PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ILINC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
December 31, March 31,
2007 2007
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 1,085 $ 1,057
Certificate of deposit ......................................................... 368 504
Accounts receivable, net of allowance for doubtful accounts of $119 and $117 at
December 31 and March 31, 2007, respectively ................................... 2,415 2,530
Note receivable ................................................................ -- 14
Prepaid and other current assets ............................................... 592 766
-------- --------
Total current assets ......................................................... 4,460 4,871
Property and equipment, net .................................................... 807 691
Goodwill ....................................................................... 11,206 11,206
Intangible assets, net ......................................................... 1,428 1,556
Other assets ................................................................... 14 14
-------- --------
Total assets ................................................................. $ 17,915 $ 18,338
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt .............................................. $ 95 $ 143
Accounts payable trade ......................................................... 1,270 1,169
Accrued liabilities ............................................................ 1,038 1,119
Current portion of capital lease liabilities ................................... 117 45
Deferred revenue ............................................................... 1,572 1,483
-------- --------
Total current liabilities .................................................... 4,092 3,959
Long term debt, less current maturities, net of discount and beneficial conversion
feature of $842 and $993, at December 31 and March 31, 2007, respectively ...... 7,504 7,406
Capital lease liabilities, less current maturities ................................ 287 223
Deferred tax liability ............................................................ 363 299
-------- --------
Total liabilities ............................................................ 12,246 11,887
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock series A & B, 10,000,000 shares authorized:
Series A preferred stock, $.001 par value, 105,000 and 115,000 shares issued
and outstanding, liquidation preference of $1,050,000 and $1,150,000 at
December 31 and March 31, 2007, respectively.................................... -- --
Series B preferred stock, $.001 par value, 59,500 shares issued and outstanding,
liquidation preference of $595,000 at December 31 and March 31, 2007............ -- --
Common stock, $.001 par value 100,000,000 shares authorized 35,276,228 and
35,017,843 issued at December 31 and March 31, 2007, respectively .............. 35 35
Additional paid-in capital ..................................................... 46,673 46,614
Accumulated deficit ............................................................ (39,631) (38,790)
Less: 1,432,412 treasury shares at cost ....................................... (1,408) (1,408)
-------- --------
Total shareholders' equity ................................................... 5,669 6,451
-------- --------
Total liabilities and shareholders' equity ................................... $ 17,915 $ 18,338
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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4
ILINC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- --------------------------
2007 2006 2007 2006
-------- -------- -------- --------
Revenues
Software licenses ..................................... $ 659 $ 1,105 $ 3,029 $ 3,255
Subscription licenses ................................. 752 488 2,140 1,515
Audio services ........................................ 1,230 1,343 4,153 3,925
Maintenance and professional services ................. 724 715 2,071 2,012
-------- -------- -------- --------
Total revenues .................................... 3,365 3,651 11,393 10,707
-------- -------- -------- --------
Cost of revenues
Software licenses ..................................... 58 51 125 132
Subscription licenses ................................. 84 77 284 227
Audio services ........................................ 803 807 2,593 2,500
Maintenance and professional services ................. 201 310 593 710
Amortization of technology ............................ 53 68 150 202
-------- -------- -------- --------
Total cost of revenues ............................ 1,199 1,313 3,745 3,771
-------- -------- -------- --------
Gross profit ............................................. 2,166 2,338 7,648 6,936
-------- -------- -------- --------
Operating expenses
Research and development .............................. 645 307 1,596 905
Sales and marketing ................................... 1,049 924 3,671 2,538
General and administrative ............................ 688 588 1,999 1,884
-------- -------- -------- --------
Total operating expenses .......................... 2,382 1,819 7,266 5,327
-------- -------- -------- --------
(Loss) income from operations ........................... (216) 519 382 1,609
Interest expense ...................................... (261) (244) (794) (741)
Amortization of beneficial debt conversion ............ (81) (150) (243) (451)
-------- -------- -------- --------
Total interest expense ............................ (342) (394) (1,037) (1,192)
Loss on extinguishment of debt ........................ -- (160) -- (160)
Interest income (charges) and other ................... -- -- (21) (12)
-------- -------- -------- --------
(Loss) income from continuing operations before income
taxes ............................................. (558) (35) (676) 245
Income tax expense .................................... (21) -- (64) --
-------- -------- -------- --------
(Loss) income from continuing operations ................ (579) (35) (740) 245
Income from discontinued operations ..................... -- -- -- 10
-------- -------- -------- --------
Net (loss) income ....................................... (579) (35) (740) 255
Series A and B preferred stock dividends .............. (32) (38) (101) (117)
-------- -------- -------- --------
(Loss) income available to common shareholders .......... $ (611) $ (73) $ (841) $ 138
======== ======== ======== ========
(Loss) income per common share, basic and diluted
From continuing operations ............................ $ (0.02) $ -- $ (0.02) $ --
From discontinued operations .......................... -- -- -- --
-------- -------- -------- --------
(Loss) income per common share .................... $ (0.02) $ -- $ (0.02) $ --
======== ======== ======== ========
Number of shares used in calculation of (loss) income per
share,
Basic ................................................. 33,841 33,190 33,717 31,676
======== ======== ======== ========
Diluted ............................................... 33,841 33,190 33,717 31,991
======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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5
ILINC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
DECEMBER 31,
-----------------------
2007 2006
------- -------
Net cash provided by operating activities ................. $ 515 $ 443
------- -------
Cash flows from investing activities:
Proceeds from (investment in) certificate of deposit ... 136 (768)
Capital expenditures ................................... (157) (393)
Capitalization of software development costs ........... (264) (295)
Proceeds from sale of fixed assets ..................... 12 3
Repayment of note receivable ........................... 14 14
------- -------
Net cash used in investing activities
(259) (1,439)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock ................. -- 2,000
Series A and B preferred stock dividends ............... (101) (118)
Stock issuance expense ................................. -- (258)
Proceeds from exercise of stock options ................ 22 5
Repayment of long-term debt ............................ (101) (121)
Repayment of capital lease liabilities ................. (48) (65)
Financing costs incurred ............................... - -- (101)
------- -------
Net cash (used in) provided by financing activities (228) 1,342
------- -------
Cash flows from continuing operations ..................... 28 346
Cash flows from discontinued operations ................... -- (40)
------- -------
Net change in cash and cash equivalents ........... 28 306
Cash and cash equivalents, beginning of period ............ 1,057 466
------- -------
Cash and cash equivalents, end of period .................. $ 1,085 $ 772
======= =======
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Supplemental Schedule of Noncash Investing and Financing Activities
NINE MONTHS
ENDED
DECEMBER 31,
-----------------------
2007 2006
----- -----
Fair value of warrants recorded as prepaid ........ $ (120) $ 450
Addition of assets under capital leases ........... 184 --
Conversion of AR to note receivable ............... -- 54
Fair value of warrants recorded as intangible asset -- 42
Deferred maintenance offset by accrued royalty .... -- 8
Conversion of preferred stock to common stock ..... -- 1
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, audio conferencing and collaboration
software and services. The Company develops and sells software that provides
real-time collaboration and training using Web-based tools. The Company's
four-product iLinc Suite, comprised of LearnLinc, MeetingLinc, ConferenceLinc,
and SupportLinc, is an award winning virtual classroom, Web conferencing and
collaboration suite of software. With its Web collaboration, conferencing and
virtual classroom products, the Company provides what it believes to be simple,
reliable and cost-effective tools for remote presentations, meetings and online
events. The Company's software is based on a proprietary architecture and code
that finds its origins as far back as 1994, in what it 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 9.
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 sells its software solutions to large,
medium and small-sized corporations inside and outside of the Fortune 1000. The
Company markets its products using a direct sales force and an indirect
distribution channel consisting of agents, distributors, value added resellers
and OEM partners. The Company allows its customers to choose between purchasing
a perpetual license or 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, audio conferencing services 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. On
December 27, 2007, the Company amended the lease slightly to incorporate certain
improvements made to the space. 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. On July 5, 2006, the Company amended the
New York lease that now expires on June 30, 2009. The New York lease requires a
monthly rent and operating expenses of approximately $4,000. In addition, the
Company maintains an 8,000 square foot Class A facility in Springville, Utah
with an emphasis on audio conferencing and support operations. The Springville
lease began in 2003 and has a term of five years that expired January 2, 2008.
On December 28, 2007, the Company amended the lease to reduce the square footage
from 10,000 square feet to 8,000 square feet. The lease expires December 31,
2008 and requires a monthly rent and operating expenses of approximately $8,000.
The Company began operations in March of 1998 in a different industry.
Its formation included the simultaneous rollup of fifty private businesses and
an initial public offering. The Company's initial services included training
enhancement services over the Internet using a browser based system. In 2002,
the Company shifted its focus away from its legacy business, leveraging its
historical experience in training, ultimately settling on its current focus, Web
conferencing and audio conferencing. The Company changed its name to iLinc
Communications, Inc. in February 2004.
The unaudited condensed consolidated financial statements included
herein have been prepared by the Company, pursuant to the rules and regulations
of the Securities and Exchange Commission (the "SEC"). Pursuant to such
regulations, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes the presentation
and disclosures herein are adequate to make the information not misleading, but
do not purport to be a complete presentation inasmuch as all note disclosures
required by generally accepted accounting principles are not included. In the
opinion of management, the unaudited condensed consolidated financial statements
reflect all elimination entries and normal recurring adjustments that are
necessary to fairly state the results for the interim periods ended December 31,
2007 and 2006.
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, 2007, as filed with the SEC and available for free on the Company's Website.
7
2. SIGNIFICANT ACCOUNTING POLICIES
RECLASSIFICATION OF PREVIOUSLY REPORTED FIGURES
The condensed consolidated statement of operations for three and nine
months ending December 31, 2006, has a reclassification of revenues and cost of
revenues derived from subscription licenses and audio services. Revenues and
cost of revenues from these sources were combined in the prior quarters'
financial statements and have been retroactively reclassified for comparative
purposes.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements of the Company include
the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and
liabilities. The more significant areas requiring use of estimates and judgment
relate to revenue recognition, accounts receivable 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 a certificate of deposit at a financial institution.
This certificate has a maturity of eight months from the date of acquisition,
which precludes it from being accounted for as a cash equivalent.
CUSTOMER CONCENTRATIONS
Accounts receivable balances for two customers totaled approximately
12% and 15% of the total balance outstanding at December 31 and March 31, 2007,
respectively, but otherwise there are not significant customer concentrations.
STOCK-BASED COMPENSATION
In December 2004, the FASB issued SFAS No. 123R, SHARE-BASED PAYMENT
("SFAS 123R"). Under this new standard, companies will no longer be able to
account for share-based compensation transactions using the intrinsic method in
accordance with APB 25. Instead, companies are required to account for such
transactions using a fair-value method and to recognize the expense over the
service period. SFAS 123R became effective for the Company for periods beginning
after March 31, 2006 and allows for several alternative transition methods. The
Company adopted SFAS 123R, effective April 1, 2006, which requires recognition
of compensation expense for all stock option or other equity-based awards that
vest or become exercisable after the option's effective date. The Company
elected the modified prospective application transition method of adoption and,
as such, prior period financial statements have not been restated. Under this
method, the fair value of all stock options granted or modified after adoption
must be recognized in the Condensed Consolidated Statement of Operations and
total compensation cost related to non-vested awards not yet recognized, as
determined under the original provisions of SFAS 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, must also be recognized in the Condensed Consolidated Statement of
Operations as vesting occurs.
8
LOSS/INCOME PER SHARE
Basic loss/income per share is 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 nine months ended December 31, 2007, options
and warrants to purchase 5,230,128 shares of common stock were excluded from the
computation of diluted earnings per share because of their anti-dilutive effect.
For the three and nine months ended December 31, 2006, respectively, options and
warrants to purchase 2,233,444 and 2,278,444 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 nine months ended December 31, 2007 and
2006, preferred stock and debt convertible into 9,580,000 and 9,960,000 shares
of common stock, respectively, were excluded from the computation of diluted
loss/income per share because inclusion of such would be antidilutive.
Furthermore, a restricted stock grant of 450,000 shares has been excluded from
the loss/income per share calculations for the three and nine months ended
December 31, 2007 and 2006 because the measurement date stock price exceeds the
average stock price for all periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 06-03 ("EITF 06-03"), "How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement (That Is, Gross versus Net Presentation)." EITF 06-03 provides
that the presentation of taxes assessed by a governmental authority that is
directly imposed on a revenue-producing transaction between a seller and a
customer on either a gross basis (included in revenues and costs) or on a net
basis (excluded from revenues) is an accounting policy decision that should be
disclosed. The provisions of EITF 06-03 became effective as of December 31,
2006. The Company's adoption of EITF 06-03 has not and is not expected to have a
material effect on its consolidated financial position or results of operations.
In July 2006, the FASB issued FASB Interpretation No. 48, ACCOUNTING
FOR UNCERTAINTY IN INCOME TAXES - AN INTERPRETATION OF FASB STATEMENT NO. 109
(FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute
for financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return, and also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for the Company and has
been adopted beginning in the first quarter of fiscal 2008. After analysis of
the Company's income tax position, the Company has determined that the impact of
the adoption of FIN 48 is not significant to the Company's financial position or
results of operations.
In September 2006, the SEC issued SAB No. 108, CONSIDERING THE EFFECTS
OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING CURRENT YEAR MISSTATEMENTS. SAB No.
108 requires analysis of misstatements using both an income statement (rollover)
approach and a balance sheet (iron curtain) approach in assessing materiality
and provides for a one-time cumulative effect transition adjustment. SAB No. 108
was effective for the Company's fiscal year 2007 annual financial statements.
The Company adopted SAB 108 effective April 1, 2006.
In September 2006, the FASB issued SFAS No. 157, FAIR VALUE
MEASUREMENTS (SFAS 157), which provides guidance on how to measure assets and
liabilities that use fair value. SFAS 157 will apply whenever another US GAAP
standard requires (or permits) assets or liabilities to be measured at fair
value but does not expand the use of fair value to any new circumstances. This
standard also will require additional disclosures in both annual and quarterly
reports. SFAS 157 will be effective for fiscal 2009. The Company is currently
evaluating the potential impact this standard may have on its financial position
and results of operations.
On February 15, 2007, the FASB issued SFAS No. 159, THE FAIR VALUE
OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES (SFAS No. 159). Under this
Standard, the Company may elect to report financial instruments and certain
other items at fair value on a contract-by-contract basis with changes in value
reported in earnings. This election is irrevocable. SFAS No. 159 provides an
opportunity to mitigate volatility in reported earnings that is caused by
measuring hedged assets and liabilities that were previously required to use a
different accounting method than the related hedging contracts when the complex
provisions of SFAS No. 133 hedge accounting are not met. SFAS No. 159 is
effective for years beginning after November 15, 2007. Early adoption within 120
days of the beginning of the company's 2008 fiscal year is permissible, provided
the company has not yet issued an interim financial statement for 2008 and has
adopted SFAS No. 157. The Company is currently evaluating the potential impact
of adopting this Standard.
9
3. INTANGIBLE ASSETS, NET
Intangible assets consisted of the following:
DECEMBER 31, 2007
---------------------------------------------------------------
WEIGHTED
AVERAGE
REMAINING GROSS CARRYING ACCUMULATED
LIVES AMOUNT AMORTIZATION NET
---------------------------------------------------------------
(YEARS) (IN THOUSANDS)
AMORTIZED INTANGIBLE ASSETS:
Deferred financing costs 3.79 $ 919 $ (499) $ 420
Purchased software 0.00 1,481 (1,481) --
Customer relationship 2.42 1,230 (748) 482
Capitalized software development 2.50 631 (105) 526
------------------------------------------------
$ 4,261 $ (2,833) $ 1,428
================================================
MARCH 31, 2007
---------------------------------------------------------------
WEIGHTED
AVERAGE
REMAINING GROSS CARRYING ACCUMULATED
LIVES AMOUNT AMORTIZATION NET
---------------------------------------------------------------
(YEARS) (IN THOUSANDS)
AMORTIZED INTANGIBLE ASSETS:
Deferred financing costs 4.57 $ 919 $ (407) $ 512
Purchased software 0.17 1,481 (1,437) 44
Customer relationship 3.17 1,230 (597) 633
Capitalized software development costs 3.00 367 -- 367
------------------------------------------------
$ 3,997 $ (2,441) $ 1,556
================================================
|
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 $631,000. 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 December 31, 2007, the net unamortized capitalized direct and indirect
software development costs were $526,000.
4. ACCRUED LIABILITIES
DECEMBER 31, MARCH 31,
2007 2007
(IN THOUSANDS)
Accrued state sales tax .................................. $ 18 $ 77
Accrued interest payable ................................. 268 290
Amount payable to third party providers and subcontractors 239 320
Accrued salaries and related benefits .................... 480 394
Other .................................................... 33 38
------ ------
Total accrued liabilities ............................. $1,038 $1,119
====== ======
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10
5. LONG-TERM DEBT
DECEMBER 31, MARCH 31,
2007 2007
------- -------
(IN THOUSANDS)
2002 Convertible unsecured subordinated notes $ 5,100 $ 5,100
2004 Senior unsecured notes ................. 2,962 2,962
Other unsecured notes payable ............... 379 480
------- -------
8,441 8,542
Less: Current portion of long-term debt ..... (95) (143)
Discount ........................... (421) (497)
Beneficial conversion feature ...... (421) (496)
------- -------
Long-term debt, net of current portion ...... $ 7,504 $ 7,406
======= =======
|
In connection with the Company's acquisition of Glyphics in 2004 (the
Company's audio conferencing operations), 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 principle
balance of $354,000 at December 31, 2007.
The aggregate maturities of long-term debt excluding capital leases for
each of the next five calendar years subsequent to December 31, 2007 were as
follows (IN THOUSANDS):
2008 ............... $ 95
2009 ............... 77
2010 ............... 3,046
2011 ............... 91
2012 ............... 5,132
Thereafter --
------
$8,441
======
6. CAPITALIZATION
|
COMMON STOCK
On June 9, 2006, the Company completed a private placement of 5,405,405
unregistered, restricted shares of common stock providing $2.0 million in gross
cash proceeds. The Company has used the proceeds for working capital and general
corporate purposes. Pursuant to the registration rights agreement between the
parties, the Company 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.
PREFERRED STOCK
During the three months ended December 31, 2007, no preferred stock was
converted to common stock. During the nine months ended December 31, 2007,
holders of 10,000 shares of Series A preferred stock converted their shares to
200,000 shares of common stock
7. INCOME TAX EXPENSE FROM CONTINUING OPERATIONS
The Company recorded income tax expense of $21,000 and $64,000 for the
three and nine months ended December 31, 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 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 2008.
11
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 nine months ended December 31, 2007. The Company has no
unrecognized tax benefit, as described in FIN 48, as of December 31, 2007.
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 December 31, 2007. Furthermore, there were
no interest or penalties recorded during the nine months ended December 31,
2007.
The Company is subject to income tax examinations for U.S. Federal
income taxes and state income taxes from fiscal 2005 forward. As of December 31,
2007, 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, 2008.
There was no current income tax expense for the three and nine months
ended December 31, 2007 and 2006 because net operating loss carry-forwards were
utilized to eliminate taxable income and the payment of any federal income tax.
8. 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 3,832,464 shares
outstanding under the Plan at December 31, 2007. The Compensation Committee of
the Board of Directors administers the Plan. Stock options granted to employees
have a contractual term of 10 years (subject to earlier termination in certain
events) and have an exercise price no less than the fair market value of the
Company's common stock on the date of grant. The options vest at varying rates
over a one to five year period.
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 grants, 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 records share-based compensation expense only for those grants
that are expected to vest.
In accordance with SFAS 123R, the Company recognized $41,000 and
$136,000, net of taxes, of compensation expense related to the vesting of the
stock options and vesting of stock grants in the three and nine months ended
December 31, 2007, respectively. The Company recognized $33,000 and $106,000,
net of taxes of compensation expense related to the vesting of the stock options
and vesting of stock grants in the three and nine months ended December 31,
2006, respectively. The following table summarizes stock-based compensation
expense related to the vesting of employee stock options and vesting of employee
stock grants under SFAS 123R for the three and nine months ended December 31,
2007 and 2006, which was allocated as follows (in thousands except per share
amounts):
12
THREE THREE NINE NINE
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2007 2006 2007 2006
---- ---- ---- ----
Stock-based compensation expense from stock options included:
Cost of sales .................................................... $ 5 $ 3 $ 13 $ 8
Research and development ......................................... 8 3 16 7
Sales and marketing .............................................. 11 11 38 28
General and administrative ....................................... 7 6 39 33
---- ---- ---- ----
Total ..................................................... 31 23 106 76
Stock-based compensation expense from stock grants included: general
and administrative costs ......................................... 10 10 30 30
---- ---- ---- ----
Total stock-based expense included in income from operations ....... 41 33 136 106
Tax benefit ........................................................ -- -- -- --
---- ---- ---- ----
Total stock-based compensation expense, net of tax ................. $ 41 $ 33 $136 $106
Decrease in basic earnings per share ............................... $ -- $ -- $ -- $ --
Decrease in diluted earnings per share ............................. $ -- $ -- $ -- $ --
|
As stock-based compensation expense recognized in the Condensed
Consolidated Statement of Operations for the three and nine months ended
December 31, 2007 and 2006 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 nine months ended December 31, 2007 and 2006 was $0.48 per share and
$0.38 per share, respectively, using the following weighted-average assumptions:
NINE MONTHS ENDED DECEMBER 31,
---------------------------------------
2007 2006
------------------- -------------------
Risk free interest rate 3.3% - 5.0% 4.43% - 5.11%
Dividend yield 0% 0%
Volatility factors of the expected market price of the
Company's common stock 90% - 102% 97% - 109%
Weighted-average expected life of options 5 - 10 years 10 years
|
Stock options activity for the nine months ended December 31, 2007 was
as follows:
WEIGHTED
AVERAGE
WEIGHTED CONTRACTUAL AGGREGATE
SHARES SUBJECT AVERAGE LIFE INTRINSIC VALUE
TO OPTIONS EXERCISE PRICE (IN YEARS) (IN THOUSANDS)
------------------ ------------------- ----------------- -----------------
Options outstanding at April 1, 2007........... 3,138,552 $0.98
Options granted............................. 664,875 $0.61
Options exercised........................... (58,385) $0.39
Options forfeited........................... (131,461) $0.50
Options expired............................. $0.76
(231,117)
----------
Options outstanding at December 31, 2007....... 3,382,464 $0.96 6.01 $ 197
----------
Options exercisable at December 31, 2007....... 2,430,943 $1.12 4.77 $ 142
----------
|
13
The aggregate intrinsic value in the table above represents total
pretax intrinsic value (the difference between the Company's closing stock price
on December 31, 2007 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 December 31, 2007. This amount
changes based on the fair market value of the Company's common stock. During the
nine months ended December 31, 2007, 58,385 options were exercised by employees
of the Company. The Company issues new shares of common stock upon the exercise
of stock options. At December 31, 2007, 1,408,513 shares were available for
future grants under The Plan. At December 31, 2007, the Company had
approximately $257,000 of total unrecognized compensation expense, net of
estimated forfeitures, related to stock options under The Plan that will be
recognized over the weighted average period of 2.7 years.
The following table summarizes information about stock options
outstanding at December 31, 2007:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE AVERAGE
NUMBER OF EXERCISE REMAINING CONTRACTUAL NUMBER OF EXERCISE
SHARES PRICE LIFE (YEARS) SHARES PRICE
-------------- ------------- --------------------------- ------------- -------------
$ 0.24 -$ 0.36 329,833 $ 0.25 7.7 244,017 $ 0.25
$ 0.39 -$ 0.58 1,353,908 $ 0.47 5.8 1,105,060 $ 0.48
$ 0.59 -$ 0.89 1,016,625 $ 0.64 8.4 399,768 $ 0.66
$ 0.92 -$ 1.38 102,125 $ 1.02 5.6 102,125 $ 1.02
$ 1.94 -$ 2.91 490,000 $ 2.18 1.5 490,000 $ 2.18
$ 6.13 -$ 9.19 89,973 $ 7.71 0.7 89,973 $ 7.71
-------------- ----------
3,382,464 2,430,943
============== ==========
|
WARRANTS
The following table summarizes information about warrants outstanding
at December 31, 2007:
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 1.2 50,000 $ 0.32
$ 0.40 -$ 0.40 50,000 $ 0.40 1.2 50,000 $ 0.40
$ 0.42 -$ 0.42 543,182 $ 0.42 3.4 543,182 $ 0.42
$ 0.44 -$ 0.44 132,972 $ 0.44 2.7 132,972 $ 0.44
$ 0.50 -$ 0.50 700,000 $ 0.50 .8 700,000 $ 0.50
$ 0.55 -$ 0.55 50,000 $ 0.55 1.2 50,000 $ 0.55
$ 0.66 -$ 0.66 150,000 $ 0.66 2.1 150,000 $ 0.66
$ 1.50 -$ 1.50 171,510 $ 1.50 3.1 171,510 $ 1.50
---------- -----------
1,847,664 1,847,664
========== ===========
|
In January 2005, in connection with the restructuring of the payments
on loan obligations due in connection with the acquisition of assets from
Glyphics, the Company issued a warrant for 50,000 shares with an exercise price
of $0.55 to one of the Glyphics stockholders, since the loan had been guaranteed
by the stockholder. 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. 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 the stockholder 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. On April 1, 2006 in connection
with the restructuring of the payments and his continuing personal guarantee,
the Company issued an additional warrant to the stockholder 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. In April 2006, the expiration dates of the warrants that had been issued
14
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 the stockholder 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. The note is now being repaid
and no further warrants are expected to be issued.
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
a reseller agreement effective June 30, 2006. The warrant expires on July 1,
2011. 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 December 31, 2007, none of the revenue targets
had been achieved. Therefore, no expense was recorded in the nine months ended
December 31, 2007. 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 $347,000 as the fair value
of the 1,000,000 shares at December 31, 2007 using the Black-Scholes pricing
model.
9. COMMITMENTS AND CONTINGENCIES
The Company is subject to various commitments and contingencies as
described in Note 13 to the consolidated financial statements in the Company's
Annual Report on Form 10-K as of and for the year ended March 31, 2007. During
the nine-month period ended December 31, 2007, 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, New York and Utah locations.
Assets recorded under capital leases, at December 31, 2007, consisted
of the following (IN THOUSANDS):
Cost ......................... $ 452
Less: accumulated amortization (100)
-----
Total ........................ $ 352
=====
|
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 December 31, 2007 (IN THOUSANDS):
CAPITAL OPERATING
------- ---------
2008 .................................... $ 158 $ 559
2009 .................................... 158 377
2010 .................................... 101 363
2011 .................................... 42 364
2012 .................................... 27 61
Thereafter .............................. -- --
------ ------
Total minimum obligations ............... 486 $1,724
======
Less: amount representing interest ...... (82)
------
Present value of minimum obligations .... 404
Less: current portion ................... (117)
------
Long-term obligation at December 31, 2007 $ 287
======
|
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. The lease related to the Utah location expires on December
31, 2008 and requires a monthly rent and operating expenses of approximately
$8,000.
15
SUBCONTRACTOR AGREEMENT
The Company has an agreement with its custom content subcontractor,
Interactive Alchemy, which provides for the provision of custom content services
to the Company's customers. The subcontractor agreement has a non-cancelable
two-year term and expires on May 1, 2008. Under the agreement, its subcontractor
provides custom content development services to the Company in exchange for a
fixed percentage of the Company's custom content revenue. The amount to be paid
under the agreement is limited to a cap of $450,000 in Fiscal 2008. On September
28, 2007, the agreement was modified in order to further clarify the rights and
obligations between the Company and its subcontractor at the end of the
agreement. To facilitate the subcontractor's possible assignment of the
agreement to a new subcontractor, the Company and the subcontractor amended the
agreement to eliminate a royalty fee that had been paid by subcontractor to the
Company and reduce the amount retained by the Company, as well as, release the
contractor from certain non-competition covenants that would have remained
effective at the end of the agreement. The Company records gross custom content
revenue for its customers with a corresponding fixed percentage commission due
to its subcontractor as a cost of sale.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Dr. Powers, Mr.
Dunn, and Mr. Moulton. All are officers, and Dr. Powers is also Chairman of the
Board of Directors. 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. Dr. 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. Mr. Moulton's agreement provides for
continuous employment for a two-year term. Under each of the employment
agreements, if the Company terminates the employee's employment without cause
(as therein defined), Dr. Powers, Mr. Dunn, and Mr. Moulton will be entitled to
a payment equal to 12 months' salary. Additionally, Dr. 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 except for Mr. Moulton's which
limits competition with iLinc for nine months following termination. The
aggregate potential payment under such agreements would be $900,000 as of
December 31, 2007.
10. DISCONTINUED OPERATIONS
Effective January 1, 2004, the Company discontinued its legacy practice
management services segment. In accordance with SFAS 144 ACCOUNTING FOR
IMPAIRMENT ON DISPOSAL OF LONG-LIVED ASSETS, the Company has restated its
historical results to reflect this segment as a discontinued operation. For the
three and nine months ended December 31, 2007, the Company had no income or loss
from discontinued operations. For the three and nine months ended December 31,
2006, the Company had net (loss) income from discontinued operations of $0 and
$10,000, respectively.
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. SUCH FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
ANTICIPATED RESULTS. THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED
TO, OUR DEPENDENCE ON OUR PRODUCTS OR SERVICES, MARKET DEMAND FOR OUR PRODUCTS
AND SERVICES, OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS AND CHANNEL PARTNERS,
OUR ABILITY TO EXPAND OUR TECHNOLOGICAL INFRASTRUCTURE TO MEET THE DEMAND FROM
OUR CUSTOMERS, OUR ABILITY TO RECRUIT AND RETAIN QUALIFIED EMPLOYEES, THE
ABILITY OF CHANNEL PARTNERS TO SUCCESSFULLY RESELL OUR SERVICES, THE STATUS OF
16
THE OVERALL ECONOMY, THE STRENGTH OF COMPETITIVE OFFERINGS, THE PRICING
PRESSURES CREATED BY MARKET FORCES, AND THE OTHER RISKS DISCUSSED HEREIN. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE BASED ON INFORMATION
AVAILABLE TO US AS OF THE DATE HEREOF. WE EXPRESSLY DISCLAIM ANY OBLIGATION OR
UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN, TO REFLECT ANY CHANGE IN OUR EXPECTATIONS OR IN
EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED. OUR
REPORTS ARE AVAILABLE FREE OF CHARGE AS SOON AS REASONABLY PRACTICABLE AFTER WE
FILE THEM WITH THE SEC AND MAY BE OBTAINED THROUGH OUR WEB SITE.
COMPANY OVERVIEW
We sell our software solutions to large, medium and small-sized
corporations inside and outside of the Fortune 1000. We market our products
using a direct sales force and an indirect distribution channel consisting of
agents, distributors, value added resellers and OEM partners. We allow our
customers to choose between purchasing a perpetual license and subscribing to a
term license, providing for flexibility in license structures. 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, audio conferencing services and
other products and services.
Our Web conferencing 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
(e.g., on either a per-seat, per-month or per-minute basis) (the "Subscription
Model"). We also offer varied hosting options, so that a customer who acquires
or rents our software may either elect to host our software behind its own
firewall or it may choose to have iLinc host it for the customer. Customers who
select the Purchase Model, whether hosted by iLinc or the customer, also
subscribe for ongoing customer support and maintenance and software upgrade
services, by entering into a support and maintenance contract with a typical
term of one year, but with multi-year options of up to five years. The annual
maintenance and support fee charged is based upon a percentage of the purchase
price (or per seat price) that varies between 12% and 18% of the license fee
paid (or on a per seat equivalent basis) for the perpetual licenses, with the
percentage depending upon the contractual length and the timing of payment. If a
customer chooses to have iLinc host its Purchase Model licenses, then the annual
hosting fee charged is based upon a percentage of the purchase price (or per
seat price) that is normally 10% of the license fee paid (or on a per seat
equivalent basis) of the Purchase Model license fee that was paid for the
perpetual license.
During fiscal 2006, we launched our iLinc Enterprise(TM) perpetual
licensing model that enables customers to pay a one-time up-front fee for an
organization-wide Web conferencing license, with the ability to expand the
number of seats in exchange for a smaller annual per seat fee. Those customers
who qualify for the iLinc Enterprise site license pay an initial license fee
that is determined based upon the number of employees within the customer's
organization, their projected conferencing use, and various other factors. The
annual maintenance and support fees and hosting fees associated with an iLinc
Enterprise license are then based upon a fixed price or upon an associated rate
per-seat that is active on each annual anniversary of the iLinc Enterprise
license agreement. Customers may expand the number of active seats available to
them at any time with a corresponding increase in annual maintenance and hosting
fees being charged. Supplementing the concurrent seat license model and the
iLinc Enterprise model, we also offer a named-user model that permits a host (or
named-user) to subscribe for a limited use room.
Customers choosing the Subscription Model pay a fee 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 and audio conferencing on a per-minute basis using the
iLinc On-Demand product. Those choosing the iLinc On-Demand product pay on a
monthly basis typically without contractual commitment.
In addition to the Web conferencing and audio conferencing products and
services, we offer custom content development services through a subcontractor
relationship. This service is a small portion of our overall revenue base and
will likely phase out as an offered service in fiscal 2009. We also offer an
off-the-shelf online library of content that includes an online mini-MBA program
co-developed with the Tuck School of Business at Dartmouth College.
17
PRODUCTS AND SERVICES
WEB CONFERENCING AND WEB COLLABORATION
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
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.
AUDIO CONFERENCING
We also deliver comprehensive audio conferencing solutions that help
businesses provide virtual meetings, corporate events, distance learning
programs and daily conference calls. Our audio conferencing offering includes a
wide array of services and products that include reservationless audio
conferencing with pre-established calling accounts for each user who may
participate in conference calls with no advance notice, 24/7; operator assisted
conference calls with operator hosting, monitoring and coordination of the call;
and, high-quality event services that include invitation and user management,
scripting, presentation preparation, post show distribution and dedicated
operator assistance from iLinc and its providers. Customers may purchase our
audio conferencing products and services without an annual contract commitment
on a monthly recurring usage basis, and often subscribe for a fixed per-minute
rate.
18
SALES AND MARKETING FOCUS
Our organization continually creates new marketing and sales campaigns
that focus on our four target markets.
o We sell to prospects that are using other Web conferencing
service providers that are ready to migrate to Web
conferencing software. We find 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 target organizations looking to deploy live, Web-based
training. Our software was originally built for training and
we have maintained a competitive technology advantage in this
area.
o We continue to cross sell all of our products and services to
our large database of existing customers.
Marketing has developed a plan that incorporates 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 Web, audio and event
product and drive usage of all products to increase the propensity for our
customers to make additional purchases.
The direct sales team is organized by geographic territory and is
broken down into distinct groups. All of our direct sales team focus their
outbound activity on specific vertical markets that include education, financial
services, technology, government and professional service organizations. We
believe that the target vertical markets have a commonality of meeting four
criteria: we have an established customer base in the market; our product
feature set is specifically appropriate to the needs of the market; analysts
have identified a need within that market for increasing use of Web and audio
conferencing; and we believe that we have the potential to capture a portion of
the share of such markets.
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 which sell on our
behalf and value added resellers (VAR's) that actively sell our products and
provide product support typically to their own existing customer base. As of
December 31, 2007, 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, Mexico, and
Japan. Our value added resellers execute agreements 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 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. Over the past three fiscal years, we have
succeeded in increasing revenues while managing cost of revenues and operating
expenses.
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 December 31, 2007 were approximately $411,000
lower than current assets at March 31, 2007. Our combined cash and cash
equivalents and certificate of deposit balance decreased by $108,000. Accounts
receivable decreased by $115,000. Prepaid and other current assets decreased by
$174,000 due in part to the timing of annual contracts that were prepaid in
addition to a decrease in the valuation of a warrant to one of our agents that
is based on meeting specific sales targets. Our current liabilities at December
31, 2007 were approximately $133,000 higher than our level of current
liabilities at March 31, 2007, with $89,000 of the increase related to an
increase in deferred revenue. Accounts payable increased $101,000, which is
consistent with the increase in operating expenses for the nine months ending
December 31, 2007. Accrued liabilities decreased $81,000, primarily as accounts
payable to third party providers and subcontractors were paid. As a result, we
decreased working capital to $368,000 at December 31, 2007 compared to working
capital of $912,000 at March 31, 2007. Our accounts receivable, net of allowance
19
for doubtful accounts, were $2.4 million and $2.5 million at December 31, 2007
and March 31, 2007, respectively. As indicated below, in the table under the
caption "Contractual Obligations" at December 31, 2007 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 $95,000, $117,000, $1.0 million and $559,000
respectively. Over the next year, we anticipate that cash flow from operations
should be sufficient to allow us to meet these obligations without raising
additional capital.
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, the percentage sold to new versus existing customers, and the
trends indicated by these factors.
External factors that our management considers in analyzing our
performance include projected growth rates for our industry, rates of
penetration of use of our product categories in the corporate sector and
telecommunications growth and rate structures. 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 moderate success from our direct sales staff
concerning the sale of perpetual license seat, but more recently failed to
achieve sales projected for the December quarter due to the deferral of several
large transactions. We are having more success achieving sales of subscription
license agreements, a trend we expect to continue to foster as markets change
and capital budgets tighten. We believe that continued direct sales success as
well as increase sales by our indirect sales channel will likely to translate
into increasing revenue in fiscal 2008. As we further implement cost reductions
in the form of headcount reductions and overhead management, we expect to derive
an increasing bottom line that should become more consistent with historical
patterns. We expect overhead to be reduced as compared to the first three
quarters, and more consistent with the levels achieved in Fiscal 2007, except
for incremental increases in sales and marketing costs associated and in
proportion to revenue growth. 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.
20
The following table shows certain items from our income statement as a
percentage of total revenue:
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, 2007 DECEMBER 31, 2006 DECEMBER 31, 2007 DECEMBER 31, 2006
-----------------------------------------------------------------------------
Revenues ............................... % % % %
Software licenses ................... $ 659 20 $ 1,105 30 $ 3,029 27 $ 3,255 30
Subscription licenses ............... 752 22 488 13 2,140 19 1,515 14
Audio services ...................... 1,230 37 1,343 37 4,153 36 3,925 37
Maintenance and professional services 724 21 715 20 2,071 18 2,012 19
-----------------------------------------------------------------------------
Total revenues ................... 3,365 100 3,651 100 11,393 100 10,707 100
-----------------------------------------------------------------------------
Cost of revenues
Software licenses ................... 58 2 51 1 125 1 132 1
Subscription licenses ............... 84 2 77 2 284 3 227 2
Audio services ...................... 803 24 807 23 2,593 23 2,500 23
Maintenance and professional services 201 6 310 8 593 5 710 7
Amortization of technology .......... 53 2 68 2 150 1 202 2
-----------------------------------------------------------------------------
Total cost of revenues ........... 1,199 36 1,313 36 3,745 33 3,771 35
-----------------------------------------------------------------------------
Gross profit
Software License .................... 601 18 1,054 29 2,904 25 3,123 29
Subscription licenses ............... 668 20 411 11 1,856 16 1,288 12
Audio services ...................... 427 13 536 15 1,560 14 1,425 14
Maintenance and professional services 523 15 405 11 1,478 13 1,302 12
Amortization of technology .......... (53) (2) (68) (2) (150) (1) (202) (2)
-----------------------------------------------------------------------------
Total gross profit ............... 2,166 64 2,338 64 7,648 67 6,936 65
-----------------------------------------------------------------------------
Operating expenses
Research and development ............ 645 19 307 9 1,596 14 905 8
Sales and marketing ................. 1,049 31 924 25 3,671 32 2,538 24
General and administrative .......... 688 20 588 16 1,999 18 1,884 18
-----------------------------------------------------------------------------
Total operating expenses .......... 2,382 70 1,819 50 7,266 64 5,327 50
-----------------------------------------------------------------------------
(Loss)/income from operations .......... $ (216) (6) $ 519 14 $ 382 3 $ 1,609 15
-----------------------------------------------------------------------------
|
21
RESULTS OF OPERATIONS
The operations of our company involve many risks, which, even through a
combination of experience, knowledge, and careful evaluation, may not be
overcome. Please read also the section entitled "Risk Factors."
REVENUES
Total revenues generated from continuing operations for the three
months ended December 31, 2007 and 2006 were $3.4 million and $3.7million,
respectively, a decrease of $286,000 or 8%. Software license revenues decreased
$446,000 or 40% from $1.1 million in the three months ended December 31, 2006 to
$659,000 in the three months ended December 31, 2007. The decrease was the
result of a decrease in both direct sales and indirect sales by partners, but
not as a result of a change in market conditions. Subscription licenses
increased $264,000 or 54% from $488,000 in the quarter ended December 31, 2006
to $752,000 in the quarter ended December 31, 2007, as the result of increased
subscriptions of $217,000 and an increase in hosting revenues of $47,000, which
are driven by increases in license sales year on year and sustaining the
customer base. Audio services revenue decreased by $113,000, or 8% from $1.3
million in the quarter ended December 31, 2006 to $1.2 million in the quarter
ending December 31, 2007. We expect audio conferencing revenue to rise and this
smaller than anticipated increase was due mostly to the customer audio usage
mix. Maintenance and professional services revenues increased slightly by $9,000
or 1% from $715,000 in the three months ended December 31, 2006 to $724,000 in
the three months ended December 31, 2007, as the result of an increase in
maintenance fees of $121,000 from renewals as the customer base continues to
grow. The increases were partially offset by a decrease in our custom content
revenues of $147,000. Declines in custom content revenue are a part of our
transition from this legacy business, and will not be a meaningful component of
revenue. For the three months ended December 31, 2007, software license revenues
were 20% of total revenues, subscription licenses were 22% of total revenues,
audio services revenues were 37% of total revenues and maintenance and
professional services revenues were 21% of total revenues, as compared to 30%,
13%, 37% and 20%, respectively, for the three months ended December 31, 2006.
Total revenues generated from continuing operations for the nine months
ended December 31, 2007 and 2006 were $11.4 million and $10.7 million,
respectively, an increase of $686,000 or 6%. Software license revenues decreased
$226,000 or 7% from $3.3 million in the nine months ended December 31, 2006 to
$3.0 million in the nine months ended December 31, 2007. The decrease was the
result of decreases of direct sales of $248,000 and off the shelf courseware of
$134,000, which were partially offset by an increase in partner sales of
$156,000. Subscription license revenues increased by $625,000, or 41% from $1.5
million in the nine months ended December 31, 2006 to $2.1 million in the nine
months ended December 31, 2007 as a result of increased subscription sales of
$495,000 and increased hosting revenues of $130,000. Audio services revenues
increased $228,000 or 6% from $3.9 million in the nine months ended December 31,
2006 to $4.2 million in the nine months ended December 31, 2007, as the result
of increased audio per minute. Maintenance and professional services revenues
increased by $59,000 or 3% from $2.0 million in the nine months ended December
31, 2006 to $2.1 million in the nine months ended December 31, 2007, as the
result of an increase in maintenance fees of $278,000 from renewals as the
customer base continues to grow. The increases were partially offset by a
decrease in our custom content revenues of $241,000. For the nine months ended
December 31, 2007, software license revenues were 27% of total revenues,
subscription licenses were 19% of total revenues, audio services revenues were
36% of total revenues and maintenance and professional services revenues were
18% of total revenues, as compared to 30%, 14%, 37% and 19%, respectively, for
the nine months ended December 31, 2006. We expect software license revenues and
indirect subscription license revenue to become a larger percentage of total
revenues as total revenues increase given our focus on the Web conferencing
aspect of our business.
COST OF REVENUES
Cost of software license revenues is driven by royalty fees paid on
certain off-the-shelf products, if any. Cost of software license revenues for
the three months ended December 31, 2007 and 2006 were $58,000 and $51,000,
respectively, an increase of $7,000 or 14%.
Cost of software license revenues for the nine months ended December
31, 2007 and 2006 were $125,000 and $132,000, respectively, a decrease of $7,000
or 5%. We expect the cost of software license revenues to remain a very small
percentage of total license revenue given the very high margin nature of our
software sales.
Cost of subscription licenses includes allocable expenses resulting
from the delivery of our subscription and hosted Web conferencing services,
primarily consisting of salaries, network costs and allocable expenses of
facilities, technical support costs for support services and depreciation and
amortization expense related to our subscription services. Cost of subscription
licenses for the three months ended December 31, 2007 and 2006 were $84,000
and $77,000, respectively, an increase of $7,000 or 9%.
22
Cost of subscription licenses for the nine months ended December 31,
2007 and 2006 were $284,000 and $227,000, respectively, an increase of $57,000
or 25%. The increase related primarily to increased salary costs of $14,000 and
network costs of $30,000.
When reviewing our cost of audio services revenue, we use a fully
allocated overhead method that includes an allocation of salaries and allocable
expenses associated with the delivery of our audio conferencing services.
Expenses related to our audio conferencing services that are accrued as cost of
revenues include salaries and allocable expenses of our telephone operators,
allocated facilities costs, allocated technical support costs for support
services, together with all direct telecommunication expenses for long distance
and local dial tone connectivity, and finally allocable depreciation and
amortization expense related to our audio conferencing assets. Cost of audio
services for the three months ended December 31, 2007 and 2006 were $803,000 and
$807,000, respectively, a decrease of $4,000 or less than 1%. In July, 2007, we
began outsourcing a portion of our audio conferencing services in order to gain
access to a larger bridge base and expand our international and 24x7
capabilities. This change caused an increase in telecommunications costs that is
commensurate with a reduction in employee expense associated with reduced
headcount in our audio division.
Cost of audio services for the nine months ended December 31, 2007 and
2006 were $2.6 million and $2.5 million, respectively, an increase of $93,000 or
4%. The increase was primarily a result of an increase in telecommunications
costs of $215,000, which was partially offset by a decrease in depreciation
expense of $104,000 as a result of the complete depreciation in May 2006 of
certain audio conferencing and computer equipment. Overall, we expect the dollar
cost of audio conferencing services to rise as audio conferencing revenues rise,
but at the same rate.
Cost of maintenance and professional 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 maintenance and professional services
arises from the amount due to our third-party subcontractor which is a fixed
proportion of the custom content revenue earned. The cost of maintenance and
professional services for the three months ended December 31, 2007 and 2006 was
$201,000 and $310,000, respectively, a decrease of $109,000 or 35%. Cost of
maintenance was slightly higher as maintenance revenues continue to increase
period over period. The increase in cost of maintenance was offset by the
decrease in cost of sales related to custom content revenue, which is consistent
with the decrease in those revenues for the period.
The cost of maintenance and professional services for the nine months
ended December 31, 2007 and 2006 was $593,000 and $710,000, respectively, a
decrease of $117,000 or 16%. Cost of maintenance was slightly higher as
maintenance revenues continue to increase period over period. The increase in
cost of maintenance was offset by the decrease in cost of sales related to
custom content revenue, which is consistent with the decrease in those revenues
for the period. Cost of maintenance and professional services revenue was
approximately 5% of total revenues in the nine months ended December 31, 2007
and 7% in the nine months ended December 31, 2006. We expect that the increase
in cost of maintenance and professional services revenue will vary
proportionately and directly with the amount of professional services revenue
earned in a quarter.
Amortization of technology consists of amortization of acquired
software technology and other assets acquired in the Mentergy, Glyphics and
Quisic acquisitions. In addition, it includes amortization of capitalized
software development costs. Amortization of technology for the three months
ended December 31, 2007 and 2006 was $53,000 and $68,000, respectively, a
decrease of $15,000 which is related to the full amortization in May 2007 of the
software technology from the Glyphics acquisition. The decrease related to the
full amortization of the Glyphics software is partially offset by amortization
of capitalized software development costs of $17,500 per month, or $52,500 per
quarter. We began amortizing the capitalized software development costs in July
2007.
Amortization of technology for the nine months ended December 31, 2007
and 2006 was $150,000 and $202,000, respectively, a decrease of $52,000 which is
related to the full amortization in May 2007 of the software technology from the
Glyphics acquisition.
GROSS PROFIT
As a result of the foregoing, our gross profit (total revenues
less total cost of revenues) decreased from $2.3 million for the three months
ended December 31, 2006 to $2.2 million for the three months ended December 31,
2007, a decrease of $172,000 or 7%. For the nine months ended December 31, 2007
gross profit was $7.6 million, an increase of $712,000 or 10% from the gross
profit of $6.9 million for the nine months ended December 31, 2006. 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 are either fixed
(amortization) or are associated only with audio conferencing and custom-content
revenue.
23
OPERATING EXPENSES
Total operating expenses consist of research and development expenses,
sales and marketing expenses and general and administrative expenses. We
incurred operating expenses of $2.4 million in the three months ended December
31, 2007, an increase of $563,000 or 31% from $1.8 million in the three months
ended December 31, 2006. This increase is due to increases in research and
development expense of $338,000, in sales and marketing expenses of $125,000 and
in general and administrative expenses of $100,000.
We incurred operating expenses of $7.3 million in the nine months ended
December 31, 2007, an increase of $1.9 million or 36% from $5.3 million in the
nine months ended December 31, 2006. This increase is due to increases in
research and development expense of $691,000, in sales and marketing expenses of
$1.1 million and in general and administrative expenses of $115,000.
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 December 31, 2007
and 2006 were $645,000 and $307,000, respectively, an increase of $338,000 or
110%. 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 conferencing 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. As a result,
salaries and benefits expenses increased by $247,000 as the salary and benefit
costs related to the 9 project were no longer being capitalized. An increase in
headcount to support our investment in innovation during the second and third
quarters of fiscal 2008 also contributed to the increase in salaries and
benefits. Office expense also increased by $45,000 as a result of an annual
quality assurance service contract accounted for as a prepaid asset that began
to be amortized in the fourth quarter of fiscal 2007, as well as other new
annual subscription software contracts during the period.
Research and development expenses for the nine months ended December
31, 2007 and 2006 were $1.6 million and $905,000, respectively, an increase of
$691,000 or 76%. As a result of the conclusion of the version 9 project as
described above and due to increased headcount, salaries and benefits expenses
increased by $436,000. Office expense also increased by $169,000 as a result of
an annual quality assurance service contract accounted for as a prepaid asset
that began to be amortized in the fourth quarter of fiscal 2007, as well as
other new annual subscription software contracts during the period. Taking into
account the release of version 9 in June and thus the completion of capitalizing
those particular software development costs and the increase in expense
anticipated from amortization of those costs in fiscal 2008, accompanied by an
increase in salary and benefit expense since a portion of that expense had been
capitalized in fiscal 2007, we expect cost of sales and research and development
costs to increase in fiscal 2008.
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 $1.0 million and $924,000 for the three months ended December 31,
2007 and 2006, respectively, an increase of $125,000 or 14%. The increase was a
result of planned increases in salaries expense of $165,000 associated with
increased headcount and compensation structure, in professional services of
$23,000, in indirect commissions and rebates of $18,000 and in travel expenses
of $25,000. The increases were partially offset by a decrease in advertising and
marketing expenses of $129,000 due to credits being issued by a lead generation
source that had overcharged us during the second quarter ending September 30,
2007.
Sales and marketing expenses were $3.7 million and $2.5 million for the
nine months ended December 31, 2007 and 2006, respectively, an increase of $1.1
million or 45%. The increase was a result of planned increases in expenses in
advertising and marketing of $206,000 related to lead generation and marketing
campaigns, in salaries expense of $585,000 associated with increased headcount
and compensation structure, in professional services of $108,000 and in indirect
commissions and rebates of $170,000. We expect sales and marketing expenses to
increase in amount as revenues increase, but expect the percentage of sales and
marketing expenses incurred in relation to total revenue to remain consistent.
24
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 fees. During the three months ended
December 31, 2007 and 2006, general and administrative expenses from continuing
operations were $688,000 and $588,000, respectively, an increase of $100,000 or
17%. The increase was a result of increased salaries and benefits of $12,000,
increased professional services of $12,000, increased accounting fees of
$29,000, increased legal fees of $11,000, increased board and investor relations
of $37,000, increased office expense of $13,000 and an increase in bad debt
expense of $19,000.
During the nine months ended December 31, 2007 and 2006, general and
administrative expenses from continuing operations were $2.0 million and $1.9
million, respectively, an increase of $115,000 or 6%. The increase is a result
of increased office expenses of $81,000 resulting from investments in annual
software subscriptions for a new accounting general ledger package, an equity
administration package and a human resources package, originally recorded as
prepaid assets and amortized to office expense, as well as increased board and
investor relations fees of $57,000, increased salaries and benefits of $30,000,
increased professional services of $29,000 and increased legal fees of $23,000.
The increase was partially offset by a decrease in other taxes of $24,000, a
decrease in bad debt expense of $33,000, and a decrease in insurance expense of
$46,000.
INCOME FROM OPERATIONS
For the three months ended December 31, 2007, we reported a loss from
operations of $216,000 as compared to income from operations of $519,000 for the
three months ended December 31, 2006, a decrease of $735,000, or 142%. For the
nine months ended December 31, 2007, we reported income from operations of
$382,000 as compared to income from operations of $1.6 million for the nine
months ended December 31, 2006, a decrease of $1.2 million, or 76%. We expect to
increase earnings from operations in fiscal 2008 by increasing revenues at a
faster rate than our increases in expenses.
INTEREST EXPENSE
Interest expense from continuing operations paid on outstanding debt
instruments for the three months ended December 31, 2007 and December 31, 2006
was $261,000 and $244,000, respectively, an increase of $17,000 or 7%. This
increase resulted from an increase in the interest rate payable on our Senior
Notes due 2010 ("Senior Notes") from 10% to 12% beginning in January 2007.
Non-cash interest expense, arising from the beneficial conversion feature of our
debt, for the three months ended December 31, 2007 and December 31, 2006 was
$81,000 and $150,000, respectively, a decrease of $69,000 or 46%. This decrease
resulted from an acceleration of the beneficial conversion feature in the third
quarter of fiscal 2007 based on the extension of the Senior Notes being
accounted for as a debt extinguishment.
Interest expense from continuing operations paid on outstanding debt
instruments for the nine months ended December 31, 2007 and December 31, 2006
was $794,000 and $741,000, respectively, an increase of $53,000 or 7%. This
increase resulted from an increase in the interest rate payable on our senior
unsecured notes due 2010 from 10% to 12% beginning in January 2007. Non-cash
interest expense, arising from the beneficial conversion feature of our debt,
for the nine months ended December 31, 2007 and December 31, 2006 was $243,000
and $451,000, respectively, a decrease of $208,000 or 46%. This decrease
resulted from an acceleration of the beneficial conversion feature in the third
quarter of fiscal 2007 based on the extension of the Senior Notes being
accounted for as a debt extinguishment.
We expect interest expense from continuing operations to increase
slightly in fiscal 2008 as the result of the increased interest rate accruing on
our Senior Notes due 2010 from 10% to 12% per annum (which began in January
2007) in connection with the agreement of the holders of those Senior Notes to
extend the Senior Notes' maturity from July 15, 2007 to July 15, 2010. We expect
non-cash interest expense resulting from the beneficial conversion feature of
our debt to remain consistent in fiscal 2008, because the amortization is
straight-line. However, should there be any debt conversions in fiscal 2008, the
interest will increase in order to accelerate the beneficial conversion feature
related to the proportion of debt converted.
25
INCOME TAX EXPENSE
We recorded tax expense of $21,000 and $64,000 for the three and nine
months ended December 31, 2007, respectively. The expense resulted from the
recognition of the deferred income tax liability related to the tax deductible
goodwill recognized on the Company's purchase of Quisic and LearnLinc in prior
periods. We have recorded a valuation allowance for our deferred tax assets due
to the lack of profitable operating history. We will continue to analyze the
deferred tax asset and the valuation allowance associated with that deferred tax
asset should we return to profitability. 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.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have generated cash from capital raising activities
and from cash flow from operations to fund our operations. In June 2006 we
raised $2.0 million of gross proceeds in a private placement of our common
stock. At December 31, 2007, we had a working capital surplus of $368,000
compared to a working capital surplus of $912,000 at March 31, 2007. The
decrease in working capital is a result of decreased sales in the quarter and
related accounts receivable in addition to a decrease in cash as we continue to
service our payables and debt. With a combination of increased sales and cost
containment in the fourth quarter of fiscal 2008, our goal is to increase our
working capital. Total current assets were $4.5 million at December 31, 2007
compared to $4.9 million at March 31, 2007. The decrease in total current assets
was due to a decrease of approximately $136,000 in our certificate of deposit, a
decrease of $115,000 in accounts receivable which resulted from decreased levels
of sales and a decrease in prepaid and other current assets of $174,000 due in
part to the timing of annual contracts that were prepaid in addition to a
decrease in the valuation of a warrant to one of our agents that is based on
meeting specific sales targets. In addition, cash and cash equivalents increased
slightly by $28,000. Our accounts receivable, net of allowance for doubtful
accounts were $2.4 million and $2.5 million at December 31, 2007 and March 31,
2007, respectively. The decrease in receivables is consistent with a decrease in
revenues quarter on quarter. The aging and assessed collectability of
receivables has remained consistent at December 31, 2007 when compared to March
31, 2007. Total current liabilities were $4.1 million at December 31, 2007
compared to $4.0 million at March 31, 2007. Contributing to the increase in
current liabilities was an $89,000 increase in deferred revenue from $1.5
million at March 31, 2007 to $1.6 million at December 31, 2007 as the result of
increased license sales and renewals based on sustaining our customer base.
Accounts payable trade increased by $101,000 from $1.2 million at March 31, 2007
to $1.3 million at December 31, 2007, which is consistent with the increase in
operating expenses for the period and the timing of payment of those expenses.
Accrued liabilities decreased by $81,000 from $1.1 million at March 31, 2007 to
$1.0 million at December 31, 2007, primarily as a result of amounts payable to
third party providers and subcontractors decreasing by $81,000. In addition,
accrued sales tax decreased by $59,000 as a result of interest on taxes paid in
the three months ending December 31, 2007 and accrued interest decreased
slightly by $22,000. These decreases were partially offset by an increase in
accrued salaries and benefits of $86,000 resulting from increased headcount at
December 31, 2007 as compared to March 31, 2007.
CONTRACTUAL OBLIGATIONS
The following schedule details all of our indebtedness and the required
payments related to such obligations at December 31, 2007 (IN THOUSANDS):
DUE IN DUE IN YEARS
LESS THAN DUE IN DUE IN YEAR FOUR AND DUE AFTER
TOTAL ONE YEAR YEAR TWO THREE FIVE FIVE YEARS
--------------------------------------------------------------------------------------
Long term debt*............... $ 8,441 $ 95 $ 77 $ 3,046 $ 5,223 $ --
Capital lease obligations*.... 404 117 132 91 64 --
Interest expense.............. 3,648 1,034 1,011 827 776 --
Operating lease obligations... 1,724 559 377 363 425 --
Base salary commitments
under employment
agreements................. 897 482 415 -- -- --
Other......................... 10 10 -- -- -- --
--------------------------------------------------------------------------------------
Total contractual obligations. $ 15,124 $ 2,297 $ 2,012 $ 4,327 $ 6,488 $ --
======================================================================================
|
*Excludes interest.
26
We plan to continue to focus on managing overhead while increasing
revenue in an effort to return to modest profitability (or modest loss) and
importantly sustain positive cash flow. We believe that we will have sufficient
working capital and liquidity to meet our operating needs, and to satisfy our
contractual obligations in the next 12 months without the need to raise
additional capital.
RESULTS OF DISCONTINUED OPERATIONS
Effective January 1, 2004, we discontinued our legacy practice
management services segment. Results of operations from this segment are
presented as discontinued for the three months and nine months ended December
31, 2007 and 2006 in accordance with SFAS 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OF DISPOSAL ACTIVITIES. Income from discontinued operations was $0 and
$10,000 for the nine months ended December 31, 2007 and 2006, respectively. We
do not expect to recognize further income or incur further expenses related to
our discontinued operations.
CASH FLOWS
Cash provided by operating activities was $515,000 for the nine months
ended December 31, 2007 and $443,000 for the nine months ended December 31,
2006. In the nine months ended December 31, 2007, cash provided by operating
activities was primarily attributable to non-cash expenses of depreciation and
amortization of $601,000, non-cash accretion of debt discount to interest
expense of $151,000, non-cash stock option expense of $136,000, non-cash warrant
expense of $21,000, provision for bad debts of $37,000, a decrease in prepaid
expenses and other current assets of $70,000, deferred income tax expense of
$64,000, an increase in accounts payable and accrued expenses of $20,000, an
increase of $98,000 in deferred revenue and a decrease in accounts receivable of
$77,000. These items were partially offset by a loss from continuing operations
of $740,000 and a gain on disposal of fixed assets of $20,000.
Cash provided by operating activities from continuing operations was
$443,000 during the nine months ended December 31, 2006. Cash provided by
operating activities for the nine months ending December 31, 2006 was primarily
attributable to non-cash expenses and revenues of $1.4 million, net income from
continuing operations of $245,000 and increases in deferred revenue of $166,000.
These items were partially offset by decreases in accounts payable and accrued
expenses of $1.0 million, increases in accounts receivable of $48,000 and
increases in prepaid expenses and other assets of $310,000.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash used in investing activities was $259,000, and $1.4 million in the
nine months ended December 31, 2007 and 2006, respectively. Cash used in
investing activities during the nine months ended December 31, 2007 was
primarily due to $157,000 in capital expenditures and $264,000 in capitalized
software development costs. These items were partially offset by a $14,000
repayment of a note receivable, proceeds from the sale of fixed assets of
$12,000 and $136,000 decrease in the certificate of deposit.
Cash used in investing activities during the nine months ended December
31, 2006 was primarily due to an investment in a 7-month certificate of deposit
of $768,000, capital expenditures of $393,000 and capitalization of software
development costs of $295,000. The proceeds from the sale of fixed assets of
$3,000 and the repayment on notes receivable of $14,000 provided cash during the
nine months ended December 31, 2006.
CASH PROVIDED BY FINANCING ACTIVITIES
Cash used in financing activities was $228,000 during the nine months
ended December 31, 2007. Cash provided by financing activities was $1.3 million
during the nine months ended December 31, 2006. Cash used in financing
activities in the nine months ended December 31, 2007 was attributable to
payment of Series A and B preferred stock dividends of $101,000, repayment of
long-term debt of $101,000 and repayment of capital lease liabilities of
$48,000. These items were partially offset by proceeds from the exercise of
stock options of $22,000.
Cash provided by financing activities for the nine months ended
December 31, 2006 was attributable to $2.0 million in gross proceeds from the
issuance of common stock in a private placement and additional proceeds from the
exercise of stock options of $5,000, partially offset by stock issuance expenses
of $258,000, payment of financing costs of $101,000, repayment of $186,000 in
long-term debt and capital leases and payment of $118,000 in preferred
dividends.
27
OUTSTANDING INDEBTEDNESS AND PREFERRED STOCK
We currently have outstanding unsecured subordinated convertible notes
with a principal balance of $5.1 million due March 29, 2012, Senior Notes with a
principal balance of $2.96 million due July 15, 2010, 105,000 issued and
outstanding shares of Series A Convertible Preferred Stock and 59,500 issued and
outstanding shares of Series B Convertible Preferred Stock. All of the foregoing
securities were issued in connection with the Company's capital raising
activities. A detailed discussion of the terms of these securities and the
impact of issuance of and certain events surrounding these securities on our
financial statements follows.
Outstanding Indebtedness
In March 2002, we completed a private placement offering (the
"Convertible Note Offering") that provided 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 Note
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. As the carrying value of the notes is less than the
conversion value, a beneficial conversion feature of $1,132,000 was calculated
and recorded as an additional discount to the notes and is being amortized to
interest expense over the ten 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 year ended March 31, 2007 or for the nine months ended December 31,
2007.
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 due at
maturity 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 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 common stock issued in
the 2004 Senior Note Offering was registered with the SEC pursuant to a resale
prospectus dated August 2, 2005. Effective August 1, 2005, holders with a
principal balance 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 year ended March 31,
2007 or for the nine months ended December 31, 2007. 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.
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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, if all converted. The warrants were immediately exercisable at a
price of $1.50 per share and expired on September 16, 2006. We pay an 8%
dividend 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
year 2005 and 2006, holders of 35,000 shares converted to 700,000 shares of
common stock. During the nine months ended December 31, 2007, holders of 10,000
shares converted to 200,000 shares of common stock. 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 December 31, 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. 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 expire on December 31, 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. 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 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 condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these condensed consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. The more
significant areas requiring use of estimates relate to revenue recognition,
accounts receivable and notes receivable valuation reserves, realizability of
intangible assets, realizability of deferred income tax assets and the
evaluation of contingencies and litigation. Management bases its estimates on
historical experience and on various other assumptions that are believed to be
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.
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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, 2007 as filed with the
SEC.
