HGBL

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2003, for I-Link Incorporated (intending to change its name to Acceris Communications, Inc.). The company operates in three segments: Acceris Partners (long-distance services), Acceris Solutions (enterprise voice/data), and Acceris Technologies (licensing). The reporting period includes the impact of the December 2002 acquisition of RSL Com U.S.A. Inc. and the May 2003 sale of its former I-Link Communications Inc. (ILC) segment, which is now classified as discontinued operations.

Key Financial Metrics

Note: All figures in thousands of dollars unless otherwise noted.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 69% to $37.0 million for the quarter (from $21.9 million in Q2 2002) and 46% to $67.4 million for the six months (from $46.3 million in 2002). This growth is primarily driven by the acquisition of RSL (Acceris Solutions) and increased subscriber base in Acceris Partners.
• Operating Loss: Operating loss widened to $(1.8) million for the quarter compared to $(0.2) million in Q2 2002. For the six months, the loss was $(14.4) million versus $(0.6) million in the prior year. Increases in network expenses and selling, general, and administrative (SG&A) costs outpaced revenue growth.
• Discontinued Operations: The company recorded a gain of $371,000 in Q2 2003 related to the sale of ILC, contrasting with a loss of $4.6 million in Q2 2002.
• Liquidity: Cash and cash equivalents decreased from $3.6 million at year-end 2002 to $2.0 million at June 30, 2003. The company has negative working capital of $66.7 million.

Guidance, Outlook, Risks, and Unusual Items

Going Concern Uncertainty

Management has raised substantial doubt about the company's ability to continue as a going concern. The company has an accumulated deficit of $212.9 million and relies heavily on funding from its controlling shareholder, Counsel Communications LLC. A debt restructuring agreement is pending shareholder approval to convert $30.9 million of related-party debt into equity. Remaining related-party debt of $31.0 million matures on June 30, 2004.

Restatement of Prior Periods

Financial statements for the quarter ended March 31, 2003, were restated. The company changed its revenue recognition policy for a specific network service offering from the accrual method to a cash-basis method due to collectibility concerns. This restatement increased the net loss for Q1 2003 by $11.97 million.

Outlook and Strategy

• The company plans to launch local communications products in New York and New Jersey in Q4 2003.
• Revenue from the discontinued network service offering (terminated July 2003) will continue to be recognized in Q3 and Q4 2003 based on cash collections finalized for prior services.
• Management expects telecommunication margins to fluctuate significantly due to regulatory changes and traffic volume variations.

Investor Verification Checklist

• Debt Restructuring Approval: Verify if the shareholder meeting approved the conversion of $30.9 million of related-party debt to equity, which is critical for solvency.
• Controlling Shareholder Support: Confirm the status of the funding commitment from Counsel Communications LLC, which extends only through April 15, 2004.
• Revenue Recognition Policy: Review the impact of the cash-basis revenue recognition on future quarters, specifically regarding the $8.8 million in collected cash not yet recognized as revenue.
• Margin Volatility: Monitor the stability of telecommunication service margins, which are subject to regulatory fees and competitor pricing.
• Discontinued Operations: Track the realization of contingent consideration (earn-out shares) from the sale of ILC to Buyers United.