| ILINC COMMUNICATIONS INC Item 1A Risk Factors |
| 9 ITEM 1A RISK FACTORS You should carefully consider the risks described below |
| The risks and uncertainties described below are not the only ones we face |
| If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected |
| In that case, the trading price of our common stock could be adversely affected |
| WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS We have a limited operating history in the Web conferencing and audio conferencing business |
| While the organizations that we have acquired have been engaged in their respective businesses for over five years, we only recently acquired those assets and have undertaken to integrate their assets into our operations at varying levels |
| Since the acquisition of these businesses, we have made significant changes to our product mix and service mix, our growth strategies, our sales and marketing plans, and other operational matters |
| Given our recent investment in technology, we cannot be certain that our business model and future operating performance will yield the results that we intend |
| In addition, the competitive and rapidly changing nature of the Web conferencing and audio conferencing markets makes it difficult for us to predict future results |
| Our business strategy may be unsuccessful and we may be unable to address the risks we face |
| WE FACE RISKS INHERENT IN INTERNET-RELATED BUSINESSES AND MAY BE UNSUCCESSFUL IN ADDRESSING THESE RISKS We face risks frequently encountered by companies in new and rapidly evolving markets such as Web conferencing and audio conferencing |
| We may fail to adequately address these risks and, as a consequence, our business may suffer |
| To address these risks among others, we must successfully introduce and attract new customers to our products and services; successfully implement our sales and marketing strategy to generate sufficient sales and revenues to sustain operations; foster existing relationships with our customers to provide for continued or recurring business and cash flow; and successfully address and establish new products and technologies as new markets develop |
| We may not be able to sufficiently address and overcome risks inherent in our business strategy |
| OUR QUARTERLY OPERATING RESULTS ARE UNCERTAIN AND MAY FLUCTUATE SIGNIFICANTLY Our operating results have varied significantly from quarter to quarter and are likely to continue to fluctuate as a result of a variety of factors, many of which we cannot control |
| Factors that may adversely affect our quarterly operating results include: the size and timing of product orders; the mix of revenue from custom services and software products; the market acceptance of our products and services; our ability to develop and market new products in a timely manner; the timing of revenues and expenses relating to our product sales; and revenue recognition rules |
| Expense levels are based, in part, on expectations as to future revenue and to a large extent are fixed in the short term |
| To the extent we are unable to predict future revenue accurately, we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall |
| WE HAVE LIMITED FINANCIAL RESOURCES AND MAY NOT REMAIN PROFITABLE We have incurred substantial operating losses and have limited financial resources at our disposal |
| We have long-term obligations that we will not be able to satisfy without additional debt and/or equity capital and/or ultimately generating profits and cash flows from our Web conferencing and audio conferencing operations |
| If we are unable to remain profitable, we will face increasing demands for capital |
| We may not be successful in raising additional debt or equity capital and may not remain profitable |
| As a result, we may not have sufficient financial resources to satisfy our obligations as they come due in the short term |
| 9 LISTING QUALIFICATIONS MAY NOT BE MET The American Stock Exchangeapstas continued listing standards require that we maintain stockholders &apos equity of at least dlra4dtta0 million if we have losses from continuing operations and/or net losses in three of our four most recent fiscal years |
| We have sustained losses in three of our four most recent fiscal years and therefore must maintain stockholders &apos equity of at least dlra4dtta0 million |
| If now or in the future, we fail to maintain a sufficient level of stockholders &apos equity in compliance with those and other listing standards of the American Stock Exchange, then we would be required to submit a plan to the American Stock Exchange describing how we intended to regain compliance with the requirements |
| In the event that our shares of common stock are diluted, the liquidity and price per share of our common stock may be adversely affected |
| DILUTION TO EXISTING STOCKHOLDERS WILL OCCUR UPON ISSUANCE OF SHARES WE HAVE RESERVED FOR FUTURE ISSUANCE On March 31, 2006, 28cmam923cmam168 shares of our common stock were issued, of which 1cmam432cmam412 were held in treasury, and 17cmam138cmam028 additional shares of our common stock were reserved for issuance as the result of the exercise of warrants or the conversion of convertible notes and convertible preferred stock |
| The issuance of these additional shares will reduce the percentage ownership of our existing stockholders |
| The existence of these reserved shares coupled with other factors, such as the relatively small public float, could adversely affect prevailing market prices for our common stock and our ability to raise capital through an offering of equity securities |
| THE LOSS OF THE SERVICES OF OUR SENIOR EXECUTIVES AND KEY PERSONNEL WOULD LIKELY CAUSE OUR BUSINESS TO SUFFER Our success depends to a significant degree on the performance of our senior management team |
| The loss of any of these individuals could harm our business |
| We do not maintain key person life insurance for any officers or key employees other than on the life of James M Powers, Jr, our Chairman, President and CEO, with that policy providing a death benefit to the Company of dlra1dtta0 million |
| Our success also depends on the ability to attract, integrate, motivate and retain additional highly skilled technical, sales and marketing, and professional services personnel |
| To the extent we are unable to attract and retain a sufficient number of additional skilled personnel, our business will suffer |
| OUR INTELLECTUAL PROPERTY MAY BECOME SUBJECT TO LEGAL CHALLENGES, UNAUTHORIZED USE OR INFRINGEMENT, ANY OF WHICH COULD DIMINISH THE VALUE OF OUR PRODUCTS AND SERVICES Our success depends in large part on our proprietary technology |
| If we fail to successfully enforce our intellectual property rights, the value of these rights, and consequently, the value of our products and services to our customers, could diminish substantially |
| It may be possible for third parties to copy or otherwise obtain and use our intellectual property or trade secrets without our authorization, and it may also be possible for third parties to independently develop substantially equivalent intellectual property |
| Currently, we do not have patent protection in place related to our products and services |
| Litigation may be necessary in the future to enforce our intellectual property rights, to protect trade secrets or to determine the validity and scope of the proprietary rights of others |
| While we have not received any notice of any claim of infringement of any of our intellectual property, from time to time we may receive notice of claims of infringement of other parties &apos proprietary rights |
| Such claims could result in costly litigation and could divert management and technical resources |
| These types of claims could also delay product shipment or require us to develop non-infringing technology or enter into royalty or licensing agreements, which agreements, if required, may not be available on reasonable terms, or at all |
| COMPETITION IN THE WEB CONFERENCING AND AUDIO CONFERENCING SERVICES MARKET IS INTENSE AND WE MAY BE UNABLE TO COMPETE SUCCESSFULLY, PARTICULARLY AS A RESULT OF RECENT ANNOUNCEMENTS FROM LARGE SOFTWARE COMPANIES The markets for Web conferencing and audio conferencing products and services are relatively new, rapidly evolving and intensely competitive |
| Competition in our market will continue to intensify and may force us to reduce our prices, or cause us to experience reduced sales and margins, loss of market share and reduced acceptance of our services |
| Many of our competitors have larger and more established customer bases, longer operating histories, greater name recognition, broader service offerings, more employees and significantly greater financial, technical, marketing, public relations, and distribution resources than we do |
| We expect that we will face new competition as others enter our market to develop Web conferencing and audio conferencing services |
| 10 These current and future competitors may also offer or develop products or services that perform better than ours |
| In addition, acquisitions or strategic partnerships involving our current and potential competitors could harm us in a number of ways |
| FUTURE REGULATIONS COULD BE ENACTED THAT EITHER DIRECTLY RESTRICT OUR BUSINESS OR INDIRECTLY IMPACT OUR BUSINESS BY LIMITING THE GROWTH OF INTERNET-BASED BUSINESS AND SERVICES As commercial use of the Internet increases, federal, state, and foreign agencies could enact laws or adopt regulations covering issues such as user privacy, content, and taxation of products and services |
| If enacted, such laws or regulations could limit the market for our products and services |
| Although they might not apply to our business directly, we expect that laws or rules regulating personal and consumer information could indirectly affect our business |
| It is possible that such legislation or regulation could expose us to liability which could limit the growth of our Web conferencing and audio conferencing products and services |
| Such legislation or regulation could dampen the growth in overall Web conferencing usage and decrease the Internetapstas acceptance as a medium of communications and commerce |
| WE DEPEND LARGELY ON ONE-TIME SALES TO GROW REVENUES WHICH MAKE OUR REVENUES DIFFICULT TO PREDICT While audio conferencing provides a more recurring revenue base, a high percentage of our revenue is attributable to one-time purchases by our customers rather than long-term, recurring, conferencing ASP type contracts |
| As a result, our inability to continue to obtain new agreements and sales may result in lower than expected revenue, and therefore, harm our ability to achieve or sustain operations or profitability on a consistent basis, which could also cause our stock price to decline |
| Further, because we face competition from larger, better-capitalized companies, we could face increased downward pricing pressure that could cause a decrease in our gross margins |
| Additionally, our sales cycle varies depending on the size and type of customer considering a purchase |
| Potential customers frequently need to obtain approvals from multiple decision makers within their company and may evaluate competing products and services before deciding to use our services |
| Our sales cycle, which can range from several weeks to several months or more, combined with the license purchase model makes it difficult to predict future quarterly revenues |
| OUR OPERATING RESULTS MAY SUFFER IF WE FAIL TO DEVELOP AND FOSTER OUR VALUE ADDED RESELLER OR DISTRIBUTION RELATIONSHIPS We have an existing channel and distribution network that provides growing revenues and contributes to our high margin software sales |
| These distribution partners are not obligated to distribute our services at any minimum level |
| As a result, we cannot accurately predict the amount of revenue we will derive from our distribution partners in the future |
| The inability or unwillingness of our distribution partners to sell our products to their customers and increase their distribution of our products could result in significant reductions in our revenue, and therefore, harm our ability to achieve or sustain profitability on a consistent basis |
| SALES IN FOREIGN JURISDICTIONS BY OUR INTERNATIONAL DISTRIBUTOR NETWORK AND US MAY RESULT IN UNANTICIPATED COSTS We continue to expand internationally through our value added reseller network and OEM partners |
| We have limited experience in international operations and may not be able to compete effectively in international markets |
| We face certain risks inherent in conducting business internationally, such as: o our inability to establish and maintain effective distribution channels and partners; o the varying technology standards from country to country; o our inability to effectively protect our intellectual property rights or the code to our software; o our inexperience with inconsistent regulations and unexpected changes in regulatory requirements in foreign jurisdictions; o language and cultural differences; o fluctuations in currency exchange rates; o our inability to effectively collect accounts receivable; or o our inability to manage sales and other taxes imposed by foreign jurisdictions |
| 11 THE GROWTH OF OUR BUSINESS SUBSTANTIALLY DEPENDS ON OUR ABILITY TO SUCCESSFULLY DEVELOP AND INTRODUCE NEW SERVICES AND FEATURES IN A TIMELY MANNER We acquired our Web conferencing software and business in November of 2002 and we acquired our audio conferencing business in June of 2004 |
| With our focus on those products and services, our growth depends on our ability to continue to develop new features, products, and services around that software and product line |
| We may not successfully identify, develop, and market new products and features in a timely and cost-effective manner |
| If we fail to develop and maintain market acceptance of our existing and new products to offset our continuing development costs, then our net losses will increase and we may not be able to achieve or sustain profitability on a consistent basis |
| IF WE FAIL TO OFFER COMPETITIVE PRICING, WE MAY NOT BE ABLE TO ATTRACT AND RETAIN CUSTOMERS Because the Web conferencing market is relatively new and still evolving, the prices for these services are subject to rapid and frequent changes |
| In many cases, businesses provide their services at significantly reduced rates, for free or on a trial basis in order to win customers |
| Due to competitive factors and the rapidly changing marketplace, we may be required to significantly reduce our pricing structure, which would negatively affect our revenue, margins and our ability to achieve or sustain profitability on a consistent basis |
| We have an existing channel and distribution network that provides growing revenues and contributes to our high margin software sales |
| These distribution partners are not obligated to distribute our services at any particular minimum level |
| As a result, we cannot accurately predict the amount of revenue we will derive from our distribution partners in the future |
| The inability of our distribution partners to sell our products to their customers and increase their distribution of our products could result in significant reductions in our revenue, and, therefore, harm our ability to achieve or sustain profitability on a consistent basis |
| IF WE ARE UNABLE TO COMPLETE OUR ASSESSMENT AS TO THE ADEQUACY OF OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING AS REQUIRED BY SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002, INVESTORS COULD LOSE CONFIDENCE IN THE RELIABILITY OF OUR FINANCIAL STATEMENTS, WHICH COULD RESULT IN A DECREASE IN THE VALUE OF OUR COMMON STOCK As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring non-accelerated public companies to include in their annual reports on Form 10-K for fiscal years beginning after December 16, 2006 a report of management on their companyapstas internal control over financial reporting, including managementapstas assessment of the effectiveness of their companyapstas internal control over financial reporting as of the companyapstas fiscal year end |
| In addition, the accounting firm auditing a public companyapstas financial statements must also attest to and report on managementapstas assessment of the effectiveness of the companyapstas internal control over financial reporting as well as the operating effectiveness of the companyapstas internal controls |
| There is a risk that we may not comply with all of its requirements |
| If we do not timely complete our assessment or if our accounting firm determines that our internal controls are not designed or operating effectively as required by Section 404, our accounting firm may either disclaim its opinion as it is related to managementapstas assessment of the effectiveness of its internal controls or may issue a qualified opinion on the effectiveness of our internal controls |
| If our accounting firm disclaims its opinion or qualifies its opinion as to the effectiveness of our internal controls, then investors may lose confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline |
| WE MAY ACQUIRE OTHER BUSINESSES THAT COULD NEGATIVELY AFFECT OUR OPERATIONS AND FINANCIAL RESULTS AND DILUTE EXISTING STOCKHOLDERS We may pursue additional business relationships through acquisitions which may not be successful |
| We may have to devote substantial time and resources in order to complete acquisitions and we therefore may not realize the benefits of those acquisitions |
| Further, these potential acquisitions entail risks, uncertainties and potential disruptions to our business |
| For example, we may not be able to successfully integrate a companyapstas operations, technologies, products and services, information systems, and personnel into our business |
| These risks could harm our operating results and could adversely affect prevailing market prices for our common stock |
| OUR CURRENT STOCK COMPENSATION EXPENSE NEGATIVELY IMPACTS OUR EARNINGS, AND WHEN WE ARE REQUIRED TO REPORT THE FAIR VALUE OF EMPLOYEE STOCK OPTIONS AS AN EXPENSE IN CONJUNCTION WITH THE NEW ACCOUNTING STANDARDS, OUR EARNINGS WILL BE ADVERSELY AFFECTED, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE 12 Under our current accounting practice, stock compensation expense is recorded on the date of the grant only if the current market price of the underlying stock exceeds the exercise price |
| Beginning with the fiscal quarter April 1, 2006, we will be required to report all employee stock options as an expense based on a change in the accounting standards and our earnings will be negatively impacted, which could adversely affect prevailing market prices for our common stock and increase our anticipated net losses |