 18% of the Purchase Model license fee paid for the
perpetual licenses, with the percentage depending upon the contractual length
and pre-payment of the annual maintenance and support agreement. If a customer
chooses to have iLinc host their Purchase Model licenses, then the customer is
also charged an annual hosting fee equal to between 8% and 10% of the Purchase
Model license fee that was paid for the perpetual license.
Customers choosing the Subscription Model pay 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 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.
SALES AND MARKETING FOCUS
Our organization continually creates new marketing and sales campaigns
that focus in three target markets.
o We target prospects that are using other Web conferencing
service providers that are ready to migrate to Web conferencing
software. We believe that these organizations appreciate the
cost and feature advantages that our technology offers.
o We target organizations that have a natural fit for highly
secure Web conferencing software such as government, military,
and financial organizations as well as the companies that
supply to these entities.
o We continue to cross sell all of our products and services to
our existing customers.
Our marketing efforts incorporate public relations, tradeshows, Web
events, Web marketing initiatives and direct marketing (mail and email) efforts
messaged in campaigns that speak to the needs of our specific target markets.
The goal of our marketing strategy is to drive new business into our customer
base and then cross sell our synergistic products and drive usage of all
products to increase the propensity for our customers to make additional
purchases.
We have formed relationships with organizations that market and sell
our products and services through their sales distribution channels. The
relationships can be categorized into those that act as agents and sell on our
behalf and value added resellers (a "VAR") that actively sell our products and
provide product support typically to their own existing customer base. As of
September 30, 2008, we had over 20 organizations selling our products providing
indirect sales in the United States and in countries outside the United States,
including Canada, the United Kingdom, The Netherlands, Germany, Spain and Japan.
Our VARs execute agreements with us to resell our products to their customers
through direct sales and in some cases through integration of our products into
their products or service offerings. Our distribution agreements typically have
terms of one to three years and are automatically renewed for an additional like
term unless either party terminates the agreement for breach or other financial
reasons. In most of these agreements, the VAR licenses the product from us and
19
resells the product to its customers. Under those VAR agreements, we record only
the amount paid to us by the VAR as revenue and recognize revenue when all
revenue recognition criteria have been met.
PERFORMANCE MEASURES AND INDICATORS
In evaluating our operating performance on a quarterly and annual
basis, we consider levels of revenues, gross profit, operating income and net
income to be important indicators.
As indicators of future financial performance, we monitor and evaluate
non-financial measures, such as number of seats sold, average sales price per
transaction, average sales cycle, quota achievement by the direct sales staff,
the number of transactions, the percentage each product sold contributes to
total revenue, monthly recurring revenue, backlog, total bookings, deferred
revenue and the trends indicated by these factors.
External factors that our management considers in analyzing our
performance include projected growth rates for our industry and rates of
penetration of use of our product categories in the corporate sector. We
consider these factors important since they permit us to better project capital
needs and growth trends that support our assertions of profitability and cash
flow. Analysis of these trends indicates that we are having decreasing success
from our direct sales staff for our perpetual licenses, but increasing success
in subscription licenses due to market driven forces. That success is likely to
translate into increasing recurring revenues over the term of the subscription,
and an increasing bottom line as we strive to contain overhead expenses. We
expect overhead to decrease in fiscal 2009, due to cost cutting and containment
measures carried out in the fourth quarter of fiscal 2008 and continuing through
fiscal 2009. We see increasing demand for Web conferencing usage in the
business, education and government sectors alike, and we expect these trends to
continue over the next three years.
The following table shows certain items from our income statement as a
percentage of revenues from continuing operations (in thousands, except
percentages):
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------------------------------------------
2008 2007 2008 2007
------------------------------------------------------------------------------
Revenues % % % %
Software licenses......................$ 335 21 $ 1,218 47 $ 920 26 $ 2,370 46
Subscription licenses.................. 528 33 440 17 997 28 951 19
Software maintenance, hosting and
other services....................... 716 46 931 36 1,582 46 1,786 35
------------------------------------------------------------------------------
Total revenues...................... 1,579 100 2,589 100 3,499 100 5,107 100
------------------------------------------------------------------------------
Cost of revenues
Software licenses...................... 16 1 -- -- 61 2 67 1
Subscription licenses.................. 74 5 78 3 140 4 181 4
Software maintenance, hosting and
other services....................... 81 5 240 9 208 6 451 9
Amortization of acquired and developed
software............................. 52 3 52 2 105 3 52 1
------------------------------------------------------------------------------
Total cost of revenues.............. 223 14 370 14 514 15 751 15
------------------------------------------------------------------------------
Gross Profit.............................. 1,356 86 2,219 86 2,985 85 4,356 85
------------------------------------------------------------------------------
Operating expenses
Research and development............... 558 35 547 21 1,089 31 909 18
Sales and marketing.................... 941 60 1,279 49 1,841 53 2,451 48
General and administrative............. 647 41 579 22 1,260 36 1,242 24
------------------------------------------------------------------------------
Total operating expenses............. 2,146 136 2,405 93 4,190 120 4,602 90
------------------------------------------------------------------------------
Loss from operations......................$ (790) (50) $ (186) (7) $ (1,205) (35) $ (246) (5)
==============================================================================
|
20
RESULTS OF OPERATIONS
REVENUES FROM CONTINUING OPERATIONS
Beginning in January 2008, we added a subscription offering to our
sales product mix (our new "Software as a Service" or "SaaS" model). Pursuant to
that SaaS model, customers are able to subscribe to iLinc's award-winning
products on a per month or per year basis. As a result, we recognize revenue
from those SaaS subscription agreements on a monthly basis regardless of the
contractual term. The expected and announced result of that shift in sales
emphasis has been a decline in Software License revenue and an increase in
Subscription Service revenue, with a corresponding increase in contractual
backlog. Therefore, when comparing revenues by category it is important to take
into account our shift from a software license model (with revenue recognized at
the time of sale) verses the more prevalent SaaS or subscription model (with
revenue recognized over the term of the agreement).
Total revenues generated from continuing operations for the three
months ended September 30, 2008 and 2007 were $1.6 million and $2.6 million,
respectively, a decrease of $1.0 million or 39% as a result of decreases in
software license revenue that was partially offset by an increase in
subscription services revenue, mostly as a result of the shift toward the SaaS
license model. For the six months ended September 30, 2008 total revenues were
$3.5 million, a 31% decrease of $1.6 million from revenues of $5.1 million for
the six months ended September 30, 2007.
o Software license revenues decreased $883,000 or 72% from $1.2
million in the three months ended September 30, 2007 to
$335,000 in the three months ended September 30, 2008. The
decrease was the result of the shift toward our new SaaS model
and away from our historical software purchase model, in
combination with declines in spending by potential customers
as a result of declines in the overall U.S. economy. For the
six months ended September 30, 2008, software licenses
decreased $1.5 million, or 61% from $2.4 million for the six
months ended September 30, 2007 to $920,000.
o Subscription revenues increased $88,000, or 20% from $440,000
in the three months ended September 30, 2007 to $528,000 in
the three months ended September 30, 2008. Direct
subscriptions increased by $132,000 from $49,000 in the three
months ended September 30, 2007 to $181,000 in the three
months ended September 30, 2008. Web conferencing per-minute
revenue was relatively flat at $251,000 from the three months
ended September 30, 2007 to the three months ended September
30, 2008. Indirect subscription revenue decreased by $45,000
from $124,000 to $79,000 as a result of changes in the sales
model and focus of one of our reseller partners. Overall,
subscription services revenues were up by 5%, or $46,000 from
$951,000 when compared to the six months ended September 30,
2007, to $997,000 for the six months ended September 30, 2008.
Direct subscriptions increased by $188,000 from $120,000 for
the six months ended September 30, 2007 to $308,000 for the
six months ended September 30, 2008. Web per-minute decreased
slightly by $23,000 from $521,000 for the six months ended
September 30, 2007 to $498,000 for the same period in fiscal
2009. Indirect subscriptions decreased $119,000 from $280,000
in the six months ended September 30, 2007 to $161,000 in the
six months ended September 30, 2008 as a result of changes in
the sales model and focus of one of our reseller partners.
With our continued emphasis on our new subscription or SaaS
sales model, we expect subscription revenue to continue to
increase throughout the remainder of fiscal 2009, software
license revenue to remain relatively flat from a sequential
quarterly basis, and backlog to continue to grow as we layer
on term subscription agreements from a direct and indirect
basis.
o Software maintenance, hosting and other services revenues
decreased $215,000 or 23% from $931,000 in the three months
ended September 30, 2007 to $716,000 in the three months ended
September 30, 2008. This decline was due to the cessation in
the sale of non-core custom content development services and
non-core third party co-location hosting that were a part of a
legacy offering, and therefore not as a result in declines in
our core Web conferencing maintenance and hosting services. To
that end, we recognized increases in maintenance fees of
$21,000 and hosting fees of $7,000 from renewals as SaaS model
agreements and our customer base continues to expand. In
addition, we recognized an increase in training, storage and
recording revenues of $19,000. We recognized commissions for
audio wholesale of $35,000 for the three months ended
September 30, 2008. The increases were partially offset by a
decrease in our non-core legacy custom content revenues of
$185,000. With the cessation of that subcontractor agreement
21
concerning non-core custom content development in April 2008
we will not recognize custom content revenues in future
periods. In addition, an agreement with one specific customer
for co-location hosting expired in July and revenues for that
customer decreased $108,000, without likewise the recognition
of further non-core collocation revenue in future periods. For
the six months ended September 30, 2008, software maintenance,
hosting and other services decreased $204,000, or 11% from
$1.8 million in the six months ended September 30, 2007 to
$1.6 million in the six months ended September 30, 2008.
Specifically, we recognized an increase in maintenance of
$83,000 from $893,000 to $976,000 and increases in hosting of
$38,000 from $214,000 to $252,000 when comparing the six
months ended September 30, 2007 to the same period in fiscal
2009. We recognized audio wholesale commissions of $55,000 in
the six months ended September 30, 2008. Product training,
storage and recording revenues increased by $28,000 from
$95,000 in the first six months of fiscal 2008 to $123,000 in
the same period in the 2009 fiscal year. The increases were
partially offset by a decrease in non-core custom content
revenues of $296,000, and non-core co-location hosting revenue
of $104,000.
o For the three months ended September 30, 2008, software
license revenues were 21% of total revenue, subscription
services revenues were 33% of total revenue and software
maintenance, hosting and other services revenues were 46% of
total revenue, as compared to 47%, 17% and 36%, respectively,
for the three months ended September 30, 2007. For the six
months ended September 30, 2008, software license revenues
were 26% of total revenue, subscription services revenues were
28% of total revenue and software maintenance, hosting and
other services revenues were 46% of total revenue, as compared
to 46%, 19% and 35%, respectively, for the six months ended
September 30, 2007. We expect software license revenues and
subscription services revenue to continue to become a larger
percentage of total revenues as total revenues increase given
our continued focus on our historical software purchase model,
and increasing emphasis on our new subscription or SaaS sales
and licensing model. We expect sales from off-the-shelf
license sales to decline.
COST OF REVENUES FROM CONTINUING OPERATIONS
Cost of software license revenues is driven by the types of software
licenses sold. It consists of royalty fees paid on certain off-the-shelf
products, if any, sold, and sales rebates to distribution partners on the sale
of certain software products. Cost of software license revenues for the three
months ended September 30, 2008 and 2007 were $16,000 and $0, respectively, an
increase of $16,000. The increase was related to an increase in off-the-shelf
courseware revenues. Cost of software license revenue was approximately 1% of
total revenues in the quarter ended September 30, 2008 and 0% of total revenues
in the quarter ended September 30, 2007. Cost of software license revenues for
the six months ended September 30, 2008 and 2007 were $61,000 and $67,000,
respectively, a decrease of $6,000, or 9%. Cost of software license revenue was
approximately 2% of total revenues in the six months ended September 30, 2008
and approximately 1% of total revenues in the six months ended September 30,
2007. We expect the cost of software license revenues to remain below 3% of
total license revenue, as we focus on the sale of our very high margin software
license products, and expect cost of revenues to rise only because of royalties
which may be due from the sale of off-the-shelf courseware.
While cost of license revenues are low, we record the cost of
subscription services revenue using a fully allocated overhead method that
includes an allocation of salaries and allocable expenses such as network costs
resulting from the delivery of our hosted Web conferencing services. Cost of
subscription services revenue for the three months ended September 30, 2008 and
2007 were $74,000 and $78,000, respectively, a decrease of $4,000 or 5%. The
decrease was primarily a result of a decrease in salaries and benefits due to a
reduction in headcount as we reshaped the organization from the sale of our
audio conferencing assets. Cost of subscription services revenue was
approximately 5% of total revenues in the three months ended September 30, 2008
and approximately 3% of total revenues in the three months ended September 30,
2007. For the six months ended September 30, 2008 and 2007 cost of subscription
services were $140,000 and $181,000, respectively, a decrease of $41,000 or 23%.
The decrease was primarily a result of a decrease in salaries and benefits due
to a reduction in headcount as we reshaped the organization from the sale of our
audio conferencing assets. Cost of subscription services revenue was
approximately 4% of total revenues in both six month periods ended September 30,
2008 and 2007. Overall, we expect the cost of subscription services to remain
relatively consistent at 3% to 5% of revenues.
22
Cost of software maintenance, hosting and other services revenue
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 expenses. However, by far the
largest and most variable component of the cost of software maintenance, hosting
and other services historically has arisen from the amount due to our
third-party subcontractor which was a fixed proportion of our non-core custom
content revenue. The cost of software maintenance, hosting and other services
for the three months ended September 30, 2008 and 2007 was $81,000 and $240,000,
respectively, a decrease of $159,000 or 66%. The decrease was primarily a result
of decreases in non-core custom content revenue and therefore associated
decreases in amount due our sub-contractor, which decreased by $137,000 from
$137,000 for the three months ended September 30, 2007 to $0 for the three
months ended September 30, 2008. Cost of software maintenance, hosting and
professional services revenue was approximately 5% and 9% of total revenues in
the three months ended September 30, 2008 and 2007, respectively. The cost of
software maintenance, hosting and other services for the six months ended
September 30, 2008 and 2007 was $208,000 and $451,000, respectively, a decrease
of $243,000 or 54%. The decrease was primarily a result of decreases in non-core
custom content revenue and therefore associated decreases in amount due our
sub-contractor, which decreased by $218,000 from $255,000 for the six months
ended September 30, 2007 to $37,000 for the six months ended September 30, 2008.
Cost of software maintenance, hosting and professional services revenue was
approximately 6% and 9% of total revenues in the three months ended September
30, 2008 and 2007, respectively. We expect that cost of software maintenance,
hosting and other services revenue will remain consistent at approximately 5% to
7% of revenues for the remainder of fiscal 2009.
Amortization of acquired and developed software consists of
amortization of capitalized software development costs related to iLinc version
9. Amortization of acquired and developed software for both the three months
ended September 30, 2008 and 2007 was $52,000. Amortization of acquired and
developed software for the six months ended September 30, 2008 and 2007 was
$105,000 and $52,000, respectively, as we began amortizing costs related to
iLinc version 9 in July, 2007.
GROSS PROFIT
As a result of the foregoing, our gross profit (total revenues less
total cost of revenues) decreased from $2.2 million for the three months ended
September 30, 2007 to $1.4 million for the three months ended September 30,
2008. We expect to see gross profit increase as revenues increase in dollar
amount and as a percentage as revenues rise since most of the cost of sales is
fixed in nature, (e.g., facilities and amortization expense).
OPERATING EXPENSES FROM CONTINUING OPERATIONS
Total operating expenses consist of research and development expenses,
sales and marketing expenses and general and administrative expenses. We
incurred operating expenses of $2.1 million in the three months ended September
30, 2008, a decrease of $259,000 or 11% from $2.4 million in the three months
ended September 30, 2007. This decrease is due to decreases in sales and
marketing expenses of $338,000 partially offset by increases in general and
administrative expenses of $68,000 and in research and development expenses of
$11,000. Total operating expenses were 136% and 93% of total revenues in the
three months ended September 30, 2008 and 2007, respectively. For the six months
ended September 30, 2008, we incurred operating expenses of $4.2 million, a
decrease of $412,000 or 9% from $4.6 million in the six months ended September
30, 2007. This decrease is due to decreases in sales and marketing expenses of
$610,000 partially offset by increases in general and administrative expenses of
$18,000 and in research and development expenses of $180,000. Total operating
expenses were 120% and 90% of total revenues in the six months ended September
30, 2008 and 2007, respectively.
Research and development expenses represent expenses incurred in
connection with the continued development and enhancement of our software
products and new versions of our software. Those costs consist primarily of
salaries and benefits, telecommunication allocations, rent allocations, computer
equipment allocations and allocated depreciation and amortization expense.
Research and development expenses for the three months ended September 30, 2008
and 2007 were $558,000 and $547,000, respectively, an increase of $11,000 or 2%.
During the first quarter of fiscal 2007, we began capitalizing identified direct
expenses associated with a specific software development upon achieving
technological feasibility for version 9 of our Web collaboration software in
accordance with SFAS No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE
SOLD, LEASED, OR OTHERWISE MARKETED. We continued to capitalize those direct
costs through June 2007 when the new software product was released for
distribution and sale to our customers. We began amortizing these software
development costs over a three year period beginning in July 2007. The increase
in research and development costs is primarily related to an increase in salary
and benefit expense of $80,000. The increase was partially offset by a decrease
of $43,000 as the result of the termination of a professional services contract
23
that we had engaged in during most of fiscal 2008. Research and development
expense was approximately 35% of total revenues in the three months ended
September 30, 2008 and approximately 21% of total revenues in the three months
ended September 30, 2007. Research and development expenses for the six months
ended September 30, 2008 and 2007 were $1.1 million and $909,000, respectively,
an increase of $180,000 or 20%. The increase in research and development costs
is primarily related to an increase in salary and benefit expense of $293,000.
This increase is a result of increased headcount period over period to support
our investment in innovation in addition to the fact that in the first three
months of the six months ended September 30, 2007, salary costs directly
associated with the development of version 9 were being capitalized, whereas in
the six months ended September 30, 2008, the salary costs of those developers
are no longer being capitalized, but are being expensed directly to research and
development expense. Research and development expense was approximately 31% of
total revenues in the six months ended September 30, 2008 and approximately 18%
of total revenues in the six months ended September 30, 2007. We expect cost of
sales and research and development costs to remain relatively consistent with
the first three months of fiscal 2009 but decline in dollar terms due to further
planned reductions in headcount where appropriate.
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
expenses were $941,000 and $1.3 million for the three months ended September 30,
2008 and 2007, respectively, a decrease of $338,000 or 26%. The decrease was a
result of planned decreases in salaries and benefits of $82,000 associated with
decreased headcount and compensation structure, a decrease in professional
services of $68,000, indirect commissions and rebates of $141,000 and a decrease
in advertising and marketing expenses of $86,000. As a percentage of revenues,
sales and marketing for the three months ended September 30, 2008 and 2007 was
60% and 49%, respectively. Sales and marketing expenses were $1.8 million and
$2.5 million for the six months ended September 30, 2008 and 2007, respectively,
a decrease of $610,000 or 25%. The decrease was a result of planned decreases in
salaries and benefits of $110,000 associated with decreased headcount and
compensation structure, a decrease in professional services of $111,000,
indirect commissions and rebates of $201,000 and a decrease in advertising and
marketing expenses of $230,000. As a percentage of revenues, sales and marketing
for the three months ended September 30, 2008 and 2007 was 53% and 48%,
respectively. We expect sales and marketing expenses to increase in amount when
comparing quarterly expenditures on a sequential quarterly basis, and
accordingly, as revenues rise we expect the percentage of sales and marketing
expenses incurred in relation to total revenue to remain consistent with the
first six months of fiscal 2009.
General and administrative expenses consist of company-wide expenses
that are not directly related to research and development or sales and marketing
activities, with the bulk of those general and administrative expenses comprised
of salaries, rent and the costs directly associated with being a public company,
including accounting costs, legal costs and exchange listing fees. During the
three months ended September 30, 2008 and 2007, general and administrative
expenses from continuing operations were $647,000 and $579,000, respectively, an
increase of $68,000 or 12%. The increase is a result of increases in salaries
and benefits of $56,000, accounting fees of $26,000, telecommunications costs of
$8,000 and taxes of $49,000. These increases were partially offset by decreases
in professional services of $24,000, legal expenses of $4,000, board and
investor relations of $18,000, computer subscriptions of $9,000, insurance
expenses of $8,000 and bad debt expense of $13,000. General and administrative
expenses from continuing operations were 41% of total revenues in the three
months ended September 30, 2008 and 22% of total revenues in the three months
ended September 30, 2007. During the six months ended September 30, 2008 and
2007, general and administrative expenses from continuing operations were $1.3
million and $1.2 million, respectively, an increase of $18,000 or 1%. The
increase is a result of increases in salaries and benefits of $56,000,
accounting fees of $62,000, telecommunications costs of $13,000 and taxes of
$46,000. These increases were partially offset by decreases in professional
services of $49,000, legal expenses of $23,000, board and investor relations of
$10,000, computer subscriptions of $14,000, insurance expenses of $10,000 and
bad debt expense of $13,000. General and administrative expenses from continuing
operations were 36% of total revenues in the six months ended September 30, 2008
and 24% of total revenues in the six months ended September 30, 2007. In
general, we expect general and administrative expense to decrease as a
percentage of revenue as revenues rise, but to remain consistent in dollar
amounts with the first six months of the 2009 fiscal year.
LOSS/INCOME FROM OPERATIONS
For the three months ended September 30, 2008, we reported a loss from
operations of $790,000 as compared to a loss from operations of $186,000 for the
three months ended September 30, 2007, a decrease of $604,000. For the six
months ended September 30, 2008, we reported a loss from operations of $1.2
million as compared to a loss from operations of $246,000 for the six months
24
ended September 30, 2007, a decrease of $959,000. During the remainder of fiscal
2009, we expect to increase earnings from operations in fiscal 2009 by
increasing revenues and decreasing expenses in all three major categories of
operating expense.
INTEREST EXPENSE FROM CONTINUING OPERATIONS
Interest expense from continuing operations paid on outstanding debt
instruments for the three months ended September 30, 2008 and September 30, 2007
was $259,000 and $263,000, respectively, a decrease of $4,000. Non-cash interest
expense, arising from the beneficial conversion feature of our debt and
amortization of deferred financing costs, for the three months ended September
30, 2008 and September 30, 2007 was $79,000 and $81,000, respectively, a
decrease of $2,000. Interest expense from continuing operations paid on
outstanding debt instruments for the six months ended September 30, 2008 and
September 30, 2007 was $517,000 and $519,000, respectively, a decrease of
$2,000. Non-cash interest expense, arising from the beneficial conversion
feature of our debt and amortization of deferred financing costs, for the six
months ended September 30, 2008 and September 30, 2007 was $158,000 and
$162,000, respectively, a decrease of $4,000.
We expect interest expense from continuing operations to remain
consistent in fiscal 2009 with the expense incurred in fiscal 2008. We also
expect non-cash interest expense resulting from the beneficial conversion
feature of our debt and amortization of deferred financing costs to remain
consistent in fiscal 2009, because the amortization is straight-line. Should
there be any debt conversions in fiscal 2009, the interest will increase in
order to accelerate the beneficial conversion feature and financing costs
related to the proportion of debt converted.
INCOME TAX EXPENSE FROM CONTINUING OPERATIONS
We recorded tax expense of $22,000 for both the three months ended
September 30, 2008 and 2007 and $43,000 for both the six months ended September
30, 2008 and 2007. The expense resulted from the recognition of the deferred
income tax liability related to the tax deductible goodwill. We recorded a
valuation allowance for our deferred tax asset because we concluded it is not
likely we would be able to realize the tax assets due to the lack of profitable
operating history. In the event that we determine that we would be able to
realize our deferred tax assets in the future, an adjustment to the deferred tax
asset would increase net income through a tax benefit in the period such a
determination was made that we have met the more likely than not threshold for
such recognition.
RESULTS OF DISCONTINUED OPERATIONS
On April 28, 2008, we entered into an Asset Purchase Agreement (the
"Audio Conferencing Agreement") with American Teleconferencing Services Ltd.
(the "Purchaser"), a subsidiary of Premiere Global Services, Inc. The Audio
Conferencing Agreement provided for the sale by iLinc of a majority of our audio
conferencing assets. The closing of the transaction occurred on May 2, 2008. On
the closing date, the Purchaser paid iLinc $3.3 million, with an additional
payment of $833,000 to be paid within ten days of the transition date of July
25, 2008 as defined in the Audio Conferencing Agreement. The transition payment
of $833,000 was received on August 8, 2008. As further consideration, the
Purchaser will tender on or before June 1, 2009 an earn-out payment, if any,
which is the product of 1.25 times the amount that the Purchaser earns in
revenue from the acquired customer accounts in excess of $2.7 million during the
first twelve months after closing. Additionally, on May 13, 2008, the Purchaser
paid $558,000 for iLinc's identified audio conferencing accounts receivable that
was less than 90 days old, and paid in August 2008 103%, or $27,000 of the
accounts receivable collected from those audio conferencing accounts in excess
of the initial payment. The total sales price including the sales of the
accounts receivable was $4.7 million and the resulting gain on sale of $1.8
million has been recorded.
On June 30, 2008, we entered into an Asset Purchase Agreement (the
"Events Business Agreement") with Conference Plus, Inc. The Events Business
Agreement provided for the sale by iLinc of the assets related to the Events
portion of our audio conferencing business (the "Events Business"). On the
closing date, the Purchaser paid iLinc $175,000, with additional monthly
earn-out payments equal to the greater of: (a) twenty-five percent of the
revenue derived by Purchaser from the Event Business or (b) $10,000 for each of
the twenty-four months after the closing date. The minimum monthly amount due of
$10,000 per month has been recorded the balance of which was $120,000 in Other
Receivables - Current, and $100,000 in Other Receivables in Noncurrent at
September 30, 2008. The Company recorded an additional $8,000 in other
receivables - current as of September 30, 2008.
25
The proceeds received as a result of the sale as of September 30, 2008
were $215,000 with a total receivable balance of $228,000. The gain on sale of
$128,000 resulting from the transaction has been recorded, which included
an additional $28,000 in revenues related to discontinued operations in excess
of the minimum monthly earn-outs for the three months ending September 30, 2008.
We sold both our audio conferencing and Events Business assets due to
continued price pressure for the market's perception of a commoditized product
in regards to audio conferencing, and as a result we experienced continued
margin contraction. We sold these assets to provide cash to enable us to focus
on our Web conferencing product.
Therefore, pursuant to the criteria established by SFAS No. 144,
ACCOUNTING FOR THE IMPAIRMENT OF DISPOSAL OF LONG-LIVED ASSETS, we have
determined that all of our audio conferencing operations and related assets and
liabilities should be classified as assets and liabilities "related to
discontinued operations" as of September 30, 2008 and March 31, 2008 and, our
results of operations related to its audio conferencing business for the three
and six months ended September 30, 2008 and 2007 have been reclassified as
income from discontinued operations.
A summary of the assets and liabilities of the audio conferencing
business are as follows:
------------------------------------
SEPTEMBER 30, MARCH 31,
---------------- ----------------
2008 2008
---------------- ----------------
(IN THOUSANDS)
Assets:
Accounts receivable......................................... $ -- $ 834
Property and equipment, net................................. -- 192
Goodwill.................................................... -- 1,686
Intangible assets, net...................................... -- 433
---------------- ----------------
Assets - related to discontinued operations................. $ -- $ 3,145
================ ================
Liabilities:
Accounts payable............................................ $ 84 $ 611
Accrued liabilities......................................... 5 167
---------------- ----------------
Liabilities - related to discontinued operations............ $ 89 $ 778
================ ================
A summary of the results from discontinued operations for the three and
six months ended September 30, 2008 and 2007 are as follows:
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2008 2007 2008 2007
--------------------------------------------------
Audio services revenues............................... $ -- $ 1,315 $ 641 $ 2,921
Cost of audio services revenues....................... 104 878 678 1,795
--------------------------------------------------
Gross profit.......................................... (104) 437 (37) 1,126
Operating expenses.................................... 77 130 106 282
--------------------------------------------------
Loss/income from discontinued operations.............. (181) 307 (143) 844
Interest expense...................................... -- -- -- (14)
Loss/gain on sale of Audio Conferencing and Events
Businesses.......................................... (1) -- 1,937 --
--------------------------------------------------
Net loss/income from discontinued operations.......... $ (182) $ 307 $ 1,794 $ 830
-========================-=========================
|
There was no tax effect within the discontinued operations.
26
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have generated cash from cash flow provided by
operations, and when necessary capital raising activities through the sale of
our common and preferred stock. On May 2, 2008, we closed a transaction in which
we sold a majority of our audio conferencing assets and audio operations for
$4.2 million in cash, of which $3.3 million was received at closing and $833,000
was received on August 8, 2008. In addition, on June 30, 2008, we sold our
Events Business for $175,000 in cash, with an additional minimum earn-out of
$10,000 per month for 24 months. As such, assets and liabilities related to the
audio conferencing business were classified as Held for Sale in our financial
statements as of March 31, 2008. We have collected $4.4 million of the purchase
price as of September 30, 2008. We have used cash from operations and cash
received from the sale of audio assets to fund our operations, but have not used
our cash to prepay or reduce debt obligations.
In evaluating our liquidity, we evaluate levels of current assets,
current liabilities and accounts receivable, aging of accounts receivable and
maturities of debt and obligations under long term leases. Our current assets,
including accounts receivable, at September 30, 2008 of $4.5 million were
$601,000 lower than our levels of current assets of $5.1 million at March 31,
2008. Our current liabilities at September 30, 2008 of $2.9 million were
approximately $939,000 less than our level of current liabilities at March 31,
2008 of $3.9 million. We had working capital of $1.6 million at September 30,
2008 compared to working capital of $1.2 million at March 31, 2008. Our cash and
cash equivalents and certificate of deposit balance increased by $2.3 million,
from $1.0 million at March 31, 2008 to $3.3 million at September 30, 2008. Our
accounts receivable, net of allowance for doubtful accounts, were $818,000 and
$627,000 at September 30, 2008 and March 31, 2008, respectively. Accounts
receivable increased, due to the timing of revenue recognized during the quarter
when comparing the three months ended September 30, 2008 to the three months
ended March 31, 2008. Other current receivables of $128,000 at September 30,
2008 consisted of minimum monthly amounts due from the purchaser of our Events
Business. Prepaid and other current assets decreased by $49,000 due in part to
the timing of annual contracts that were prepaid and by a decrease in the
valuation of a warrant. Accounts payable decreased by $144,000 from $612,000 at
March 31, 2008 to $468,000 at September 30, 2008 as a result of paying amounts
due at March 31, 2008 during the June 2008 quarter in addition to our efforts to
cut expenses during the six months ended September 30, 2008. Accrued liabilities
increased by $98,000 from $751,000 at March 31, 2008 to $849,000 at September
30, 2008, primarily due to the increase of accrued salaries and benefits of
$215,000. At September 30 and March 31, 2008, assets related to discontinued
operations were $0 and $3.1 million, respectively. Liabilities classified as
related to discontinued operations were $89,000 and $778,000 at September 30 and
March 31, 2008, respectively. At September 30, 2008 long term debt due in less
than one year, capital lease obligations due in less than one year, interest
expense for the coming year and operating lease obligations for the coming year
aggregated $96,000, $128,000, $1.0 million and $414,000, respectively. We
anticipate that cash flow from operations combined, with the cash received for
the sale of our audio conferencing assets, should be sufficient to allow us to
meet these obligations without raising additional capital.
We plan to continue to focus on managing, and reducing where
appropriate, overhead while increasing revenue through software and subscription
sales in an effort to return to positive cash flow in fiscal 2009, and
ultimately profitability when appropriate.
CASH FLOWS FROM CONTINUING OPERATIONS
Cash used in operating activities from continuing operations
was $1.8 million for the six months ended September 30, 2008. In the six months
ended September 30, 2008, cash used in operating activities was primarily
attributable to a net loss from continuing operations of $1.9 million, an
increase in accounts receivable of $200,000, an increase in prepaid expenses and
other current assets of $12,000, a provision for bad debt expense of $9,000, a
decrease in accounts payable and accrued expenses of $46,000 and a decrease in
deferred revenue of $213,000. These items were partially offset by depreciation
and amortization of $286,000, stock compensation expense of $103,000, deferred
income tax expense of $43,000, non-cash accretion of deferred debt discount to
interest expense of $101,000, and warrant expense of $7,000.
Cash used in operating activities from continuing operations was
$154,000 during the six months ended September 30, 2007. Cash used in operating
activities from continuing operations during the six months ended September 30,
2007 was primarily attributable to a net loss of $991,000. Cash provided by
operating activities was attributable to an increase in accounts payable and
accrued expenses of $154,000, increase in deferred revenue of $86,000, decrease
in prepaid expenses and other current assets of $71,000, depreciation and
amortization of $207,000, warrant expense of $21,000, stock compensation expense
of $89,000, deferred income tax expense of $43,000, non-cash accretion of
deferred debt discount to interest expense of $101,000, a decrease in accounts
receivable of $44,000 and a provision for bad debts of $21,000.
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CASH FLOWS FROM INVESTING ACTIVITIES
Cash used in investing activities from continuing operations was $2.5
million, and $371,000 in the six months ended September 30, 2008 and 2007,
respectively. Cash used in investing activities from continuing operations
during the six months ended September 30, 2008 was primarily due to $2.4 million
investment in certificates of deposit and $56,000 in capital expenditures. Cash
used in investing activities from continuing operations during the six months
ended September 30, 2007 was primarily due to investments of $12,000 in
certificates of deposit, capital expenditures of $110,000 and capitalization of
software development costs of $263,000. These items were partially offset by the
repayment of a note receivable of $12,000.
CASH PROVIDED BY FINANCING ACTIVITIES
Cash used in financing activities from continuing operations was
$154,000 and $158,000 during the six months ended September 30, 2008 and 2007,
respectively. Cash used in financing activities from continuing operations in
the six months ended September 30, 2008 was attributable to payment of Series A
and B preferred stock dividends of $56,000, repayment of long-term debt of
$40,000 and repayment of capital lease liabilities of $58,000. Cash used in
financing activities from continuing operations in the six months ended
September 30, 2007 was attributable to payment of Series A and B preferred
stock dividends of $70,000, repayment of long-term debt of $83,000 and
repayment of capital lease liabilities of $24,000, partially offset by proceeds
from exercise of stock options of $19,000.
CASH FLOWS FROM DISCONTINUED OPERATIONS
Cash used in operating activities from discontinued operations for the
six months ended September 30, 2008 was $646,000. Cash provided by operating
activities from discontinued operations for the six months ended September 30,
2007 was $749,000. Cash provided by investing activities from discontinued
operations for the six months ended September 30, 2008 was $5.0 million. Cash
used in investing activities from discontinued operations for the six months
ended September 30, 2007 was $2,000.
OUTSTANDING INDEBTEDNESS AND PREFERRED STOCK
We currently have outstanding unsecured subordinated convertible notes
with a remaining principal balance of $5.1 million due March 29, 2012, Senior
Notes with a remaining principal balance of $2.96 million due July 15, 2010,
75,000 issued and outstanding shares of Series A Convertible Preferred Stock and
55,000 issued and outstanding shares of Series B Convertible Preferred Stock.
All of the foregoing securities were issued in connection with our capital
raising activities.
Outstanding Indebtedness
In March 2002, we completed a private placement offering (the
"Convertible Note Offering") that provided gross proceeds of $5.75 million that
was used to extinguish an existing line of credit. Under the terms of the
Convertible Note Offering, we issued unsecured subordinated convertible notes
(the "Convertible Notes"). The Convertible 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 holders of the Convertible Notes may convert the
principal into shares of our common stock at the fixed price of $1.00 per share.
We may force redemption by conversion of the principal into common stock at the
fixed conversion price, if at any time the 20 trading day average closing price
of our common stock exceeds $3.00 per share. These notes are subordinated to any
present or future senior indebtedness. As a part of the Convertible Notes
offering, we also issued warrants to purchase 5,775,000 shares of our common
stock, but those warrants expired on March 29, 2005 without exercise. The fair
value of the warrants was estimated using the Black-Scholes pricing model and a
discount to the Convertible Notes of $1,132,000 was recorded using this value,
which is being amortized to interest expense over the 10-year term of the
Convertible Notes. Upon conversion, any remaining discount and beneficial
conversion feature will be expensed in full at the time of conversion. During
fiscal years 2004, 2005 and 2006, holders with a principal balance totaling
$675,000 converted their notes into 2,121,088 shares of our common stock at
prices from $0.25 to $0.30 per share. No conversion of debt or acceleration of
amortization of costs occurred during the six months ended September 30, 2007 or
2008.
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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 originally bore an interest rate of 10% per annum and
accrued interest is due and payable on a quarterly basis, with principal
originally due on July 15, 2007. The senior notes are redeemable by us at 100%
of the principal value at any time. The notes and common stock were originally
issued with a debt discount of $768,000. The fair value of the warrants to the
placement agent 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 original term of the notes, which was
thirty-nine months. The senior notes are unsecured obligations of our company
but are senior in right of payment to all existing and future indebtedness of
our company. The resale of the common stock issued in the 2004 Senior Note
Offering was registered with the SEC pursuant to a resale registration statement
dated August 2, 2005. Effective August 1, 2005, holders with a principal balance
and accrued interest totaling $225,800 converted their senior notes and accrued
interest into 903,205 shares of our common stock at a price of $0.25 per share.
No conversion of debt to equity or acceleration of amortization of costs related
to such conversions occurred during the years ended March 31, 2007 or 2008. In
December, 2006, we negotiated a modification of the terms of the senior notes to
extend the maturity date to July 15, 2010. In exchange for the three year
extension, the interest rate increased to 12% per annum effective on January 16,
2007. All other terms and provisions of the senior notes remained unchanged. The
direct expenses of the note amendment was $101,000, and the estimated fair value
of the warrant issued to the placement agent of $42,000 were recorded as a
deferred offering cost and both are being amortized as a component of interest
expense over the remaining term of the senior notes.
Preferred Stock
On September 16, 2003, we completed our private placement of Series A
convertible preferred stock with detachable warrants to purchase 750,000 shares
of common stock, providing $1,500,000 in gross proceeds. We originally issued
150,000 shares of Series A Preferred Stock that converts to 3,000,000 shares of
common stock. The warrants were immediately exercisable at a price of $1.50 per
share and expired on September 16, 2006. We pay an 8% cash dividend, payable
quarterly to holders of the Series A Preferred Stock, and the dividend is
cumulative. The Series A Preferred Stock is non-voting and non-participating.
The shares of 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 Series A Preferred Stock were 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 were
considered a deemed dividend in the calculation of loss per share. During fiscal
years 2005 and 2006, holders of 35,000 shares converted to 700,000 shares of
common stock. During fiscal 2007, holders of 12,500 shares of Series A Preferred
Stock converted those shares into 250,000 shares of our common stock. During
fiscal 2008, holders of 10,000 shares of Series A Preferred Stock converted
those shares into 200,000 shares of our common stock. During the three months
ended September 30, 2008, holders of 30,000 shares of Series A Preferred Stock
converted those shares into 600,000 shares of our common stock. The resale of
the underlying common stock that would be issued upon conversion of the
preferred stock and upon exercise of the associated warrants has been registered
with the SEC and may be sold pursuant to a resale prospectus.
On September 30, 2005, we completed our private placement of Series B
convertible preferred stock, with detachable warrants. We originally issued
70,000 shares of Series B Preferred Stock that converts to 2,800,000 shares of
common stock, if all converted and warrants to purchase 700,000 shares of common
stock. The Series B Preferred Stock bears an 8% dividend payable quarterly. The
dividend is cumulative, and the Series B Preferred Stock is non-voting and
non-participating. The shares of Series B 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 warrants that are
exercisable at an exercise price equal to $0.50 per share expired on September
30, 2008. The aggregate value of the warrants of $55,000 is considered a deemed
dividend in the calculation of earnings/loss per share. During the 2007 fiscal
year, holders of 10,500 shares of Series B Preferred Stock converted those
shares into 420,000 shares of our common stock. During the 2008 fiscal year,
holders of 4,500 shares of Series B Preferred Stock converted those shares into
180,000 shares of our common stock. The resale of the underlying common stock
that would be issued upon conversion of the preferred stock and upon exercise of
the associated warrants has been registered with the SEC and may be sold
pursuant to a resale prospectus.
29
On June 9, 2006, we completed a private placement of 5,405,405
unregistered, restricted shares of common stock providing $2.0 million in gross
cash proceeds. We have used the proceeds for working capital and general
corporate purposes. We paid our placement agent an underwriting commission of
$185,000 of which $25,000 was recorded as deferred offering costs, and incurred
additional offering expenses of approximately $103,000. Pursuant to the
registration rights agreement between the parties, we filed a Registration
Statement on Form S-3 to enable the resale of the shares by the investors which
was declared effective on September 29, 2006.
OFF BALANCE SHEET TRANSACTIONS
There are no off-balance sheet transactions, arrangements, obligations
(including contingent obligations) or other relationships of our Company with
unsolicited entities or other persons that have or may have a material effect on
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources of our Company.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these 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
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.
We consider an accounting policy to be critical if it requires an
accounting estimate that requires us to make assumptions about matters that are
highly uncertain at the time the accounting estimate is made. In addition,
different estimates that we reasonably could have used for the accounting
estimate in the current period, or changes in the accounting estimate that are
reasonably likely to occur from period to period would have a material impact on
the presentation of our financial condition, changes in financial condition or
results of operations. We believe there are a number of accounting policies that
are critical to understanding our historical and future performance. The
critical accounting policies include revenue recognition, sales reserves,
allowance for doubtful accounts, software development costs, intangible assets,
income taxes and stock-based compensation.
Our critical accounting policies and estimates are included in our
annual report on Form 10-K for the year ended March 31, 2008 as filed with the
SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The disclosure is not applicable because iLinc is a smaller reporting
company.
ITEM 4T. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer
and chief financial officer, carried out an evaluation of the effectiveness of
our "disclosure controls and procedures" (as defined in the Securities Exchange
Act of 1934 (the "Exchange Act") Rules 13a-15(e) and 15d-15(e)) as of September
30, 2008. Based upon that evaluation, our chief executive officer and chief
financial officer concluded that as of September 30, 2008, our disclosure
controls and procedures are effective. Disclosure controls and procedures are
controls and other procedures designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act (i)
is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms and (ii) is accumulated and communicated
to our management, including our chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding required disclosure.
30
Our management, including our chief executive officer and chief
financial officer, do not expect that our disclosure controls and procedures or
our internal control over financial reporting will prevent all errors and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within our company have been
detected.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the second quarter ended September 30, 2008, no changes were
made to our internal control over financial reporting that materially affected
or were reasonably likely to materially affect our internal control over
financial reporting.
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PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
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 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 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 dependence upon software purchase license sales
in addition to the more ratable subscription model, the size and timing of
product orders; 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.
We have limited financial resources at our disposal. We have long-term
obligations that are due in 2010 and 2012 that we may not be able to satisfy
from existing working capital. 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. As a result, we may not have sufficient
financial resources to satisfy our obligations as they come due in the short
term.
DILUTION TO EXISTING STOCKHOLDERS WILL OCCUR UPON ISSUANCE OF SHARES WE HAVE
RESERVED FOR FUTURE ISSUANCE.
On September 30, 2008, 34,692,077 shares of our common stock were
issued and outstanding, net of treasury shares. An additional 15,422,631 shares
of our common stock were reserved for issuance that would be issued as the
result of the exercise of options, warrants and restricted stock or the
conversion of convertible notes and/or 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
32
$1.0 million. Our success also depends on the ability to attract, integrate,
motivate and retain additional highly skilled technical, sales and marketing and
professional services personnel. To the extent we are unable to attract and
retain a sufficient number of additional skilled personnel, our business will
suffer.
OUR INTELLECTUAL PROPERTY MAY BECOME SUBJECT TO LEGAL CHALLENGES, UNAUTHORIZED
USE OR INFRINGEMENT, ANY OF WHICH COULD DIMINISH THE VALUE OF OUR PRODUCTS AND
SERVICES.
Our success depends in large part on our proprietary technology. If we
fail to successfully enforce our intellectual property rights, the value of
these rights, and consequently, the value of our products and services to our
customers, could diminish substantially. It may be possible for third parties to
copy or otherwise obtain and use our intellectual property or trade secrets
without our authorization, and it may also be possible for third parties to
independently develop substantially equivalent intellectual property. Currently,
we do not have patent protection in place related to our products and services.
Litigation may be necessary in the future to enforce our intellectual property
rights, to protect trade secrets or to determine the validity and scope of the
proprietary rights of others. While we have not received any notice of any claim
of infringement of any of our intellectual property, from time to time we may
receive notice of claims of infringement of other parties' proprietary rights.
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.
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 subscription Web 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 subscription 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.
33
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.
SALES IN FOREIGN JURISDICTIONS BY OUR INTERNATIONAL DISTRIBUTOR NETWORK AND US
MAY RESULT IN UNANTICIPATED COSTS.
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.
With our focus on our Web and audio conferencing products and services,
our growth depends on our ability to continue to develop new features, products
and services around that software and product line including the ability to
operate our software in non-Windows based operating systems (e.g., MAC and
Linux). 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.
34
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 smaller reporting
companies to include in their annual reports on Form 10-K for fiscal years
ending after December 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
smaller reporting company's financial statements must also attest to and report
on the effectiveness of the company's internal control over financial reporting
for fiscal years ending after December 15, 2009. 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 accounting firm determines that our internal control over financial
reporting is not designed or operating effectively as required by Section 404,
our accounting firm may either disclaim its opinion or may issue a qualified
opinion on the effectiveness of our internal control over financial reporting.
If our accounting firm disclaims its opinion or qualifies its opinion as to the
effectiveness of our internal control over financial reporting, 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 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) During the six months ended September 30, 2008, holders of 30,000
shares of Series A preferred stock converted their shares to 600,000 shares of
common stock. The conversion of the Preferred Stock was in accordance with the
terms of the Preferred Stock agreement. We received no proceeds from the
conversion of these shares of Series A preferred stock. The shares of common
stock issued upon conversion of the shares of Series A preferred stock were
issued in transactions exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended. The resale of the underlying common stock
issued upon conversion of the preferred stock has been registered with the SEC.
No underwriting discounts or commissions were paid in conjunction with the
conversions.
(b) Not applicable.
(c) We do not have a share repurchase program, and during the six
months ended September 30, 2008, we did not repurchase any shares of our common
stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2008 annual meeting of stockholders of the Company was held on
August 15, 2008 at 9:00 a.m., local time, at the Company's offices. The
stockholders elected Michael T. Flynn and James M. Powers, Jr. to serve a three
year term as Class A directors. Mr. Flynn received 22,038,992 votes for and
79,026 votes withheld. Mr. Powers received 22,035,892 votes for and 82,126 votes
withheld. The stockholders approved and ratified the appointment of Moss Adams
LLP as the Company's independent registered public accounting firm for the
fiscal year ended March 31, 2009 with 21,978,506 voting for, 73,444 voting
against and 66,067 abstaining.
ITEM 5. OTHER INFORMATION
None
35
ITEM 6. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
3.1 Restated Certificate of Incorporation of the Company (previously
filed as an exhibit to iLinc's Annual Report on Form 10-K for the
year ended March 31, 2002).
3.2 Bylaws of the Company, as amended (previously filed as an exhibit
to iLinc's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 31, 2007).
3.3 Certificate of Designations of Series A Preferred Stock
(previously filed as an exhibit to iLinc's Quarterly Report on
Form 10-Q for the fiscal quarter ended December 31, 2003).
3.4 Certificate of Amendment of Restated Certificate of Incorporation
of the Company (previously filed as an exhibit to iLinc's
Quarterly Report on Form 10-Q for the fiscal quarter ended
December 31, 2003).
3.5 Revised Certificate of Designations of Series B Preferred
Stock (previously filed as an exhibit to iLinc's Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30,
2005).
4.1 Form of certificate evidencing ownership of common stock of the
Company (previously filed as an exhibit to iLinc's Annual Report
on Form 10-K for the year ended March 31, 2001).
4.2 Form of Convertible Redeemable Subordinated Note (previously filed
as an exhibit to iLinc's Annual Report on Form 10-K for the year
ended March 31, 2002).
4.3 Form of Redeemable Warrant (2003 Private Placement Offering)
(previously filed as an exhibit to iLinc's Quarterly Report on
Form 10-Q for the fiscal quarter ended December 31, 2003).
10.1 Asset Purchase Agreement by and between American Teleconferencing
Services, Ltd. d/b/a Premier Global Services and the Company
(previously filed as an exhibit to iLinc's Form 8-K filed May 2,
2008).
10.2 Asset Purchase Agreement by and between Conference Plus, Inc.
and the Company (previously filed as an exhibit to iLinc's
Form 8-K filed July 7, 2008).
+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.
------------------
|
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to the requirements of Item 15 of Form 10-K.
+ Furnished herewith as an Exhibit
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant, iLinc Communications, Inc., has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 5, 2008 ILINC COMMUNICATIONS, INC.
By:/s/ James M. Powers, Jr.
----------------------------------------------
Chairman of the Board, President and Chief
Executive Officer
By:/s/ James L. Dunn, Jr.
---------------------------------------------
Senior Vice President and Chief Financial Officer
|
37
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