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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
______________
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER 1-13725
_____________
iLINC COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0545043
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2999 NORTH 44TH STREET, SUITE 650, PHOENIX, ARIZONA 85018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(602) 952-1200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
EDT LEARNING, INC.
(FORMER NAME - CHANGED SINCE LAST REPORT)
______________
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes ( ) No (X)
The number of shares of Common Stock of the Registrant, par value $.001
per share, outstanding at February 5, 2004 was 17,665,647 net of shares held in
treasury.
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FORM 10-Q REPORT INDEX
PART I--FINANCIAL INFORMATION PAGE
- ----------------------------- ----
Item 1--Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2003
(Unaudited) and March 31, 2003.........................................3
Unaudited Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended December 31, 2003 and 2002.................4
Unaudited Condensed Consolidated Statement of Changes in Shareholders'
Equity for the Nine Months Ended December 31, 2003.....................5
Unaudited Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended December 31, 2003 and December 31, 2002..............6
Notes to Unaudited Condensed Consolidated Financial Statements.........7
Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations................................17
Item 3--Quantitative and Qualitative Disclosures about Market Risk.........30
Item 4--Controls and Procedures............................................31
PART II--OTHER INFORMATION
Item 1--Legal Proceedings..................................................31
Item 2--Change in Securities and Use of Proceeds...........................32
Item 3--Defaults of Senior Securities......................................32
Item 4--Submission of Matters to a Vote of Security Holders................32
Item 5--Other Information..................................................32
Item 6--Exhibits and Reports on Form 8-K...................................33
Signatures.................................................................35
Certifications.............................................................36
A copy of the annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those reports are available
for free on the Company's website, www.iLinc.com, as soon as reasonably
practical after such material is electronically filed with the Securities and
Exchange Commission.
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
iLINC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
2003 MARCH 31,
(UNAUDITED) 2003 (A)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 227 $ 409
Accounts receivable, net of allowance for doubtful accounts of
$58 and $425, respectively ....................................... 1,656 675
Notes receivable, net of allowance for doubtful accounts of
$90 and $553, respectively ....................................... 252 270
Prepaid and other current assets ................................... 123 33
------------ ------------
Total current assets ............................................. 2,258 1,387
Property and equipment, net ........................................... 397 485
Goodwill .............................................................. 9,050 8,823
Intangible assets, net ................................................ 1,087 1,346
Notes receivable, net of allowance for doubtful accounts of $173
and $607, respectively ........................................... 107 326
Other assets ......................................................... 55 56
------------ ------------
Total assets ..................................................... $ 12,954 $ 12,423
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt .................................. $ 329 $ 728
Accounts payable and accrued liabilities ........................... 2,031 2,040
Current portion of capital lease liabilities ....................... 348 462
Current portion of deferred revenue ................................ 975 817
------------ ------------
Total current liabilities ........................................ 3,683 4,047
Long term debt, less current maturities, net of discount of
$1,827 and $2,038, respectively .................................. 5,166 5,863
Capital lease liabilities, less current maturities .................... 20 193
------------ ------------
Total liabilities ................................................ 8,869 10,103
------------ ------------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Convertible preferred stock, $.001 par value 10,000,000 shares
authorized, 150,000 and 0 issued, respectively (aggregate
liquidation preference $1,500,000) ............................... -- --
Common stock, $.001 par value, 100,000,000 shares authorized,
19,073,059 and 17,018,184 issued, respectively ................... 19 17
Additional paid-in capital ......................................... 35,976 32,854
Accumulated deficit ................................................ (30,502) (29,300)
Less: 1,432,412 and 1,244,713 treasury shares at cost, respectively (1,408) (1,251)
------------ ------------
Total shareholders' equity ....................................... 4,085 2,320
------------ ------------
Total liabilities and shareholders' equity ....................... $ 12,954 $ 12,423
============ ============
(A) Derived from the audited consolidated financial statements as of March
31, 2003.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
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,
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues
Licenses ........................................... $ 568 $ 306 $ 1,756 $ 359
Service and maintenance ............................ 1,011 769 2,559 2,988
--------- --------- --------- ---------
Total e-Learning revenue ....................... 1,579 1,075 4,315 3,347
Dental contract revenue ............................ 12 642 128 2,635
--------- --------- --------- ---------
Total revenues ................................. 1,591 1,717 4,443 5,982
--------- --------- --------- ---------
Operating expenses
Research and development ........................... 741 786 1,950 2,596
Sales and marketing ................................ 460 427 1,171 1,278
General and administrative ......................... 358 699 1,371 2,162
Depreciation and amortization ...................... 97 464 300 1,397
--------- --------- --------- ---------
Total operating expenses ....................... 1,656 2,376 4,792 7,433
--------- --------- --------- ---------
Loss from operations .................................. (65) (659) (349) (1,451)
Interest expense ................................... (343) (415) (1,003) (1,239)
Interest income and other .......................... 10 25 31 117
Gain on termination of service agreements
with Affiliated Practices ..................... 9 82 23 897
Gain on settlement of debt and other
Obligations ................................... 58 -- 379 --
Gain on foreign currency translation ............... 9 -- 9 --
--------- --------- --------- ---------
Loss before income taxes ............................. (322) (967) (910) (1,676)
Income taxes ....................................... -- -- -- --
--------- --------- --------- ---------
Net loss .............................................. (322) (967) (910) (1,676)
Preferred stock dividends ............................. (30) -- (45) --
Imputed preferred stock dividends ..................... -- -- (247) --
--------- --------- --------- ---------
Loss available to common shareholders ................. $ (352) $ (967) $ (1,202) $ (1,676)
========= ========= ========= =========
Net loss per share - basic and diluted ................ $ (0.02) $ (0.06) $ (0.07) $ (0.11)
========= ========= ========= =========
Number of shares used in calculation of loss per share,
basic and diluted ................................. 17,304 16,638 16,376 15,927
========= ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
ILINC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
-------------------- -------------------- PAID-IN ACCUMULATED TREASURY SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY
--------- --------- --------- --------- --------- --------- --------- ---------
Balances, April 1, 2003 ......... -- $ -- 17,018 $ 17 $ 32,854 $(29,300) $ (1,251) $ 2,320
Issuances of common stock ....... -- -- 25 -- 14 -- -- 14
Repricing of warrants
Vesting of restricted stock grant -- -- -- -- 12 -- -- 12
Vesting of restricted
stock grant ................... -- -- -- -- 30 -- -- 30
Issuance of convertible
preferred stock in
private placement (net
of expenses of $212) .......... 150 -- -- -- 1,288 -- -- 1,288
Convertible subordinated
notes converted to
common stock .................. -- -- 1,572 2 1,099 -- -- 1,101
Convertible redeemable
subordinated notes
converted to common stock ..... -- -- 125 -- 125 -- -- 125
Accrued liability converted
to common stock ............... -- -- 333 -- 300 -- -- 300
Preferred stock dividends ....... -- -- -- -- -- (45) -- (45)
Warrant grant ................... -- -- -- -- 7 -- -- 7
Dental terminations ............. -- -- -- -- -- -- (157) (157)
Imputed preferred stock
dividends ..................... -- -- -- 247 (247) -- --
Net loss ........................ -- -- -- -- -- (910) -- (910)
--------- --------- --------- --------- --------- --------- --------- ---------
Balances, December 31, 2003 ..... 150 $ -- 19,073 $ 19 $ 35,976 $(30,502) $ (1,408) $ 4,085
========= ========= ========= ========= ========= ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
iLINC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
DECEMBER 31,
-------------------
2003 2002
-------- --------
Net cash used in operating activities .................................................. $(1,113) $(1,578)
-------- --------
Cash flows from investing activities:
Repayments of notes receivable ...................................................... 334 444
Proceeds from practice terminations ................................................. 91 1,054
Acquisition, royalty earnout ........................................................ (227) --
Capital expenditures ................................................................ (45) (89)
Proceeds from sale of equipment ..................................................... 4 --
Issuance of notes receivable ........................................................ -- (85)
-------- --------
Net cash provided by investing activities ......................................... 157 1,324
-------- --------
Cash flows from financing activities:
Proceeds from issuance of convertible preferred stock ............................... 1,500 --
Repayment of long-term debt ......................................................... (291) (485)
Repayment of capital lease liabilities .............................................. (178) (350)
Proceeds from stock option exercise ................................................. -- 19
Convertible preferred stock issuance costs .......................................... (212) --
Preferred dividends ................................................................. (45) --
-------- --------
Net cash used in financing activities ............................................. 774 (816)
-------- --------
Net change in cash and cash equivalents ................................................ (182) (1,070)
Cash and cash equivalents, beginning of period ......................................... 409 1,498
-------- --------
Cash and cash equivalents, end of period ............................................... $ 227 $ 428
======== ========
Non cash investing and financing activities:
Subordinated notes, Series A conversion into common shares .......................... $ 849 $ --
Accrued liability conversion into common shares ..................................... 300 --
Convertible redeemable subordinated notes converted into common shares .............. 125 --
Issuance of common stock for acquisitions ........................................... -- 2,307
Convertible subordinated notes offset against receivables from affiliated practices . -- 307
Issuance of debt for acquisition .................................................... -- 500
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE 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., ("We",
"Us", "Our" or the "Company") (formerly EDT Learning, Inc.) is a leading
provider of Web conferencing, virtual classroom and Web collaboration software
and services.
We changed our name from EDT Learning, Inc. to "iLinc Communications,
Inc." to reflect not only the breadth of our Web conferencing products and
services but also to reflect the integration of audio conferencing, video
conferencing, and voice-over-IP technologies. The name change was approved by
our stockholders at a special meeting of stockholders on February 5, 2004.
We provide Web collaboration and Web conferencing software that includes
one of the most comprehensive set of features and functionality in the Web
conferencing industry. Our name change is reflective of our focus in terms of
research, development, sales and marketing on our award-winning suite of Web
conferencing and Web collaboration software known as the iLinc(TM) Suite. The
iLinc suite includes: LearnLinc(TM) - permits live instructor-led training and
education over the Internet to remote students replicating the instructor-led
environment; MeetingLinc(TM) - facilitates more effective and economical
communication through online meetings using voice-over-IP technology to avoid
the expense of travel and long-distance charges; ConferenceLinc(TM) - delivers
your message more consistently in a one-to-many format replicating
professionally managed conferencing events; and SupportLinc(TM) - gives customer
service organizations the ability to provide remote, hands-on support for
products, systems, or software applications. Our iLinc Web collaboration
software suite is available in both an ASP and license purchase model. Since its
beginnings in 1994, LearnLinc and MeetingLinc have been installed and
operational in corporate, government, and educational organizations in the
United States and Internationally. LearnLinc(TM), the flagship of EDT Learning's
four-product iLinc suite, won first place at the Synchronous e-Learning Shootout
held at Online Learning's Conference in the fall of 2002, winning by a vote of
training professionals over such other notable companies as WebEx, PlaceWare
(now Microsoft Live), and Centra. Our iLinc suite of products boasts one of the
most comprehensive feature lists in the industry that includes the use of
voice-over-IP and two-way live video.
While we are focused on our iLinc suite of products, we also continue to
provide various e-Learning solutions to corporate, government, and education
clients alike. Those products include our online collaboration and development
software products that include TestLinc(TM), and i-Canvas(TM) as well as
providing custom content services. We also market our 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.
So that one may better understand historical references in the
consolidated financial statements and elsewhere, it is important to note that we
began in March of 1998 as a dental practice management company and our formation
included the simultaneous rollup of dental practices ("Affiliated Practices")
and an initial public offering (the "IPO"). Our initial goals were to provide
training and practice enhancement services to the Affiliated Practices spread
over 31 states using the Internet (see references to the "Dental Segment").
However, we shifted our business model and focus away from the dental practice
management industry and toward the overall e-Learning sector in the summer of
2001, and accordingly as of December 31, 2003, all of the contracts with the
Affiliated Practices have expired.
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. We believe that the presentation and disclosures
made herein are adequate to make the information not misleading, but do not
purport to be a complete presentation inasmuch as all note disclosures required
by generally accepted accounting principles are not included. In the opinion of
management, the unaudited condensed consolidated financial statements reflect
all elimination entries and normal recurring adjustments that are necessary for
a fair statement of the results for the interim periods ended December 31, 2003
and 2002.
7
Fiscal operating results for interim periods are not necessarily
indicative of the results for full years. It is suggested that these unaudited
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements of the Company and related notes thereto, and
management's discussion and analysis related thereto, all of which are included
in the Company's annual report on Form 10-K as of and for the year ended March
31, 2003, as filed with the SEC.
The accompanying unaudited condensed consolidated financial statements
have been prepared on a basis which assumes that the Company will continue as a
going concern and which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of business.
The Company changed its business model from a dental practice management company
to an e-Learning company in the summer of 2001. Furthermore, we acquired the
iLinc software and related assets in the fall of 2002, and therefore, the
Company has a limited operating history in the Web collaboration and Web
conferencing business.
The Company had a working capital deficiency, and incurred an operating
loss and had negative cash flows from operations during the three and nine
months ended December 31, 2003 and during fiscal 2003. While the service
agreements with Affiliated Practices had provided revenues and corresponding
cash flows, all of those service agreements from our legacy business have
terminated and therefore we will not receive any further revenues and cash flow
from our dental segment. These matters, among others, including our limited
operating history as a provider of Web conferencing and Web collaboration
software, raise substantial doubt about the Company's ability to continue as a
going concern. Our plan with regard to these matters includes the continued
development, marketing and licensing of our iLinc suite of products and services
through both internal sales efforts and through external channel partnerships.
We plan to expand where appropriate with external growth by acquisition, with
those acquisitions including providers of audio conferencing as well as Web
conferencing products and services. Although we continue to pursue these plans,
there is no assurance that the Company will be successful in obtaining
sufficient revenues from its Web collaboration and e-Learning products and
services to provide adequate cash flows to sustain our operations. Our
continuation as a Company is therefore dependent on our ability to raise
additional equity or debt capital, to continue to increase sales and revenues,
to generate positive cash flows from operations and ultimately to achieve
profitability. The unaudited condensed consolidated financial statements do not
include any adjustments related to the recoverability of assets and
classification of liabilities that might result from the outcome of this
uncertainty.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
We have not materially added to or changed our significant accounting
policies since March 31, 2003. For a description of these policies, refer to
Note 3 of the consolidated financial statements in the Company's annual report
on Form 10-K as of and for the year ended March 31, 2003.
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 relate to
revenue recognition, accounts receivable and notes receivable valuation
reserves, realizability of intangible assets, realizability of income tax assets
and the evaluation of contingencies and litigation. We base our estimates on our
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances given. 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.
RECLASSIFICATIONS
Certain prior year balances in the unaudited condensed consolidated
financial statements have been reclassified to conform to the current year
presentation.
8
STOCK-BASED COMPENSATION
We have adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
for disclosure purposes. Under SFAS No. 123, and we measure compensation expense
for our stock-based employee compensation plan using the intrinsic value method
prescribed in Accounting Principles Board ("APB") No. 25, "Accounting for Stock
Issued to Employees" and its related interpretations. We provide pro forma
disclosure of the effect on net income or loss as if the fair value based method
prescribed in SFAS No. 123 has been applied in measuring compensation expense.
The fair value for options granted was estimated at the date of grant using a
Black-Scholes option-pricing model with the following weighted-average
assumptions for the three and nine months ended December 31, 2003 and 2002.
THREE AND NINE MONTHS
ENDED DECEMBER 31,
-----------------------------
2003 2002
------------- -------------
Risk free interest rate 3.88% - 4.45% 4.17%
Dividend yield 0% 0%
Volatility factors of the expected market
price of the Company's common stock 70% - 139% 90%
Expected life of options 10 years 10 years
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
-------- -------- -------- --------
Loss, available to common shareholders, as .... $ (352) $ (967) $(1,202) $(1,676)
reported
Plus: Stock based employee compensation expense
included in reported net income (loss) ..... -- -- -- --
Less: Total stock based employee compensation
expense determined using fair value based
method ..................................... (41) (46) (127) (263)
-------- -------- -------- --------
Pro forma net loss ............................ $ (393) $(1,013) $(1,329) $(1,939)
======== ======== ======== ========
Net loss per share:
Basic and diluted - as reported ............... $ (0.02) $ (0.06) $ (0.07) $ (0.11)
======== ======== ======== ========
Basic and diluted - pro forma ................. $ (0.02) $ (0.06) $ (0.08) $ (0.12)
======== ======== ======== ========
RECENT ACCOUNTING PRONOUNCEMENTS
On December 18, 2003 the SEC issued Staff Accounting Bulletin No. 104,
REVENUE RECOGNITION ("SAB 104"), which supersedes SAB 101, Revenue Recognition
in Financial Statements. SAB 104's primary purpose is to rescind accounting
guidance contained in SAB 101 related to multiple element revenue arrangements,
which was superseded as a result of the issuance of EITF 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables." The adoption of SAB 104 is not
expected to have a material impact the Company's consolidated financial position
or results of operations.
3. EARNINGS PER SHARE
Basic earnings per share are computed by dividing net loss available to
common stockholders by the weighted-average number of common shares outstanding
for the reporting period. Diluted earnings per share are computed similar to
basic earnings per share while giving effect to all potential dilutive common
stock equivalents that were outstanding during the period. For the three and
nine months ended December 31, 2003 and 2002, options and warrants to purchase
9,629,769 and 8,332,227 shares of common stock were excluded from the
computation of diluted loss per share because of their anti-dilutive effect.
Furthermore, a restricted stock grant of 450,000 shares and 3,000,000 shares
issuable upon conversion of the Company's convertible preferred stock have been
excluded from the diluted loss per share calculations.
9
4. SEGMENT INFORMATION
Because we began as a dental practice management company and then shifted
the focus of the business to Web collaboration and e-Learning, during the three
and nine months ended December 31, 2003 and 2002, the Company had two reportable
segments, e-Learning and dental practice management. The dental practice
management segment includes revenues that had been derived from service
contracts and operating expenses related to the delivery of the dental services
and other non-operating expenses. While historically the revenues and associated
expenses were meaningful, as of December 31, 2003, all of the contracts with the
Affiliated Practices have expired. The e-Learning segment that is the focus of
our efforts, includes all revenues and operating expenses from our e-Learning
products and services as well as revenues and operating expenses related to the
development and sale of our iLinc suite of Web conferencing, virtual classroom
and Web collaboration products. There are no intersegment revenues. Summary
financial information of the segments is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues:
Licenses ..................... $ 568 $ 306 $ 1,756 $ 359
Service and maintenance ...... 1,011 769 2,559 2,988
-------- -------- -------- --------
Total e-Learning revenues . 1,579 1,075 4,315 3,347
Dental practice management ... 12 642 128 2,635
-------- -------- -------- --------
Total revenues ........... $ 1,591 $ 1,717 $ 4,443 $ 5,982
======== ======== ======== ========
Operating expenses:
e-Learning ................... $ 1,614 $ 2,350 $ 4,637 $ 7,204
Dental practice management ... 42 26 155 229
-------- -------- -------- --------
Total operating expenses . $ 1,656 $ 2,376 $ 4,792 $ 7,433
======== ======== ======== ========
Income (loss) from operations:
e-Learning ................... $ (35) $(1,276) $ (322) $(3,857)
Dental practice management ... (30) 617 (27) 2,406
-------- -------- -------- --------
Total loss from operations $ (65) $ (659) $ (349) $(1,451)
======== ======== ======== ========
Capital expenditures:
e-Learning ................... $ 45 $ 6 $ 45 $ 89
Dental practice management ... -- -- -- --
-------- -------- -------- --------
Total capital expenditures $ 45 $ 6 $ 45 $ 89
======== ======== ======== ========
DECEMBER 31, 2003 MARCH 31, 2003
----------------- -----------------
Total assets:
e-Learning..................................... $ 11,986 $ 11,081
Dental practice management..................... 968 1,342
----------------- -----------------
Total assets................................. $ 12,954 $ 12,423
================= =================
5. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill consisted of the following:
DECEMBER 31, 2003 MARCH 31, 2003
----------------- -----------------
(IN THOUSANDS)
Goodwill......................................... $ 9,050 $ 8,823
================= =================
10
The changes in the carrying amount of the goodwill for the nine months
ended December 31, 2003 (in thousands):
LEARNING
SEGMENT
----------
Balance, March 31, 2003................................................ $ 8,823
LearnLinc royalty earnout (see Note 10)............................. 227
----------
Balance, December 31, 2003............................................. $ 9,050
==========
Intangible assets consisted of the following (in thousands):
DECEMBER 31, 2003
------------------------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET
------------ ------------ ------------
AMORTIZED INTANGIBLE ASSETS:
Deferred offering costs.............. $ 839 $ (147) $ 692
Purchase software.................... 675 (287) 388
Customer relationship................ 32 (25) 7
------------ ------------ ------------
$ 1,546 $ (459) $ 1,087
============ ============ ============
MARCH 31, 2003
------------------------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET
------------ ------------ ------------
AMORTIZED INTANGIBLE ASSETS:
Deferred offering costs.............. $ 1,020 $ (249) $ 771
Purchase software.................... 675 (118) 557
Customer relationship................ 32 (14) 18
------------ ------------ ------------
$ 1,727 $ (381) $ 1,346
============ ============ ============
6. ACCOUNT PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following:
DECEMBER 31, MARCH 31,
2003 2003
------------ ------------
(IN THOUSANDS)
Accounts payable trade........................................ $ 842 $ 681
Accrued state sales tax....................................... 50 384
Accrued interest.............................................. 221 310
Amount payable to certain Quisic shareholders (*)............. -- 150
Amounts related to acquisitions............................... 40 73
Accrued salaries and related benefits......................... 199 160
Amount payable to third party providers....................... 441 37
Deferred rent liability....................................... 87 89
Lease termination liability related to acquisitions........... 86 101
Other......................................................... 65 55
------------ ------------
Total accounts payable and accrued liabilities............. $ 2,031 $ 2,040
============ ============
(*) As of December 31, 2003, the Company had collected $300,000 of funds
that were ultimately due to certain shareholders of Quisic
Corporation. On December 31, 2003, those Quisic shareholders agreed
to convert this liability into 333,333 shares of our common stock at
the then market price of $0.90 per share.
11
7. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31, MARCH 31,
2003 2003
------------ ------------
(IN THOUSANDS)
Convertible redeemable subordinated notes.................. $ 5,650 $ 5,775
Subordinated notes, Series A............................... -- 849
Subordinated promissory notes.............................. 1,068 1,072
Shareholders' notes payable................................ 322 430
Notes payable.............................................. 282 503
------------ ------------
7,322 8,629
Less: current portion of long-term debt................. (329) (728)
Discount...................................... (914) (1,019)
Beneficial conversion feature................. (913) (1,019)
------------ ------------
Long-term debt............................................. $ 5,166 $ 5,863
============ ============
In October 2001, the Company issued $1.1 million of subordinated
promissory notes to the shareholders of Learning-Edge, Inc. under the terms of
the acquisition agreement (the "Learning-Edge Notes"). The Learning-Edge Notes
bear interest at rates ranging from at 7.5% to 9.0% and are due in two equal
installments on April 5, 2005 and on October 1, 2005, respectively. The terms of
the Learning-Edge Notes provided that if the Company raises additional capital
equal to or in excess of $3 million, 25% of the principal of the Learning-Edge
Notes is to be repaid. For each $500,000 raised above $3 million, the repayment
percentage increases by 15%. If more than $5 million is raised, 100% of the
principal of the Learning-Edge Notes is to be repaid. The holders of the
Learning-Edge Notes waived these accelerated payment provisions in relation to
the Convertible Note Offering.
In connection with the Company's IPO in March of 1998, the Company issued
$468,000 of notes (the "IPO Notes") to certain shareholders who had provided
capital prior to the IPO. Originally, interest accrued at the rate of 6% with
the entire amount due on March 30, 2003. Many of the IPO Note holders agreed to
have the accrued interest added to the principal balance and extended the
maturity date to April 1, 2005 in exchange for quarterly payments of interest
and an increase in the interest rate to 10%. Several of the holders agreed to
accept a discounted sum in full payment of their IPO Note. The new principal
balance on these renewed and extended IPO Notes is $278,000 as of December 31,
2003. Several of the holders could not be located and therefore the principal
portion related to those holders of $44,000 is currently past due.
The Company had issued in 1998 as a part of the consideration due to
Affiliated Practices certain subordinated promissory notes (the "Series A
Notes"). On September 19, 2003, all of the outstanding principal balance of the
Series A Notes, in the sum of $849,000, were converted into 1,572,222 shares of
the Company's common stock. A conversion price of $0.54 per share was used as
the fair price per share which was the preceding twenty trading day average
closing price of the Company's common stock. As a result of that conversion, the
Company recorded a $252,000 charge associated with the conversion of the Series
A Notes due to a difference in the closing price of the Company's common stock
on the day of conversion and the twenty trading day average closing price.
Holders of the Series A Notes included James Powers, who had received a $253,000
Series A Note as a part of the consideration paid to him from his own Affiliated
Dental Practice transaction in 1998.
In March 2002, the Company completed a private placement offering (the
"Convertible Note Offering") raising capital of $5,775,000 that was used to
extinguish an existing line of credit. Under the terms of the Convertible Note
Offering, the Company 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 Note may convert the
principal into shares of the Company's common stock at the fixed price of $1.00
per share. The Company 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 the Company's common stock exceeds $3.00 per share. The
notes are subordinated to any present or future senior indebtedness. The
12
placement agent received a commission of $577,500 plus $173,250 as a
non-accountable expense reimbursement and received a warrant to purchase units
on the same basis as other investors representing ten percent of the gross
proceeds at a price of 110% of that paid by investors. During the three months
ended December 31, 2003, holders with a principal balance totaling $125,000
converted their notes into common shares of the Company. As a part of the
Convertible Note Offering, the Company also issued warrants to purchase
5,775,000 shares of the Company's common stock for an exercise price of $3.00
per share. The Company may force redemption of the warrants if at any time the
20 trading day average closing price of the Company's common stock exceeds $5.50
per share, and the warrants expire on March 29, 2005. The fair value of the
warrants was estimated using a Black-Scholes pricing model with the following
assumptions: contractual and expected life of three years, volatility of 75%,
dividend yield of 0%, and a risk-free rate of 3.87%. A discount to the
Convertible Notes of $1,132,000 was recorded using this value, which is being
amortized to interest expense over the ten (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 (10) year term of the Convertible Notes. Upon conversion, any remaining
discount associated with the beneficial conversion feature will be expensed in
full at the time of conversion.
In connection with the acquisition of certain assets from Mentergy, Inc.
(and its wholly owned subsidiary LearnLinc Corporation), the Company issued
among other consideration a secured promissory note with a principal balance of
$250,000 that was due on December 13, 2003 (the "Mentergy Note"). By agreement
with Mentergy and its assignees, the Company paid $50,000 in principal amount on
the note during December of 2003, leaving $200,000 of the remaining balance past
due. Subsequent to December 31, 2003, the remaining balance of $200,000 plus
accrued interest has been paid in full and Mentergy has released its security
interest in the LearnLinc Assets.
As of December 31, 2003, as discussed above the Company was past due on
the Mentergy Note, which has now been paid, and on a portion of the IPO Notes in
the total amount of $244,000. The aggregate maturities of long-term debt
excluding capital leases for each of the next five calendar years subsequent to
December 31, 2003 were as follows (in thousands):
Amount Due in 2004 (includes the $244,000 discussed above)........$ 329
Amount Due in 2005................................................ 1,343
Amount Due in 2006................................................ --
Amount Due in 2007................................................ --
Amount Due in 2008................................................ --
Amount Due in 2009 and Thereafter................................. 5,650
---------
Total Due: $ 7,322
=========
8. STOCK OPTION PLANS AND WARRANTS
The Company grants stock options under its 1997 Stock Compensation Plan
(the "Plan"). The Company recognizes stock-based compensation issued to
employees at the intrinsic value between the exercise price of options granted
and the fair value of stock for which the options may be exercised. However, pro
forma disclosures as if the Company recognized stock-based compensation at the
fair value of the options themselves are presented below.
Under the Plan, the Company is authorized to issue up to 3,500,000 shares
of its Common Stock to officers and employees in the form of stock options and
restricted stock grants.
As of December 31, 2003, there were options granted to purchase 1,982,105
shares of the Company's common stock at various prices. The Compensation
Committee administers the Plan. These stock options have contractual terms of 10
years and have an exercise price usually equal to the fair market value of the
stock on the date of the grant. The options vest at varying rates over a one to
five year period.
13
Following is a summary of the stock options that were granted, exercised,
forfeited or expired under the plan as of December 31, 2003:
NUMBER OF WEIGHTED WEIGHTED
SHARES AVERAGE AVERAGE
UNDERLYING EXERCISE FAIR-VALUE OF
OPTIONS PRICES OPTIONS GRANTED
------------ ------------ ------------
Outstanding at March 31, 2003................. 1,835,865 $ 1.82
Granted....................................... 322,500 0.49 $ 0.37
=============
Exercised..................................... -- --
Forfeited..................................... (176,260) 2.78
Expired....................................... -- --
------------ ------------
Outstanding at December 31, 2003.............. 1,982,105 $ 1.68
============ ============
The following table summarizes information about stock options that were
outstanding at December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ---------------------------
WEIGHTED WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE
SHARES PRICE LIFE (YEARS) SHARES PRICE
------------ ------------ ------------ ------------ ------------
(SHARE DATA IN THOUSANDS)
$0.01 - $0.99 1,291,706 $ 0.53 7.72 826,982 $ 0.52
$1.00 - $1.99 87,125 1.72 6.37 102,676 1.61
$2.00 - $2.99 430,000 2.22 5.53 378,000 2.25
$3.00 - $8.50 173,274 6.98 4.33 156,596 7.08
------------ ------------
1,982,105 1,464,254
============ ============
The following table summarizes information about any warrants to purchase
the Company's common stock that were outstanding at December 31, 2003:
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
------------------------------------------ ---------------------------
WEIGHTED WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE
SHARES PRICE LIFE (YEARS) SHARES PRICE
------------ ------------ ------------ ------------ ------------
(SHARE DATA IN THOUSANDS)
$0.40 - $0.40 250,000 $ 0.40 2.88 250,000 $ 0.40
$0.42 - $0.42 543,182 $ 0.42 7.64 543,182 $ 0.42
$0.44 - $0.44 132,972 $ 0.44 7.70 132,972 $ 0.44
$0.50 - $0.50 25,000 $ 0.50 2.00 25,000 $ 0.50
$1.50 - $1.50 921,510 $ 1.50 3.64 921,510 $ 1.50
$3.00 - $3.00 5,775,000 $ 3.00 1.24 5,775,000 $ 3.00
------------ ------------
7,647,664 7,647,664
============ ============
In December 2001, the Company, under the initiative of the Compensation
Committee with the approval of the Board of Directors, issued its chief
executive officer an incentive stock grant under the 1997 Stock Compensation
Plan of 450,000 restricted shares of the Company's common stock as a means to
retain and incentivize the chief executive officer. The shares 100% vest after
10 years from the date of grant. The shares were valued at $405,000 based on the
closing price of the stock on the date of grant, which is recorded as
compensation expense ratably over the ten-year vesting period. The restricted
shares vest based on the Company's share price as follows:
14
PERFORMANCE CRITERIA SHARES VESTED
--------------------------------------------------------------------- --------------
Share price trades for $4.50 per share for 20 consecutive days 150,000 shares
Share price trades for $8.50 share for 20 consecutive days 150,000 shares
Share price trades for $12.50 per share for 20 consecutive days 150,000 shares
On November 19, 2003, the Company issued a warrant to purchase 250,000
shares of common stock to an advisor of the Company in exchange for certain
advisory and consulting services pursuant to a written advisory agreement that
will be provided to the Company over a three-year contractual period. The
warrants are exercisable for shares of the Company's common stock at a price of
$0.40. The warrant contained a provision that prohibited the delivery of shares
even if exercised until after February 5, 2004. The warrants are currently
treated as a variable plan grant; accordingly, the warrant will be revalued at
each quarter end and the portion related to the cumulative expired services
period less prior charges recorded will be recorded as a charge to expense
during the period. The warrants were valued using the Black-Scholes model to
calculate a fair value of $0.49 per share at December 31, 2003. A portion of the
fair value totaling $7,000 was recognized for the three months ended December
31, 2003.
9. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist of the following items for
the periods presented.
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
2003 2002 2003 2002
------------ ------------ ----------- ------------
Salaries and employee benefits......... $ 203 $ 225 $ 619 $ 896
Occupancy.............................. 124 149 359 368
Insurance.............................. 60 67 178 171
Bad debt expense....................... 18 127 35 382
Bad debt recovery...................... (244) -- (438) (542)
Other ................................. 197 131 618 887
------------ ------------ ----------- ------------
Total general and administrative... $ 358 $ 699 $ 1,371 $ 2,162
============ ============ =========== ============
10. COMMITMENTS AND CONTINGENCIES
The Company is subject to various commitments and contingencies as
described in Note 16 to the consolidated financial statements in the Company's
Annual Report on Form 10-K as of and for the year ended March 31, 2003. The
significant items included were Lease Commitments, Employment Agreements,
Litigation and Royalty Agreements. During the nine month period ended December
31, 2003, the following commitments and contingencies arose or were settled:
In conjunction with the settlement of certain dental contracts, the
Company received 187,699 shares of its commons stock as part of the
consideration of said settlements. The Company has reflected the return of such
stock on the treasury method.
During the three months ended September 30, 2003, the Company was
successful in settling long-term debts and acquisition related liabilities at
amounts less than their recorded values. The Company paid $89,000 in order to
settle debts of $260,000 during the three months ended September 30, 2003.
Accordingly, the Company has recorded the difference of $171,000 as other income
in the period. During the three and nine months ended December 31, 2003, the
Company removed $58,000 and $109,000 respectively, of accounts payable related
to its acquisitions of Learning-Edge, Inc. and ThoughtWare Technologies, Inc.
since the Company determined that these amounts were not valid claims against
the Company. As the purchase allocation period related to these acquisitions was
closed, the amounts were recorded as other income rather than a reduction to
goodwill.
Effective May 1, 2003, the Company terminated the employment of certain
employees that had provided custom content development services. Those employees
were permitted to create a new company, Interactive Alchemy, Inc. ("IA") and
simultaneously entered into a non-cancelable three-year subcontractor agreement
with the Company. IA continues to provide custom content development services to
15
the Company for its customers in exchange for a fixed percentage of the
Company's custom content project fee. The Company provides IA with certain
facilities and administrative support for which in exchange it receives a
specified amount of support services. During the three and nine month periods
ended December 31, 2003, the Company incurred approximately $283,000 and
$616,000 of fees to IA in connection with this agreement. The Company has open
accounts payable to IA totaling $214,000 as of December 31, 2003.
On November 4, 2002, two former employees of Quisic Corporation, filed
suit in the Superior Court of the State of California claiming damages in the
amount of $6.4 million against the Board of Directors of Quisic Corporation
resulting from their employment termination by Quisic alleging among other
things breach of contract. The Company is a third party defendant with an
allegation of successor liability to the extent the Quisic defendants are found
liable and to the extent the plaintiffs prove successor liability by the
Company. The Company only acquired certain assets of Quisic Corporation in an
asset purchase transaction. The Company believes that the plaintiff's assertions
are without merit and intends to vigorously defend this lawsuit. While in the
opinion of management, resolution of these matters is not expected to have a
material adverse effect on the Company's financial position, results of
operations or cash flows, the ultimate outcome of any litigation is uncertain.
Were an unfavorable outcome to occur in this Quisic lawsuit, then the impact is
likely to be material to the Company. Subsequent to the defendant's answers
being filed, the Quisic defendants sought an order that would compel binding
arbitration of the plaintiff's claims. The court denied that motion. The trial
court's ruling is being appealed, with the proceeds at the trail court stayed
pending outcome of the appeal.
In conjunction with the LearnLinc acquisition, the Company agreed to
provide a royalty earn-out payment due upon sales of the LearnLinc product. The
royalty earn-out is equal to 20% for all revenues collected from the sale or
license of LearnLinc software over a three-year period beginning with the
closing date, with the first $600,000 of collected revenues not subject to the
royalty, and the maximum amount ever due is $5,000,000. The Company accounts for
any such amounts collected as additional purchase consideration in accordance
with EITF No. 95-8 at the time such amounts are collected. The Company has
accrued LearnLinc royalties totaling $227,000 for the nine months ended December
31, 2003. The operating results are included with the Company's as of November
4, 2002.
On June 11, 2003, Kepner-Tregoe, Inc. filed suit in the Supreme Court of
the State of New York, County of New York, on Internal & External
Communications, Inc., Quisic Corporation, Investor Growth Capital, Ltd.,
Investor Group, L.P., Leeds Equity Partners III, L.P., et al. seeking to collect
an arbitration award against Quisic in the amount of $1,701,331. The defendants
have filed a motion to dismiss and EDT Learning has filed a verified answer in
this matter denying any liability. The Company is a third party defendant with
an allegation of successor liability to the extent the Quisic defendants are
found liable and to the extent the plaintiff proves successor liability by the
Company. The Company believes that the Plaintiff's assertions are without merit
and intends to vigorously defend this lawsuit. While in the opinion of
management, resolution of these matters is not expected to have a material
adverse effect on the Company's financial position, results of operations or
cash flows, the ultimate outcome of any litigation is uncertain. Were an
unfavorable outcome to occur in the this Quisic lawsuit then the impact is
likely to be material to the Company. Subsequent to the defendant's answers
being filed, the Quisic defendants sought an order dismissing the plaintiff's
clams. Pending resolution of that motion to dismiss the trial court is
permitting only limited discovery.
11. PRIVATE PLACEMENT OFFERING
On September 16, 2003, the Company completed its private placement of
convertible preferred stock with detachable warrants. The Company sold 30 units
with each unit costing $50,000 that provided to the Company total gross proceeds
of $1,500,000. Each unit consisted of 5,000 shares of preferred stock, par value
$0.001 and a warrant to purchase 25,000 shares of the Company's common stock.
The preferred stock is convertible into the Company's common stock at a price of
$0.50 per share (subject to adjustment in certain events with a floor of $0.30
per share) making each share of preferred stock convertible into 20 shares of
common stock. The warrants are immediately exercisable at a price of $1.50 per
share and have a three-year term. The Company will pay an 8% dividend to holders
of the convertible preferred stock, and the dividend is cumulative. The
convertible preferred stock is non-voting and non-participating. The shares of
convertible preferred stock will not be registered under the Securities Act of
1933, as amended, and were offered in a private placement providing exemption
from registration. The placement agent was paid a commission of $150,000 or 10%
of the gross proceeds plus $45,000, which represented a 3% non-accountable
expense fee and received a warrant to purchase 3 units at the same terms of the
original units. In addition, the Company paid $17,000 in legal and accounting
fees bringing the net proceeds raised to $1,288,000. The Company plans on using
the net proceeds for general working capital, to expand its sales and marketing
activities and to retire certain acquisition related liabilities.
16
The cash proceeds of the private placement of convertible preferred
stock was allocated prorata between the relative fair values of the preferred
stock and warrants at issuance using the Black Scholes valuation model for
valuing the warrants. After allocating the proceeds between the preferred stock
and warrant, an effective conversion price was calculated for the convertible
preferred stock to determine the beneficial conversion discount for each share.
The aggregate value of the warrants and the beneficial conversion discount of
$247,000 are considered a deemed dividend in the calculation of loss per share.
12. SUBSEQUENT CAPITAL RAISE
In February of 2004, the Company completed a private placement offering
raising capital of $500,000 that will be used for general corporate purposes.
Under the terms of the offering, the Company issued unsecured subordinated
convertible notes that have a term of 24 months (subject to adjustment in
certain events), and the notes are subordinated to any present or future senior
indebtedness. The notes bear interest at the rate of 8% per annum for the first
twelve months and then 10% for the second twelve months (subject to a
retroactive adjustment to 15% if the underlying shares into which the notes are
convertible have not been registered by July 31, 2004) and require quarterly
payments of interest only, with the principal due at maturity on February 12,
2006. The holders of the notes may convert the outstanding principal into shares
of the Company's common stock at the fixed price of $0.70 per share (subject to
adjustments for dilution, as defined). At the issue date, the Company calculated
a beneficial conversion feature of the notes to be $214,286, which will be
amortized as interest expense over the 2-year life of the debt. The holders of
the notes retain certain demand and piggy-back registration rights.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENTS CONTAINED IN THIS 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
CHANGE OUR PRODUCTS AND EXPAND OUR TECHNOLOGICAL INFRASTRUCTURE TO MEET THE
DEMAND FROM OUR CUSTOMERS, OUR ABILITY TO RECRUIT AND RETAIN QUALIFIED
EMPLOYEES, THE STATUS OF THE OVERALL ECONOMY, THE STRENGTH OF COMPETITIVE
OFFERINGS, THE PRICING PRESSURES CREATED BY MARKET FORCES, AND THE OTHER RISKS
DISCUSSED HEREIN. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE
BASED ON INFORMATION AVAILABLE TO US AS OF THE DATE HEREOF. WE EXPRESSLY
DISCLAIM ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR
REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, TO REFLECT ANY
CHANGE IN OUR EXPECTATIONS OR IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH
ANY SUCH STATEMENT IS BASED. OUR REPORTS ARE AVAILABLE FREE OF CHARGE AS SOON AS
REASONABLY PRACTICABLE AFTER WE FILE THEM WITH THE SEC AND MAY BE OBTAINED
THROUGH OUR WEBSITE.
OVERVIEW
Headquartered in Phoenix, Arizona, iLinc Communications, Inc., ("We",
"Us", "Our" or the "Company") (formerly EDT Learning, Inc.) is a provider of Web
conferencing, virtual classroom and Web collaboration software and services.
We changed our name from EDT Learning, Inc. to "iLinc Communications,
Inc." to reflect not only the breadth of our Web conferencing products and
services but also to reflect the integration of audio conferencing, video
conferencing, and voice-over-IP technologies. The name change was approved by
our stockholders at a special meeting of stockholders on February 5, 2004. Along
with the name change, the Company's stock symbol changed to the new symbol of
"ILC."
17
THE iLINC SUITE OF PRODUCTS
We provide Web collaboration and Web conferencing software that includes
a comprehensive set of features and functionality in the Web conferencing
industry. Our name change is reflective of our focus in terms of research,
development, sales and marketing on our award-winning suite of Web conferencing
and Web collaboration software known as the iLinc(TM) Suite. The iLinc Suite
includes: LearnLinc(TM) - permits live instructor-led training and education
over the Internet to remote students replicating the instructor-led environment;
MeetingLinc(TM) - facilitates more effective and economical communication
through online meetings using voice-over-IP technology to avoid the expense of
travel and long-distance charges; ConferenceLinc(TM) - delivers your message
more consistently in a one-to-many format replicating professionally managed
conferencing events; and SupportLinc(TM) - gives customer service organizations
the ability to provide remote, hands-on support for products, systems, or
software applications. Our iLinc Web collaboration software suite is available
in both an ASP and license purchase model. Since its beginnings in 1994,
LearnLinc and MeetingLinc have been installed and operational in corporate,
government, and educational organizations in the United States and
Internationally. LearnLinc(TM), the flagship of our four-product iLinc suite,
won first place at the Synchronous e-Learning Shootout held at Online Learning's
Conference in the fall of 2002, winning by a vote of training professionals over
such other notable companies as WebEx, PlaceWare (now Microsoft Live), and
Centra. Unlike many of our competitors, our iLinc suite of products includes the
use of integrated voice-over-IP and two-way live video.
In addition to our focus on the iLinc suite, we recently added a new
senior vice president of sales who brings to us sales experience specifically in
the Web conferencing and audio conferencing industries. We recently launched
sales and marketing efforts that are designed increase market share and grow
usage within our existing customer base.
INDUSTRY TRENDS
We see several emerging industry trends that makes us well positioned to
take advantage of these trends. First, the industries that have embraced Web
conferencing to the largest degree continue to be the Financial sector and High
Technology. According to a recent report by the analyst group Frost and
Sullivan, these two segments represented 52.2% of the total Web conferencing
revenues in 2002 and will continue to be the largest single markets for Web
conferencing revenue by 2009. Frost & Sullivan has also identified Professional
Service agencies as a large adopter of the Web Conferencing from now until 2009.
To that end, we now have more than 200 Professional Service companies have
chosen our Web conferencing solution as their tool of choice, including some of
the larger organizations inside the Fortune 1000.
A second notable trend is that specific features and licensing options
are becoming increasingly important to the Financial sector and High Technology
markets. This has created unique opportunities for iLinc. Frost & Sullivan
expects that desktop videoconferencing and voice over IP integration will be
heavily utilized features among high technology companies in the immediate
future and that Web conferencing vendors offering these functionalities within
their solution will likely find numerous successes within this vertical market.
Unlike many of our competitors, our video and voice over IP can be throttled for
high bandwidth users or for low bandwidth users allowing anyone from a dial-up
connection to utilize these features. Frost & Sullivan also expects that the
Financial Services vertical market offers significant growth opportunities for
those Web conferencing vendors offering a behind the firewall solution. iLinc is
one of the carrier class Web conferencing solutions that offer both a behind the
firewall solution installation combined with the strength of feature set and AES
security. Prominent organizations inside the Financial sector of the Fortune
1000 have chosen our solution. To leverage these advantages, our organization is
launching an aggressive marketing and sales campaign inside these vertical
markets with the goal of achieving significant market share within the financial
services, high tech and professional services markets. Our ability to attract
and maintain these specific types of customers has given us a base of existing
customers that we hope will enable us to further grow within these sectors and
others. As to maintaining the existing customer base, our client services group
is frequently praised by our customers who also use our competitor's products as
competitive. Our emphasis in client service has allowed us to strengthen the
existing iLinc customer base while maintaining almost all of the previously
existing clients in the 14 months since we acquired the software. The ability to
maintain our customer base provides recurring maintenance revenues as well as
opportunities for up-sales of our new iLinc products and services within those
organizations. Assuming renewals of existing customers, our recurring
maintenance, hosting and iLinc ASP revenues are now approximately $1.8 million
per year and growing each month.
OUR OTHER E-LEARNING PRODUCTS
While we have focused on our iLinc suite of products, we also continue to
provide various e-Learning solutions to corporate, government, and education
clients alike. Those products include our online collaboration and development
software products that include TestLinc(TM), and i-Canvas(TM) as well as
providing custom content services.
18
We also offer a library of online courses focused upon the training of
executives on essential business topics. Our off-the-shelf online library of
content includes an online mini-MBA program co-developed with the Tuck School of
Business at Dartmouth College. Customers subscribe for a period of time per
course, with the license providing for access over typically one year from date
the students first access of the course.
For the development of custom online content we offer an award winning
content development software, called i-Canvas(TM) which is sold on an individual
user perpetual license basis. We continue to provide to our customers award
winning custom content services through the Interactive Alchemy subcontractor
relationship. Custom content services are bid on a project-by-project basis and
revenue is recognized on the percentage-of-completed contract method.
SEGMENT INFORMATION
We began operations in March of 1998 as a dental practice management
company and our formation included the simultaneous rollup of dental practices
and an initial public offering. Our initial goals were to provide training and
practice enhancement services to the Affiliated Practices spread over 31 states
using the Internet (see references to the "Dental Segment"). However, we shifted
our business model and focus away from the dental practice management industry
and toward the overall e-Learning sector in the summer of 2001, and accordingly
as of December 31, 2003, all of the contracts with the Affiliated Practices have
expired and therefore comparisons to prior periods may not be meaningful. During
the three and nine months ended December 31, 2003 and 2002, the Company had two
reportable segments, e-Learning and dental practice management. The e-Learning
segment included revenues and operating expenses related to the development and
sale of the Company's e-Learning products. The dental practice management
segment included revenues from service contracts, operating expenses related to
the delivery of the dental services and other non-operating expenses. There are
no intersegment revenues. Summary financial information of the segments is as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- -------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Licenses............................... $ 568 $ 306 $ 1,756 $ 359
Service and maintenance................ 1,011 769 2,559 2,988
------------ ------------ ------------ ------------
Total e-Learning revenues........... 1,579 1,075 4,315 3,347
Dental practice management............. 12 642 128 2,635
------------ ------------ ------------ ------------
Total revenues..................... $ 1,591 $ 1,717 $ 4,443 $ 5,982
============ ============ ============ ============
Operating expenses:
e-Learning............................. $ 1,614 $ 2,350 $ 4,637 $ 7,204
Dental practice management............. 42 26 155 229
------------ ------------ ------------ ------------
Total operating expenses........... $ 1,656 $ 2,376 $ 4,792 $ 7,433
============ ============ ============ ============
Income (loss) from operations:
e-Learning............................. $ (35) $ (1,276) $ (322) $ (3,857)
Dental practice management............. (30) 617 (27) 2,406
------------ ------------ ------------ ------------
Total loss from operations......... $ (65) $ (659) $ (349) $ (1,451)
============ ============ ============ ============
Capital expenditures:
e-Learning............................. $ 45 $ 6 $ 45 $ 89
Dental practice management............. -- -- -- --
------------ ------------ ------------ ------------
Total capital expenditures......... $ 45 $ 6 $ 45 $ 89
============ ============ ============ ============
19
DECEMBER 31, 2003 MARCH 31, 2003
------------------ -------------------
Total assets:
e-Learning.............................................. $ 11,986 $ 11,081
Dental practice management.............................. 968 1,342
------------------ -------------------
Total assets.......................................... $ 12,954 $ 12,423
================== ===================
RESULTS OF OPERATIONS
As of December 31, 2003, we provide Web collaboration and Web
conferencing software that includes a comprehensive set of features and
functionality. Our name change is reflective of our focus in terms of research,
development, sales and marketing on our award-winning suite of Web conferencing
and Web collaboration software known as the iLinc(TM) Suite. The iLinc suite
includes: LearnLinc(TM) - permits live instructor-led training and education
over the Internet to remote students replicating the instructor-led environment;
MeetingLinc(TM) - facilitates more effective and economical communication
through online meetings using voice-over-IP technology to avoid the expense of
travel and long-distance charges; ConferenceLinc(TM) - delivers your message
more consistently in a one-to-many format replicating professionally managed
conferencing events; and SupportLinc(TM) - gives customer service organizations
the ability to provide remote, hands-on support for products, systems, or
software applications. Our iLinc Web collaboration software suite is available
in both an ASP and license purchase model. Since its beginnings in 1994,
LearnLinc and MeetingLinc have been installed and operational in corporate,
government, and educational organizations in the United States and
Internationally. LearnLinc(TM), the flagship of EDT Learning's four-product
iLinc suite, won first place at the Synchronous e-Learning Shootout held at
Online Learning's Conference in the fall of 2002, winning by a vote of training
professionals over such other notable companies as WebEx, PlaceWare (now
Microsoft Live), and Centra. Our iLinc suite of products includes the ability to
use integrated voice-over-IP and two-way live video.
On June 14, 2002, the Company acquired certain assets of Quisic
Corporation ("Quisic"); a California based private e-Learning company in an
asset purchase and common stock purchase transaction that involved the issuance
of 2,000,000 common shares to certain shareholders of Quisic. The operating
results of Quisic have been included in the consolidated operations of the
Company commencing June 17, 2002. The purchase agreement requires that the
Company pay certain contingent compensation to the seller if during the 5 year
period following the closing certain sales to PBS and others occur. Through
December 31, 2003, the Company has collected funds subject to this contingent
provision totaling $300,000. On December 31, 2003, the seller agreed to convert
the entire amount then due instead into 333,333 common shares our common stock
at the fair market price of $0.90 per share.
Effective November 4, 2002, the Company acquired certain assets of
Mentergy, Inc. ("Mentergy") that included the LearnLinc Web collaboration and
Web conferencing software that is the foundation for the iLinc suite of products
(the "LearnLinc Assets"). In exchange for the LearnLinc Assets, the Company paid
$500,000, with one half due at closing and the remaining payment due in a note
that was due December 13, 2003, assumed scheduled liabilities equal to $462,000
and agreed to provide a royalty earn-out payment due upon sales of the LearnLinc
product. The royalty earn-out is equal to 20% for all revenues collected from
the sale or license of LearnLinc software over a three-year period beginning
with the closing date, with the first $600,000 of collected revenues not subject
to the royalty, and the maximum amount ever due is $5,000,000. The Company
accounts for any such amounts collected as additional purchase consideration in
accordance with EITF No. 95-8 at the time such amounts are collected. The
Company has accrued LearnLinc royalties totaling $227,000 for the nine months
ended December 31, 2003. The operating results are included with the Company's
as of November 4, 2002.
The operations of the Company involve many risks, which, even through a
combination of experience, knowledge and careful evaluation, may not be
overcome. These risks include the fact that the market for e-learning products
and services is in the early stages of development and may not grow to a
sufficient size or at a sufficient rate to sustain the Company's business. The
Company also faces intense competition from other e-learning providers and may
be unable to compete successfully. Many of the Company's existing and potential
competitors have longer operating histories and significantly greater financial,
technical and other resources and therefore may be able to more quickly respond
to changing opportunities or customer requirements. New competitors are also
likely to enter this market in the future due to the lack of significant barrier
to entry in the market share. See "Additional Risk Factors That May Affect Our
Operating Results and The Market Price of Our Common Stock."
20
REVENUES
Total revenues generated for the three months ended December 31, 2003
and December 31, 2002 were $1.6 million and $1.7 million respectively, a
decrease of $100,000. Web collaboration and Learning revenues for the three
months ended December 31, 2003 and December 31, 2002 were $1.6 million and $1.1
million, respectively, an increase of $500,000. The increase was a result of an
increase in license revenue of $260,000 and an increase of $240,000 in service
and maintenance revenues. The Company continues to focus its efforts on the
higher margin license revenues while maintaining the service and maintenance
revenues.
Total revenues generated for the nine months ended December 31, 2003 and
2002 were $4.4 million and $6.0 million respectively, a decrease of $1.6
million. The Company recognized $4.3 million in Web collaboration and learning
revenues in the nine months ended December 31, 2003 compared with $3.3 million
of Web collaboration and learning revenues in the nine months ended December 31,
2002, an increase of $1.0 million. The increase is a result of the Company's
continuing focus on the Web collaboration and Web conferencing markets as well
as the sales of other Learning products and services.
Revenue from dental contracts decreased by $630,000 from $642,000 for the
three months ended December 31, 2002 to $12,000 for the three months ended
December 31, 2003 due to the previously announced and planned modification and
termination of certain dental management service contracts. As anticipated and
previously announced, all of the remaining legacy management service agreements
terminated during the three months ended December 31, 2003. Revenue from dental
contracts decreased by $2.5 million during the nine months ended December 31,
2003 due to the previously announced and planned modification and termination of
certain dental management service contracts. As anticipated and previously
announced, all of the remaining legacy management service agreements terminated
during the three months ended December 31, 2003.
OPERATING EXPENSES
Operating expenses consist of research and development, sales and
marketing, general and administrative, and depreciation and amortization
expenses. The Company incurred operating expenses of $1.7 million for the three
months ended December 31, 2003, a decrease of $700,000 from $2.4 million for the
three months ended December 31, 2002. This is due to decreases in salaries and
wages of $437,000, depreciation and amortization of $367,000, and bad debt
expense of $353,000. These were offset by increases of $391,000 in product
development costs and $138,000 in legal fees. The Company has reduced head count
from 66 in December of 2002 to 43 at December 31, 2003. In addition, the Company
has streamlined its operations by closing non-essential facilities and
consolidating those functions in its Phoenix and Troy, New York locations and is
now receiving the full benefit of those cost reduction programs.
The Company incurred operating expenses of $4.8 million and $7.4 million
for the nine months ended December 31, 2003 and 2002 respectively, a decrease of
$2.6 million. The decrease is primarily due to decreases in salaries and wages
of $1.6 million and depreciation and amortization of $1.1 million.
Research and development expenses represent expenses incurred in
connection with the development of custom content services, the development of
new iLinc products and new product versions and consist primarily of salaries
and benefits, communication equipment and supplies. Research and development
expenses for the three months ended December 31, 2003 and December 31, 2002 were
$741,000 and $786,000 respectively, a decrease of $45,000. The decrease is a
result of the Company's closure of the Memphis and Los Angeles offices,
outsourcing of custom content development and elimination of dental operations
costs. These changes caused a decrease in salaries and wages of $399,000 and
dental operations of $7,000. This was partially offset by an increase in product
development costs of $358,000 due to increased costs of custom development and
royalty expense.
The Company incurred research and development costs of $2.0 million and
$2.6 million for the nine months ended December 31, 2003 and 2002 respectively,
a decrease of $650,000. The decrease is primarily a result of a decrease in
compensation expenses of $1.3 million and dental operations of $34,000. This was
partially offset by an increase in product development costs of $699,000 due to
increased costs of custom development and royalty expense.
21
Sales and marketing expenses consist primarily of sales and marketing
salaries and benefits, travel, advertising, and other marketing literature.
Sales and marketing expenses were $460,000 and $427,000 for the three months
ended December 31, 2003 and December 31, 2002, respectively, an increase of
$33,000. The increase is a result of an increase in advertising and printing of
$29,000 and compensation expenses of $14,000. These increased expenses were
partially offset by a decrease in travel expenses of $15,000.
The Company incurred $1.2 million and $1.3 million in sales and marketing
expenses for the nine months ended December 31, 2003 and 2002 respectively, a
decrease of $100,000. This decrease is primarily a result of decreases in
general office expenses of $83,000 and travel expenses of $73,000. These
decreases were partially offset with increases of $34,000 in compensation
expense and $29,000 in advertising and printing expense.
General and administrative expenses consist of the corporate expenses of
the Company. These corporate expenses include salaries and benefits of
executive, finance and administrative personnel, rent, bad debt expense,
professional services, travel, office costs and other general corporate
expenses. During the three months ended December 31, 2003 and December 31, 2002,
general and administrative expenses were $358,000 and $699,000, respectively, a
decrease of $341,000. The change in general and administrative expenses was
primarily due to decreases in bad debt expense of $353,000, investor relations
and board fees of $43,000, occupancy of $25,000, compensation and related
benefit expense of $22,000, telephone of $16,000, liability insurance of $7,000
and increases in legal fees of $137,000 and travel expenses of $12,000.
The Company incurred general and administrative expenses of $1.4 million
and $2.2 million for the nine months ended December 31, 2003 and 2002
respectively, a decrease of $800,000. The change was primarily due to decreases
in compensation expenses of $277,000, bad debt expense of $243,000, investor
relations of $121,000, accounting fees of $52,000, telephone expenses of
$38,000, general office expenses of $29,000 and occupancy of $9,000.
For the three months ended December 31, 2003 and December 31, 2002
depreciation and amortization expense was $97,000 and $464,000, respectively.
For the nine months ended December 31, 2003 and December 31, 2002 depreciation
and amortization expense was $300,000 and $1.4 million, respectively. Beginning
in fiscal 2003 the Company ceased amortizing goodwill in accordance with SFAS
No. 142. The decrease is also attributed to the termination of the service
agreements that returned ownership of the dental practice equipment to the
related dental practices.
INTEREST EXPENSE
Interest expense of $343,000 for the three months ended December 31, 2003
decreased by $72,000 from $415,000 for the three months ended December 31, 2002.
The decrease was primarily a result of a reduction in interest expense
associated with the Company's interest bearing liabilities. Interest expense for
the nine months ended December 31, 2003 and 2002 was $1.0 million and $1.2
million respectively, a decrease of $200,000.
GAIN FROM THE TERMINATION OF SERVICE CONTRACTS WITH AFFILIATED PRACTICES
The gains of $9,000 and $82,000 for the three months ended December 31,
2003 and December 31,2002 relate to a variety of transactions with Affiliated
Practices, including the results of negotiated settlements, the results of
litigation to enforce contracts and modified service agreements.
The gains of $23,000 and $897,000 for the nine months ended December 31,
2003 and 2002 relate to a variety of transactions with Affiliated Practices,
including the results of negotiated settlements, the results of litigation to
enforce contracts and modified service agreements. As anticipated and previously
announced all of the remaining legacy service agreements terminated during the
three months ended December 31, 2003.
22
GAIN ON SETTLEMENT OF DEBT AND OTHER OBLIGATIONS
During the three and nine months ended December 31, 2003, the Company
recognized gains of $58,000 and $379,000 respectively relating to the settlement
of debt and other obligations. During the nine months ended December 31, 2003,
the Company recognized a gain of $352,000 relating to a state sales tax
settlement. As part of the acquisition of ThoughtWare in January of 2002, the
Company assumed a sales and use tax liability of $384,000. On July 29, 2003, the
Company was notified by the state taxing authorities that the amount due
relating to the sales tax would be removed from the assessment resulting in a
net amount due of $32,000. As the purchase allocation period related to the
acquisition was closed, the $352,000 was recorded as other income rather than a
reduction to goodwill. There were no like items for the nine months ended
December 31, 2002.
INCOME TAX EXPENSE
The Company recorded no tax benefit during the three and nine months
ended December 31, 2003 or 2002 because it concluded it is not likely it would
be able to recognize the tax asset created due to the lack of operating history.
At March 31, 2003, the Company has a net deferred tax asset of $9.9 million with
a corresponding valuation allowance. The Company's tax benefits are scheduled to
expire over a period of six to fourteen years.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a working capital deficiency, incurred an operating loss
and had negative cash flows from operations during the nine months ended
December 31, 2003. While the service agreements with Affiliated Practices had
provided revenues and corresponding cash flows, all of those service agreements
from our legacy business have terminated and therefore we will not receive any
further revenues and cash flow from our dental segment. The Company currently
does not have existing working capital and does not generate positive cash flows
from operations. As a result, we may not have sufficient financial resources to
satisfy our obligations as they come due in the near term. These matters, among
others, including our limited operating history as a provider of Web
conferencing and Web collaboration software, raise substantial doubt about the
Company's ability to continue as a going concern. Our plan with regard to these
matters includes the continued development, marketing and licensing of our iLinc
suite of products and services through both internal sales efforts and through
external channel partnerships. We plan to expand where appropriate with external
growth by acquisition, with those acquisitions including providers of audio
conferencing as well as Web conferencing products and services. Although we
continue to pursue these plans, there is no assurance that the Company will be
successful in obtaining sufficient revenues from its Web collaboration and
e-Learning products and services to provide adequate cash flows to sustain our
operations. Our continuation as a Company is therefore may be dependent on our
ability to raise additional equity or debt capital, to continue to increase
sales and revenues, to generate positive cash flows from operations and
ultimately to achieve profitability.
In order to increase its liquidity, the Company intends to restructure or
extend existing obligations to reduce cash outflows for debt service, seek if
necessary additional funding from the placement of debt or equity securities,
invest in further marketing and sales efforts that result in the sale of the
Company's high margin software products and services. However, there can be no
assurance that the Company's plans will be achieved or that the Company will be
able to acquire additional sums.
As of December 31, 2003, the Company had a working capital deficit of
$1.4 million. Current assets included $227,000 in cash, $1.7 million in accounts
receivable, $252,000 in notes receivable and $123,000 in prepaid and other
current assets. Current liabilities consisted of $975,000 of deferred revenue,
$677,000 of current maturities of long-term debt and capital leases and $2.0
million in accounts payable and accrued liabilities.
Cash used in operating activities was $1.1 million during the nine months
ended December 31, 2003 and $1.6 million during the nine months ended December
31, 2002. Cash used in operating activities during the nine months ended
December 31, 2003 was primarily attributable to a net loss of $910,000,
settlement of debt and other obligations of $632,000 and increases in accounts
receivable and prepaid expenses of $893,000 and $110,000, respectively. These
items were offset by $379,000 of depreciation and amortization expenses,
discount accretion on debt of $210,000, an increase in deferred revenue of
$150,000 and an increase in accounts payable and accrued liabilities of
$818,000. Cash used in operating activities during the nine months ended
December 31, 2002 was primarily attributable to a net loss of $1.7 million,
increases in accounts receivable of $406,000, and decreases in deferred revenue
and accounts payable and accrued liabilities totaling $740,000 and $399,000,
respectively. These items were partially offset by $1.5 million of depreciation
and amortization expense.
Cash provided by investing activities was $157,000 and $1.3 million for
the nine months ended December 31, 2003 and December 31, 2002, respectively.
Cash provided by investing activities for the nine months ended December 31,
2003 was primarily due to $334,000 from the repayment of notes receivable,
proceeds received from practice terminations of $91,000 offset by $227,000 of
acquisition related royalty expenses. Cash provided by investing activities
during the nine months ended December 31, 2002 was primarily due to proceeds
received from practice terminations of $1.1 million.
Cash provided by financing activities was $774,000 during the nine months
ended December 31, 2003, while cash used in financing activities was $816,000
during the nine months ended December 31, 2002. Cash provided by financing
activities during the nine months ended December 31, 2003 was due to the net
proceeds of $1,288,000 related to the issuance of convertible preferred stock
and warrants which was partially offset by repayment of debt and capital leases
of $469,000. Cash used in financing activities during the nine months ended
December 31, 2002 was primarily attributable to the repayment of debt and
capital leases totaling $835,000.
23
HISTORICAL ACTIVITIES RELATED TO ACQUISITIONS AND CAPITAL RAISE ACTIVITIES
In connection with the Company's IPO in March of 1998, the Company issued
$468,000 of notes (the "IPO Notes") to certain shareholders who had provided
capital prior to the IPO. Originally, interest accrued at the rate of 6% with
the entire amount due on March 30, 2003. Many of the IPO Note holders agreed to
have the accrued interest added to the principal balance and extended the
maturity date to April 1, 2005 in exchange for quarterly payments of interest
and an increase in the interest rate to 10%. Several of the holders agreed to
accept a discounted sum in full payment of their IPO Note. The new principal
balance on these renewed and extended IPO Notes is $278,000 as of December 31,
2003. Several of the holders could not be located and therefore the principal
portion related to those holders of $44,000 is currently past due.
The Company had issued in 1998 as a part of the consideration due to
Affiliated Practices certain subordinated promissory notes (the "Series A
Notes"). On September 19, 2003, all of the outstanding principal balance of the
Series A Notes, in the sum of $849,000, were converted into 1,572,222 shares of
the Company's common stock. A conversion price of $0.54 per share was used as
the fair price per share which was the preceding twenty trading day average
closing price of the Company's common stock. As a result of that conversion, the
Company recorded a $252,000 charge associated with the conversion of the Series
A Notes due to a difference in the closing price of the Company's common stock
on the day of conversion and the twenty trading day average closing price.
Holders of the Series A Notes included James Powers, who had received a $253,000
Series A Note as a part of the consideration paid to him from his own Affiliated
Dental Practice transaction in 1998.
In October 2001, the Company issued $1.1 million of subordinated
promissory notes to the shareholders of Learning-Edge, Inc. under the terms of
the acquisition agreement (the "Learning-Edge Notes"). The Learning-Edge Notes
bear interest at rates ranging from at 7.5% to 9.0% and are due in two equal
installments on April 5, 2005 and on October 1, 2005, respectively. The terms of
the Learning-Edge Notes provided that if the Company raises additional capital
equal to or in excess of $3 million, 25% of the principal of the Learning-Edge
Notes is to be repaid. For each $500,000 raised above $3 million, the repayment
percentage increases by 15%. If more than $5 million is raised, 100% of the
principal of the Learning-Edge Notes is to be repaid. The holders of the
Learning-Edge Notes waived these accelerated payment provisions in relation to
the Convertible Note Offering.
In March 2002, the Company completed a private placement offering (the
"Convertible Note Offering") raising capital of $5,775,000 that was used to
extinguish an existing line of credit. Under the terms of the Convertible Note
Offering, the Company 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 Note may convert the
principal into shares of the Company's common stock at the fixed price of $1.00
per share. The Company 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 the Company's common stock exceeds $3.00 per share. The
notes are subordinated to any present or future senior indebtedness. The
placement agent received a commission of $577,500 plus $173,250 as a
non-accountable expense reimbursement and received a warrant to purchase units
on the same basis as other investors representing ten percent of the gross
proceeds at a price of 110% of that paid by investors. During the three months
ended December 31, 2003, holders with a principal balance totaling $125,000
converted their notes into common shares of the Company. As a part of the
Convertible Note Offering the Company also issued warrants to purchase 5,775,000
shares of the Company's common stock for an exercise price of $3.00 per share.
The Company may force redemption of the warrants if at any time the 20 trading
day average closing price of the Company's common stock exceeds $5.50 per share,
and the warrants expire on March 29, 2005. The fair value of the warrants was
estimated using a Black-Scholes pricing model with the following assumptions:
contractual and expected life of three years, volatility of 75%, dividend yield
24
of 0%, and a risk-free rate of 3.87%. A discount to the Convertible Notes of
$1,132,000 was recorded using this value, which is being amortized to interest
expense over the ten (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 (10) year term
of the Convertible Notes. Upon conversion, any remaining discount associated
with the beneficial conversion feature will be expensed in full at the time of
conversion.
On September 16, 2003, the Company completed its private placement of
convertible preferred stock with detachable warrants. The Company sold 30 units
at $50,000 each and raised a total of $1,500,000. Each unit consisted of 5,000
shares of convertible preferred stock, par value $0.001 and a warrant to
purchase 25,000 shares of common stock. The convertible preferred stock is
convertible into the Company's common stock at a price of $0.50 per share
(subject to adjustment in certain events, with a floor of $0.30), and the
warrants are immediately exercisable at a price of $1.50 per share with a
three-year term. Accordingly, each share of preferred stock is convertible into
20 shares of common stock and retains a $10 liquidation preference. The Company
will pay an 8% dividend to holders of the convertible preferred stock, and the
dividend is cumulative. The convertible preferred stock is non-voting and
non-participating. The shares of convertible preferred stock will not be
registered under the Securities Act of 1933, as amended, and were offered in a
private placement providing exemption from registration. The placement agent was
paid a commission of $150,000 or 10% of the gross proceeds plus $45,000, which
represented a 3% non-accountable expense fee and received a warrant to purchase
3 units at the same terms of the original units. In addition, the Company paid
$17,000 in legal and accounting fees bringing the net proceeds raised to
$1,288,000. The Company plans on using the net proceeds for general working
capital, to expand its sales and marketing activities and to retire certain
acquisition related liabilities. The cash proceeds of the private placement of
convertible preferred stock was allocated pro-rata between the relative fair
values of the preferred stock and warrants at issuance using the Black Scholes
valuation model for valuing the warrants. After allocating the proceeds between
the preferred stock and warrant, an effective conversion price was calculated
for the convertible preferred stock to determine the beneficial conversion
discount for each share. The aggregate value of the warrants and the beneficial
conversion discount of $247,000 are considered a deemed dividend in the
calculation of loss per share.
In connection with the acquisition of certain assets from Mentergy, Inc.
(and its wholly owned subsidiary LearnLinc Corporation), the Company issued
among other consideration a secured promissory note with a principal balance of
$250,000 that was due on December 13, 2003 (the "Mentergy Note"). By agreement
with Mentergy and its assignees, the Company paid $50,000 on the note during
December of 2003, leaving $200,000 of the remaining balance past due. Subsequent
to December 31, 2003, the remaining balance of $200,000 plus accrued interest
has been paid in full and the associated security interest in the LearnLinc
Assets has been terminated.
In February of 2004, the Company completed a private placement offering
raising capital of $500,000 that will be used for general corporate purposes.
Under the terms of the offering, the Company issued unsecured subordinated
convertible notes that have a term of 24 months (subject to adjustment in
certain events), and the notes are subordinated to any present or future senior
indebtedness. The notes bear interest at the rate of 8% per annum for the first
twelve months and then 10% for the second twelve months (subject to a
retroactive adjustment to 15% if the underlying shares into which the notes are
convertible have not been registered by July 31, 2004) and require quarterly
payments of interest only, with the principal due at maturity on February 12,
2006. The holders of the notes may convert the outstanding principal into shares
of the Company's common stock at the fixed price of $0.70 per share (subject to
adjustments for dilution, as defined). At the issue date, the Company calculated
a beneficial conversion feature of the notes to be $214,286, which will be
amortized as interest expense over the 2-year life of the debt. The holders of
the notes retain certain demand and piggy-back registration rights.
25
CONTRACTUAL OBLIGATIONS
The following schedule details all of the Company's indebtedness and the
required payments related to such obligations at December 31, 2003 (in
thousands):
DUE IN
DUE IN DUE IN YEARS
LESS THAN DUE IN YEAR FOUR AND DUE AFTER
TOTAL ONE YEAR YEAR TWO THREE FIVE FIVE YEARS
-------- -------- -------- -------- -------- --------
Long term debt ............... $ 7,322 $ 329 $ 1,343 $ -- $ -- $ 5,650
Capital lease obligations .... 368 348 17 3 -- --
Operating lease obligations .. 2,085 690 539 434 203 219
Base salary commitments
under employment
agreements ................ 840 465 375 -- -- --
-------- -------- -------- -------- -------- --------
Total contractual obligations $10,615 $ 1,832 $ 2,274 $ 437 $ 203 $ 5,869
======== ======== ======== ======== ======== ========
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. The more significant areas
requiring use of estimates relate to revenue recognition, 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.
Our critical accounting policies and estimates are included in the
Company's Annual Report on Form 10-K for the year ended March 31, 2003 as filed
with the SEC.
RECENT ACCOUNTING PRONOUNCEMENTS
On December 18, 2003 the SEC issued Staff Accounting Bulletin No. 104,
REVENUE RECOGNITION ("SAB 104"), which supersedes SAB 101, Revenue Recognition
in Financial Statements. SAB 104's primary purpose is to rescind accounting
guidance contained in SAB 101 related to multiple element revenue arrangements,
which was superseded as a result of the issuance of EITF 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables." The adoption of SAB 104 is not
expected to have a material impact the Company's consolidated financial position
or results of operations.
RISK FACTORS THAT MAY AFFECT THE COMPANY, OUR OPERATING RESULTS AND THE MARKET
PRICE OF OUR COMMON STOCK
You should carefully consider the risks factors described below before
making an investment decision concerning the Company. Of course the risks and
uncertainties described below are not the only ones we face. If any of the
following risks actually occur, our business, financial condition, results of
operations and market price of our common stock could be materially and
adversely affected.
WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE OUR
BUSINESS.
We have a limited operating history in the e-Learning business and
particularly as a provider of Web conferencing and Web collaboration software.
While the organizations that we have acquired have been engaged in the their
respective business for over five years, we only recently acquired those assets
and have undertaken to integrate their assets into our operations at varying
levels. You should not rely on our historical results as an indication of our
future performance. Over the past 18 months we have made significant changes to
our product mix and service mix, our growth strategies, our sales and marketing
26
plans, and other operational matters, including a significant reduction in our
employee base. As a result, it may be difficult to evaluate an investment in our
company. Given our recent investment in technology, we cannot be certain that
our business model and future operating performance will yield the results that
we intend. In addition, the competitive and rapidly changing nature of the
e-Learning and Web conferencing markets makes it difficult for us to predict
future results. Our business strategy may be unsuccessful and we may be unable
to address the risks we face.
WE FACE RISKS INHERENT IN EARLY-STAGE COMPANIES IN INTERNET-RELATED BUSINESSES
AND MAY BE UNSUCCESSFUL IN ADDRESSING THESE RISKS.
We face risks frequently encountered by early-stage companies in new and
rapidly evolving markets such as e-Learning and Web conferencing. We may fail to
adequately address these risks and, as a consequence, our business may suffer.
To address these risks among others, we must, successfully introduce and attract
new customers to our products and services; successfully implement our sales and
marketing strategy to generate sufficient sales and revenues to sustain
operations; foster existing relationships with our existing customers to provide
for continued or recurring business and cash flow; and, successfully address and
establish new products and technologies as new markets develop. As an
early-stage company, we may not be able to sufficiently access, address and
overcome risks inherent in our business strategy.
OUR QUARTERLY OPERATING RESULTS ARE UNCERTAIN AND MAY FLUCTUATE SIGNIFICANTLY.
Our operating results have varied significantly from quarter to quarter
and are likely to continue to fluctuate as a result of a variety of factors,
many of which we cannot control. Factors that may adversely affect our quarterly
operating results include: the size and timing of product orders; the mix of
revenue from custom services and software products; the market acceptance of our
products and services; our ability to develop and market new products in a
timely manner and the market acceptance of these new products; the timing of
revenues and expenses relating to our product sales; and, the timing of revenue
recognition. Expense levels are based, in part, on expectations as to future
revenue and to a large extent are fixed in the short term. To the extent we are
unable to predict future revenue accurately, we may be unable to adjust spending
in a timely manner to compensate for any unexpected revenue shortfall.
WE HAVE SIGNIFICANT OPERATING LOSSES, HAVE LIMITED FINANCIAL RESOURCES, AND MAY
NOT BECOME PROFITABLE.
We have incurred substantial operating losses and have limited financial
resources at our disposal. We have substantial current and long-term obligations
that we will not be able to satisfy without additional debt and/or equity
capital and ultimately generating profits and cash flows from our e-Learning and
Web conferencing operations. If we are unable to achieve profitability in the
near future, we will face increasing demands for capital and liquidity. We may
not be successful in raising additional debt or equity capital and may not
become profitable in the short term. As a result, we may not have sufficient
financial resources to satisfy our obligations as they come due in the short
term.
OUR AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT AS TO OUR ABILITY TO CONTINUE AS A
GOING CONCERN
Our consolidated financial statements have been prepared on a basis which
assumes that we will continue as a going concern and which contemplates the
realization of our assets and the satisfaction of our liabilities and
commitments in the normal course of business. We have a significant working
capital deficiency, and have suffered historically substantial recurring losses
and negative cash flows from operations. These matters, among others, and the
limited operating history as an e-Learning and Web collaboration company, caused
our independent accountants to express their substantial doubt as to our ability
to continue as a going concern.
LISTING QUALIFICATIONS MAY NOT BE MET
In September of 2003, the Company was notified by the American Stock
Exchange (the "Exchange") that the Company may not have been in compliance with
certain of the Exchange's continued listing standards. Specifically, the
Exchanged questioned whether the Company was then in compliance with the
requirement that a company maintain shareholder's equity of at least $4 million
and/or not have losses from continuing operations and/or net losses in three of
its four most recent fiscal years. As of September 30, 2003 and December 31,
2003, the Company was in compliance with this listing standard since it had
27
shareholder's equity of at least $4.0 million. If in the future, the Company
fails to maintain a sufficient level of shareholder's equity in compliance with
those and other listing standards of the Exchange then the Company would be
required to submit a plan to the Exchange describing how it intended to re-gain
compliance with the requirements within the Exchange's required time frame,
which is generally eighteen months. The Company's ability to continue to meet
the Exchange's continued listing requirements cannot be assured and if it could
not satisfy the exchange that it complies with the listing requirements then the
Exchange could de-list the Company's common stock.
DILUTION TO EXISTING SHAREHOLDERS IS LIKELY TO OCCUR UPON ISSUANCE OF SHARES WE
HAVE RESERVED FOR FUTURE ISSUANCE
On December 31, 2003, 19,073,059 shares of our common stock were issued,
of which 1,432,412 were held in treasury, and 22,459,769 additional shares of
our common stock were reserved for issuance. The issuance of these additional
shares will reduce the percentage ownership of existing stockholders in the
Company.
The following shares were reserved for issuance as of December 31, 2003:
o Issued and outstanding stock options to purchase common shares
totaling approximately 1,982,105;
o Issued and outstanding warrants to purchase common shares totaling
approximately 7,647,664; includes a warrant for 250,000 shares
that if exercised precluded the delivery of the shares until
February 5, 2004.
o Issued and outstanding warrant to purchase $577,500 of convertible
redeemable subordinated notes with detachable warrants for 577,500
common shares, all of which are exercisable for or convertible
into an aggregate 1,155,000 common shares;
o Issued and outstanding warrant to purchase 15,000 shares of
convertible preferred stock with detachable warrants for 75,500
common shares, all of which are exercisable for or convertible
into a potential aggregate 575,000 common shares;
o A restricted stock grant to receive shares totaling approximately
450,000; and
o Shares issuable upon the conversion of convertible redeemable
subordinated notes and preferred stock totaling a potential
aggregate of 10,650,000 common shares.
The existence of these reserved shares coupled with other factors, such
as the relatively small public float, could adversely affect prevailing market
prices for our common stock and our ability to raise capital through an offering
of equity securities.
THE LOSS OF THE SERVICES OF OUR SENIOR EXECUTIVES AND KEY PERSONNEL WOULD LIKELY
CAUSE OUR BUSINESS TO SUFFER.
Our success depends to a significant degree on the performance of our
senior management team. The loss of any of these individuals could harm our
business. We do not maintain key person life insurance for any officers or key
employees other than on the life of James M. Powers, Jr., our Chairman,
President and CEO, with that policy providing a death benefit to the Company of
$1.0 Million. Our success also depends on the ability to attract, integrate,
motivate and retain additional highly skilled technical, sales and marketing,
and professional services personnel. To the extent we are unable to attract and
retain a sufficient number of additional skilled personnel, our business will
suffer.
OUR INTELLECTUAL PROPERTY MAY BECOME SUBJECT TO LEGAL CHALLENGES, UNAUTHORIZED
USE OR INFRINGEMENT, ANY OF WHICH COULD DIMINISH THE VALUE OF OUR PRODUCTS AND
SERVICES.
Our success depends in large part on our proprietary technology. If we
fail to successfully enforce our intellectual property rights, the value of
these rights, and consequently the value of our products and services to our
customers, could diminish substantially. It may be possible for third parties to
copy or otherwise obtain and use our intellectual property or trade secrets
without our authorization, and it may also be possible for third parties to
independently develop substantially equivalent intellectual property. Currently,
we do not have patent protection in place related to our products and services.
Litigation may be necessary in the future to enforce our intellectual property
rights, to protect trade secrets or to determine the validity and scope of the
proprietary rights of others. From time to time we have received, and may in the
future receive, notice of claims of infringement of other parties' proprietary
rights. Such claims could result in costly litigation and could divert
management and technical resources. These types of claims could also delay
product shipment or require us to develop non-infringing technology or enter
into royalty or licensing agreements, which agreements, if required, may not be
available on reasonable terms, or at all.
28
A DETERIORATION OF GENERAL ECONOMIC CONDITIONS MAY MATERIALLY AND ADVERSELY
AFFECT OUR BUSINESS.
Our revenues are subject to fluctuation as a result of general economic
conditions. Our customers may reduce their expenditures for education and
training during economic downturns. Therefore, a continued economic downturn
could adversely affect the Company's business.
WE OFFER OUR WEB COLLABORATION PRODUCTS ON AN ASP BASIS SO IF WE DO NOT INCREASE
THE CAPACITY OF OUR INFRASTRUCTURE IN EXCESS OF CUSTOMER DEMAND, CUSTOMERS MAY
EXPERIENCE SERVICE PROBLEMS.
We expect the demand on our ASP business to increase significantly.
Accordingly, we must increase our capacity to keep pace with that growth in
demand. To accommodate increased customer usage requires a significant increase
in the capacity of our infrastructure and may cause us to invest significant
resources or capital. If we fail to increase our capacity in a timely and
efficient manner, customers may experience service problems that could cause us
to lose customers and decrease our revenue.
COMPETITION IN THE WEB CONFERENCING SERVICES MARKET IS INTENSE AND WE MAY
BE UNABLE TO COMPETE SUCCESSFULLY, PARTICULARLY AS A RESULT OF RECENT
ANNOUNCEMENTS FROM LARGE SOFTWARE COMPANIES.
The market for Web conferencing services is relatively new, rapidly
evolving and intensely competitive. Competition in our market will continue to
intensify and may force us to reduce our prices, or cause us to experience
reduced sales and margins, loss of market share and reduced acceptance of our
services. Many of our competitors have larger and more established customer
bases, longer operating histories, greater name recognition, broader service
offerings, more employees and significantly greater financial, technical,
marketing, public relations and distribution resources than we do. We expect
that we will face new competition as others enter our market to develop web
conferencing services. These current and future competitors may also offer or
develop products or services that perform better than ours. In addition,
acquisitions or strategic partnerships involving our current and potential
competitors could harm us in a number of ways.
FUTURE REGULATIONS COULD BE ENACTED THAT EITHER DIRECTLY RESTRICT OUR BUSINESS
OR INDIRECTLY IMPACT OUR BUSINESS BY LIMITING THE GROWTH OF INTERNET-BASED
BUSINESS AND SERVICES.
As commercial use of the Internet increases, federal, state and foreign
agencies could enact laws or adopt regulations covering issues such as user
privacy, content and taxation of products and services. If enacted, such laws or
regulations could limit the market for our products and services. Although they
might not apply to our business directly, we expect that laws or rules
regulating personal and consumer information could indirectly affect our
business. It is possible that such legislation or regulation could expose
companies involved in providing Internet-based services to liability, which
could limit the growth of Web use generally and thereby reduce demand for our
products and services. Such legislation or regulation could dampen the growth in
Web usage and decrease its acceptance as a medium of communications and
commerce.
WE DEPEND LARGELY ON ONE-TIME SALES TO GROW REVENUES.
A high percentage of our revenue is attributable to one-time purchases by
our customers rather than long term recurring ASP type contracts. As a result,
our inability to continue to obtain new agreements and sales may result in lower
than expected revenue, and therefore, harm our ability to sustain operations or
profitability on a consistent basis, which could also cause our stock price to
decline. Further, because we face competition from larger better-capitalized
companies, we could face increased downward pricing pressure that could cause a
decrease in our gross margins.
29
OUR OPERATING RESULTS MAY SUFFER IF WE FAIL TO DEVELOP AND FOSTER OUR VALUE
ADDED RESELLER OR DISTRIBUTION RELATIONSHIPS.
We have an existing channel and distribution network that provides
growing revenues and contributes to our high margin software sales. These
distribution partners are not obligated to distribute our services at any
particular minimum level. As a result, we cannot accurately predict the amount
of revenue we will derive from our distribution partners in the future. The
inability of our distribution partners to sell our products to their customers
and increase their distribution of our products could result in significant
reductions in our revenue, and therefore, harm our ability to sustain
profitability on a consistent basis.
SALES IN FOREIGN JURISDICTIONS BY US AND OUR INTERNATIONAL DISTRIBUTOR NETWORK
MAY CAUSE COSTS THAT ARE NOT ANTICIPATED.
We continue to expand internationally through our value added reseller
network and OEM partners. We have limited experience in international operations
and may not be able to compete effectively in international markets. We face
certain risks inherent in conducting business internationally, such as: our
inability to establish and maintain effective distribution channels and
partners; the varying technology standards from country to country; our
inability to effectively protect our intellectual property rights or the code to
our software; our inexperience with inconsistent regulations and unexpected
changes in regulatory requirements in foreign jurisdictions; language and
cultural differences; fluctuations in currency exchange rates; our inability to
effectively collecting accounts receivable; or our inability to manage sales and
other taxes imposed by foreign jurisdictions.
THE GROWTH OF OUR BUSINESS SUBSTANTIALLY DEPENDS ON OUR ABILITY TO SUCCESSFULLY
DEVELOP AND INTRODUCE NEW SERVICES AND FEATURES IN A TIMELY MANNER.
We acquired our Web collaboration, Web conferencing and virtual classroom
software in November of 2002. With our focus upon that product suite our growth
depends on our ability to continue to develop new features, products and
services around the iLinc suite and line of products. We may not successfully
identify, develop and market new products and features in a timely and
cost-effective manner. If we fail to develop and maintain market acceptance of
our existing and new products to offset our continuing development costs, then
our net losses will increase and we may not be able to sustain profitability on
a consistent basis.
IF WE FAIL TO OFFER COMPETITIVE PRICING, WE MAY NOT BE ABLE TO ATTRACT AND
RETAIN CUSTOMERS.
Because the Web conferencing market is relatively new and still evolving,
the prices for these services are subject to rapid and frequent changes. In many
cases, businesses provide their services at significantly reduced rates, for
free or on a trial basis in order to win customers. Due to competitive factors
and the rapidly changing marketplace, we may be required to significantly reduce
our pricing structure, which would negatively affect our revenue, margins and
our ability to sustain profitability on a consistent basis. We have an existing
channel and distribution network that provides growing revenues and contributes
to our high margin software sales. These distribution partners are not obligated
to distribute our services at any particular minimum level. As a result, we
cannot accurately predict the amount of revenue we will derive from our
distribution partners in the future. Our inability of our distribution partners
to sell our products to their customers and increase their distribution of our
products could result in significant reductions in our revenue, and therefore,
harm our ability to sustain profitability on a consistent basis.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. Market risk
generally represents the risk of loss that may result from the potential change
in the value of a financial instrument as a result of fluctuations in interest
rates and market prices. We have not traded or otherwise bought and sold
derivatives nor do we expect to in the future. We also do not invest in market
risk sensitive instruments for trading purposes.
30
We provide our products and services to customers in the United States,
Europe and elsewhere throughout the world. Sales are predominately made in U.S.
Dollars. however, we do have certain contracts in Euros and Canadian Dollars. A
strengthening of the U.S. Dollar could make our products and services less
competitive in foreign markets.
The primary objective of the Company's investment activity is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, the Company maintains its portfolio
of cash equivalents in a variety of money market funds.
As of December 31, 2003, the carrying value of our outstanding
convertible redeemable subordinated notes was approximately $5.7 million at a
fixed interest rate of 12%. In certain circumstances, we may redeem this
long-term debt. Our other components of indebtedness bear fixed interest rates
of 6% to 9%. Because the interest rates on these instruments are fixed, a
hypothetical 10% change in interest rates would not have a material impact on
our financial condition, revenues or operations. Increases in interest rates
could, however, increase the interest expense associated with future borrowings,
if any. We do not hedge against interest rate increases.
ITEM 4. CONTROLS AND PROCEDURES
We evaluated the design and operation of our disclosure controls and
procedures to determine whether they were effective, as of December 31, 2003, in
ensuring that we disclose the required information in a timely manner and in
accordance with the Securities Exchange Act of 1934, as amended, or the Exchange
Act, and the rules and forms of the Securities and Exchange Commission.
Management, including our principal executive officer and principal financial
officer, supervised and participated in the evaluation. The principal executive
officer and principal financial officer concluded, based on their review, that
our disclosure controls and procedures, as defined by Exchange Act Rules
13a-15(e) and 15d-15(e), are effective and ensure that we disclose the required
information in reports that we file under the Exchange Act and that the filings
are recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. No significant
changes were made to our internal controls or other factors that could
significantly affect these controls subsequent to the date of their evaluation.
A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Because of the inherent limitations in all control systems no
evaluation of controls can provide absolute assurance that all control issues,
if any, within a company have been detected.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 4, 2002, two former employees of Quisic Corporation, filed
suit in the Superior Court of the State of California claiming damages in the
amount of $6.4 million against the Board of Directors of Quisic Corporation
resulting from their employment termination by Quisic alleging among other
things breach of contract. The Company is a third party defendant with an
allegation of successor liability to the extent the Quisic defendants are found
liable and to the extent the plaintiffs prove successor liability by the
Company. The Company only acquired certain assets of Quisic Corporation in an
asset purchase transaction. The Company believes that the plaintiff's assertions
are without merit and intends to vigorously defend this suite. While in the
opinion of management, resolution of these matters is not expected to have a
material adverse effect on the Company's financial position, results of
operations or cash flows, the ultimate outcome of any litigation is uncertain.
Were an unfavorable outcome to occur in this Quisic lawsuit, then the impact is
likely to be material to the Company. Subsequent to the defendant's answers
being filed, the Quisic defendants sought an order that would compel binding
arbitration of the plaintiff's claims. The court denied that motion. The trial
court's ruling is being appealed, with the proceeds at the trail court stayed
pending outcome of the appeal.
On June 11, 2003, Kepner-Tregoe, Inc. filed suit in the Supreme Court of
the State of New York, County of New York, on Internal & External
Communications, Inc., Quisic Corporation, Investor Growth Capital, Ltd.,
Investor Group, L.P., Leeds Equity Partners III, L.P., et al. seeking to collect
an arbitration award against Quisic in the amount of $1,701,331. The defendants
have filed a motion to dismiss and EDT Learning has filed a verified answer in
this matter denying any liability. The Company is a third party defendant with
an allegation of successor liability to the extent the Quisic defendants are
found liable and to the extent the plaintiff proves successor liability by the
31
Company. The Company believes that the plaintiff's assertions are without merit
and intends to vigorously defend this suite. While in the opinion of management,
resolution of these matters is not expected to have a material adverse effect on
the Company's financial position, results of operations or cash flows, the
ultimate outcome of any litigation is uncertain. Were an unfavorable outcome to
occur in the this Quisic lawsuit then the impact is likely to be material to the
Company. Subsequent to the defendant's answers being filed, the Quisic
defendants sought an order dismissing the plaintiff's clams. Pending resolution
of that motion to dismiss the trial court is permitting only limited discovery.
ITEM 2. CHANGE IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
None
ITEM 3. DEFAULTS OF SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a Special Meeting of Stockholders that was held February 5, 2004, a
proposal by proxy was submitted to a vote of stockholders that would approve the
Certificate of Amendment to the Company's Restated Certificate of Incorporation
that would (a) increase the number of shares of common stock that the Company
will have authority to issue from Forty Million (40,000,000) to One Hundred
Million (100,000,000) shares and (b) change the name of the Company to "iLinc
Communications, Inc." The proposal passed with 12,079,459 voting in favor of the
proposal and 316,816 voting against the proposal. With affirmative vote of a
majority of the outstanding shares of the Company's common stock, the proposal
passed and the Company accordingly filed an amendment to its and the Restated
Certificate of Incorporation that became effective on February 5, 2004. A copy
of the Certificate of Amendment to the Company's Restated Certificate of
Incorporation is attached hereto as Exhibit.
ITEM 5. OTHER INFORMATION
Mr. Brian Berry has served as EDT Learning's Vice President of Finance
and principal financial officer since August of 2002 and prior to that served as
the Corporate Controller for the Company since October of 1998. In 1999, the
Securities and Exchange Commission initiated a Rule 102(e) proceeding against
Mr. Berry, among others, in his role as manager for Coopers & Lybrand and their
audit of the fiscal 1994 financial statements of California Micro Devices, Inc.
An administrative hearing was held in 2000 and the Administrative Law Judge
dismissed the claim in 2001. Subsequently, the Division of Enforcement of the
SEC appealed that decision and on July 29, 2003, the SEC reversed the decision
of the Administrative Law Judge, finding that Mr. Berry, among others, violated
Generally Accepted Auditing Standards in connection with certain limited aspects
of the audit. While it was undisputed that senior management of California Micro
Devices, in connection with the audit, intentionally misled Mr. Berry and the
Coopers & Lybrand audit team, the SEC nonetheless has concluded that Mr. Berry
should be barred from practicing before it and issued a ruling accordingly. Mr.
Berry applied for a stay of the order pending appeal and has filed an appeal of
the decision seeking to overturn it. Upon denial of the stay, the Company and
Mr. Berry mutually terminated his employment, even though the order did not
require the termination of his employment. Mr. James L. Dunn, the Company's Sr.
Vice President has assumed the role of interim CFO until a permanent CFO is
found, with Mr. Berry providing consulting services to the Company during the
CFO transition. Mr. Dunn is an attorney and CPA and has been intimately involved
in the operations of the Company since its IPO in March of 1998.
32
ITEM 6. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
3.1(1) Restated Certificate of Incorporation of Pentegra Dental Group,
Inc.
3.2(1) Bylaws of Pentegra Dental Group, Inc.
3.3(7) Restated Certificate of Incorporation of Pentegra Dental Group,
Inc.
3.4(7) Amendment of Bylaws of Pentegra Dental Group, Inc.
3.5(8) Restated Certificate of Incorporation of e-dentist.com, Inc.
3.6(14) Certificate of Designations of Series A Preferred Stock
++3.7 Certificate of Amendment of Restated Certificate of Incorporation
of EDT Learning, Inc.
4.1(1) Form of certificate evidencing ownership of Common Stock of
Pentegra Dental Group, Inc.
4.2(1) Form of Registration Rights Agreement for Owners of Founding
Affiliated Practices
4.3(1) Registration Rights Agreement dated September 30, 1997 between
Pentegra Dental Group, Inc. and the stockholders named therein
4.4(2) Form of Stockholders' Agreement for Owners of Affiliated Practices
4.5(3) Form of Indenture from Pentegra Dental Group, Inc. to U.S. Trust
Company of Texas, N.A., as Trustee relating to the Convertible
Debt Securities
4.6(7) Form of certificate evidencing ownership of Common Stock of
e-dentist.com, Inc.
4.7(8) Form of Convertible Redeemable Subordinated Note
4.8(8) Form of Redeemable Warrant (2002 Private Placement Offering)
4.9(14) Form of Redeemable Warrant (2003 Private Placement Offering)
+10.1(1) Pentegra Dental Group, Inc. 1997 Stock Compensation Plan
+10.2(1) Form of Service Agreement
10.3(4) Credit Agreement dated June 1, 1998 between Bank One, Texas, N.A.
and Pentegra Dental Group, Inc.
10.4(5) Modification to Credit Agreement between Pentegra Dental Group,
Inc. and Bank One, Texas, N.A. dated September 9, 1998
10.5(5) Agreement and Plan of Merger among Pentegra Dental Group, Inc.,
Liberty Dental Alliance, Inc., Liberty Acquisition Corporation,
James M. Powers, Jr., Sylvia H. McAlister and William Kelly dated
as of November 13, 1998
10.6(2) First Amendment to Credit Agreement by and among Pentegra Dental
Group, Inc. and Bank One, Texas, N.A. dated as of February 9, 1999
10.7(2) First Amendment to the Agreement and Plan of Merger by and among
Pentegra Dental Group, Inc., Liberty Dental Alliance, Inc.,
Liberty Acquisition Corporation, James M. Powers, Jr., Sylvia H.
McAlister and William Kelly dated as of January 29, 1999
10.8(6) Third Amendment to Credit Agreement
+10.9(7) Employment Agreement dated November 12, 2000 between e-dentist.com
and James M. Powers, Jr.
+10.10(7) Employment Agreement dated February 15, 2001 between e-dentist.com
and Charles Sanders
+10.11(7) Employment Agreement dated February 15, 2001 between e-dentist.com
and James Dunn, Jr.
10.12(7) Asset Purchase Agreement by and among e-dentist.com, Inc. and
Dexpo.com, Inc.
10.13(7) Fourth Amendment of Credit Agreement
10.14(9) Plan of Reorganization and Agreement of Merger by and among EDT
Learning, Inc., Edge Acquisition Subsidiary, Inc. and the
Stockholders of Learning-Edge, Inc.
10.15(10) Plan of Reorganization and Agreement of Merger by and among EDT
Learning, Inc., TW Acquisition Subsidiary, Inc., ThoughtWare
Technologies, Inc. and the Series B Preferred Stockholder of
ThoughtWare Technologies, Inc.
10.16(11) Asset Purchase Agreement by and among EDT Learning, Inc., and
Quisic Corporation. Common Stock Purchase Agreement by and between
EDT Learning, Inc., Investor Growth Capital Limited, A Guernsey
Corporation and Investor Group, L.P., A Guernsey Limited
Partnership and Leeds Equity Partners III, L.P.
10.16(12) Asset Purchase Agreement by and among EDT Learning, Inc., and
Mentergy, Inc. and its wholly-owned subsidiaries, LearnLinc Corp
and Gilat-Allen Communications, Inc.
10.17(14) Subcontractor Agreement between EDT Learning, Inc. and Interactive
Alchemy, Inc.
16(13) Letter re Change in Certifying Accountant
++31.1 Chief Executive Officer Section 302 Certification
++31.2 Principal Financial Officer Section 302 Certification
++32.1 Chief Executive Officer Section 906 Certification
++32.2 Principal Financial Officer Section 906 Certification
________________
33
(1) Previously filed as an exhibit to iLinc's Registration Statement
on Form S-1 (No. 333-37633), and incorporated herein by reference.
(2) Previously filed as an exhibit to iLinc's Registration Statement
on Form S-4 (No. 333-78535), and incorporated herein by reference.
(3) Previously filed as an exhibit to iLinc's Registration Statement
on Form S-4 (No. 333-64665), and incorporated herein by reference.
(4) Previously filed as an exhibit to iLinc's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1998.
(5) Previously filed as an exhibit to iLinc's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1998.
(6) Previously filed as an exhibit to iLinc's Annual Report on Form
10-K for the year ended March 31, 2000.
(7) Previously filed as an exhibit to iLinc's Annual Report on Form
10-K for the year ended March 31, 2001.
(8) Previously filed as an exhibit to iLinc's Annual Report on Form
10-K for the year ended March 31, 2002.
(9) Previously filed as an exhibit to iLinc's Form 8-K filed October
16, 2001.
(10) Previously filed as an exhibit to iLinc's Form 8-K filed January
30, 2002
(11) Previously filed as an exhibit to iLinc's Form 8-K filed July 2,
2002.
(12) Previously filed as an exhibit to iLinc's Form 8-K filed December
20, 2002.
(13) Previously filed as an exhibit to iLinc's Form 8-K filed April 3,
2003.
(14) Previously filed as an exhibit to iLinc's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 2003.
+ Management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to the requirements of Item 15
of Form 10-K.
++ Furnished herewith as an Exhibit
(b) REPORTS ON FORM 8-K.
A Report on Form 8-K was filed November 6, 2003 furnishing under Item 12 our
press release announcing our operating results for the quarter ended September
30, 2003.
A Report on Form 8-K was filed November 7, 2003 furnishing under Item 9
additional disclosures regarding the Company's operations for the fiscal year
ending March 31, 2004.
A Report on Form 8-K was filed February 5, 2004 furnishing under Item 12 our
press release announcing our operating results for the quarter ended December
31, 2003.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, iLinc Communications, Inc., has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
iLINC COMMUNICATIONS, INC.
Dated: February 17, 2004
By: /s/ James M. Powers, Jr.
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Chairman of the Board, President and
Chief Executive Officer
By: /s/ James L. Dunn, Jr.
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Senior Vice President and
Principal Financial Officer
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