================================================================================ UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
Quarterly Report Pursuant to Section--------------
QUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d) of the Securities Exchange Act ofOF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005Quarterly Period Ended March 31, 2008
Commission File Number: 0-21683
------------------------------------
GraphOn Corporation
(Exact name of Registrantregistrant as specified in its charter)
------------------------------------
Delaware 13-3899021
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5400 Soquel Avenue, Suite A2
Santa Cruz, CA 95062
(Address of principal executive offices)
Registrant's telephone number: (800) 472-7466
----------------------
Indicate by check mark whether the Registrantregistrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the precedingpast 12 months (or for such shorter period that the Registrantregistrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]|X| No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, (as defineda non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act Rule 12b-2). YesAct.
Large accelerated filer [ ] NoNon-accelerated filer [ ]
Accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]|X|
As of November 14, 2005,May 15, 2008 there were issued and outstanding 46,167,04747,596,401 shares of
the Registrant's Common Stock,issuer's common stock, par value $0.0001.
================================================================================
GRAPHON CORPORATION
FORM 10-Q
Table of Contents
Page
PART I.FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2005
(unaudited) and December 31, 2004 2
Unaudited Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) for the three months ended
September 30, 2005 and 2004 and for the nine months ended
September 30, 2005 and 2004 3
Unaudited Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2005 and 2004 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 6.Exhibits 25
PART I. FINANCIAL INFORMATION PAGE
------------- ------------------------------------------------------------------------ -----------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2008 (unaudited)
and December 31, 2007 2
Unaudited Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2008 and 2007 3
Unaudited Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2008 and 2007 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
------------- ------------------------------------------------------------------------
Item 1. Legal Proceedings 19
Item 1A. Risk Factors 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits 19
Signatures
26
PART I--FINANCIALI. FINANCIAL INFORMATION
ITEM 11. Financial Statements
GRAPHON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,GraphOn Corporation
Condensed Consolidated Balance Sheets
-------------------------------------
(Unaudited)
Assets March 31, 2008 December 31, 2005 2004
ASSETS ------------- ------------
------------ (Unaudited)2007
------ ------------------- -------------------
Current Assets:Assets
Cash and cash equivalents ..................... $ 3,125,9004,780,500 $ 675,3005,260,800
Accounts receivable, net of allowance for
doubtful accounts of $62,000 and $46,800 ..... 459,200 518,900747,700 886,600
Prepaid expenses and other current assets ..... 10,300 24,100
------------ ------------99,600 42,600
------------------- -------------------
Total Current Assets .......................... 3,595,400 1,218,300
------------ ------------
Property and equipment, net ...................... 93,500 75,400
Capitalized software, net ........................ 128,500 273,7005,627,800 6,190,000
Patents, net ..................................... 4,827,400 --
Deferred acquisition costs ....................... -- 269,700
Note receivable - related party .................. -- 350,0002,519,000 2,741,300
Other assets, ..................................... 9,400 37,300
------------ ------------
TOTAL ASSETS ................................net 145,000 143,100
------------------- -------------------
Total Assets $ 8,654,2008,291,800 $ 2,224,400
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------9,074,400
=================== ===================
Liabilities and Stockholders' Equity
Current Liabilities:Liabilities
Accounts payable ..............................and accrued expense $ 122,900717,000 $ 250,200
Accrued expenses .............................. 231,100 231,400
Accrued wages ................................. 327,400 260,100867,200
Deferred revenue .............................. 818,800 689,800
------------ ------------1,416,500 1,475,000
------------------- -------------------
Total Current Liabilities ..................... 1,500,200 1,431,5002,133,500 2,342,200
Deferred revenue .............................. 567,400 426,600
------------ ------------
TOTAL LIABILITIES ........................... 2,067,600 1,858,100
------------ ------------1,802,400 1,833,100
------------------- -------------------
Total Liabilities 3,935,900 4,175,300
------------------- -------------------
Commitments and contingencies - -
Stockholders' Equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding .... -- --Equity
Common stock, $0.0001 par value, 195,000,000 shares
authorized, 46,167,04747,596,401 and 21,716,76547,576,401 shares issued
and outstanding ................... 4,600 2,200at March 31, 2008 and
December 31, 2007, respectively 4,800 4,800
Additional paid inpaid-in capital ....................... 58,397,500 46,930,700
Deferred Compensation ............................ (6,900) --
Notes receivable - directors ..................... -- (50,300)
Note receivable - shareholder .................... (347,400) --
Accumulated other comprehensive loss ............. -- (400)59,527,700 59,399,000
Accumulated deficit .............................. (51,461,200) (46,515,900)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY .................. 6,586,600 366,300
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..(55,176,600) (54,504,700)
------------------- -------------------
Total Stockholders' Equity 4,355,900 4,899,100
------------------- -------------------
Total Liabilities and Stockholders' Equity $ 8,654,2008,291,800 $ 2,224,400
============ ============9,074,400
=================== ===================
See accompanying notes to unaudited condensed consolidated financial statements.statements
2
GRAPHON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSGraphOn Corporation
Condensed Consolidated Statements of Operations
-----------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------March 31,
------------------------------------
2008 2007
(Unaudited) (Unaudited)
(Unaudited) (Unaudited)
Revenue:---------------- ----------------
Product licenses ..............................Revenue $ 829,7001,312,300 $ 568,800 $ 2,666,900 $ 1,645,800
Service fees .................................. 338,000 257,700 939,400 751,700
Other ......................................... 8,700 105,000 26,300 114,300
------------ ------------ ------------ ------------
Total Revenue .............................. 1,176,400 931,500 3,632,600 2,511,800
------------ ------------ ------------ ------------
Cost1,137,600
Costs of Revenue:
Product costs ................................. 53,000 60,000 156,800 517,100
Service costs ................................. 62,300 87,100 210,200 244,800
------------ ------------ ------------ ------------
Total Cost of Revenue ...................... 115,300 147,100 367,000 761,900
------------ ------------ ------------ ------------revenue 158,600 118,900
---------------- ----------------
Gross Profit ............................... 1,061,100 784,400 3,265,600 1,749,900
------------ ------------ ------------ ------------profit 1,153,700 1,018,700
---------------- ----------------
Operating Expenses:expenses
Selling and marketing ......................... 337,100 356,700 1,014,000 1,119,500408,500 432,500
General and administrative .................... 756,900 357,000 2,252,000 869,700965,400 974,000
Research and development ...................... 333,200 366,800 969,900 1,226,400
------------ ------------ ------------ ------------486,400 671,500
---------------- ----------------
Total Operating Expenses ...................... 1,427,200 1,080,500 4,235,900 3,215,600
------------ ------------ ------------ ------------operating expenses 1,860,300 2,078,000
---------------- ----------------
Loss From Operations .......................... (366,100) (296,100) (970,300) (1,465,700)
------------ ------------ ------------ ------------from operations (706,600) (1,059,300)
---------------- ----------------
Other Income (Expense):
Interest and other income, .................. 10,200 2,500 30,000 9,000
Interest and other expense ................. (3,500) -- (5,000) --
------------ ------------ ------------ ------------
Total Other Income ......................... 6,700 2,500 25,000 9,000
------------ ------------ ------------ ------------net 35,500 19,600
---------------- ----------------
Loss before provision for income tax (671,100) (1,039,700)
Provision for income tax 800 1,700
---------------- ----------------
Net Loss ...................................... (359,400) (293,600) (945,300) (1,456,700)
Other Comprehensive Income (Loss), net of tax:
Foreign currency translation gain (loss) ... -- (100) -- 400
------------ ------------ ------------ ------------
Comprehensive Loss ............................ (359,400) (293,700) (945,300) (1,456,300)
Deemed dividends on preferred stock ........... -- -- (4,000,000) --
------------ ------------ ------------ ------------
Loss Attributable to Common Shareholders ......loss $ (359,400)(671,900) $ (293,700) $ (4,945,300) $ (1,456,300)
============ ============ ============ ============(1,041,400)
================ ================
Basic and Diluted Lossdiluted loss per Common Share .......share $ (0.01) $ (0.01) $ (0.12) $ (0.07)
============ ============ ============ ============
Weighted(0.02)
================ ================
Average Common Shares Outstanding .... 46,158,786 21,679,723 40,373,157 21,218,971
============ ============ ============ ============weighted common shares outstanding 47,089,808 46,238,191
================ ================
See accompanying notes to unaudited condensed consolidated financial statements.statements
3
GRAPHON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NineGraphOn Corporation
Condensed Consolidated Statements of Cash Flows
-----------------------------------------------
(Unaudited) (Unaudited)
For the Three Months Ended
September 30,
2005 2004
------------ ------------
(Unaudited) (Unaudited)------------------------------------
March 31, 2008 March 31, 2007
---------------- ----------------
Cash Flows FromProvided By (Used In) Operating
Activities:
---------------------------------------------------
Net loss ..............................................Loss $ (945,300)(671,900) $ (1,456,700)(1,041,400)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ...................... 777,300 596,000
Amortization of deferred238,800 243,500
Stock-based compensation .............. 2,000 --expense 125,100 138,900
Provision for doubtful accounts .................... 15,200 --
Proceeds from notes receivable4,600 - directors .......... 50,300 --
Proceeds from note receivable - shareholder ......... 2,600 --
Interest accrued on notes receivable - directors ... (300) (1,400)4,800
Interest accrued on note receivable - shareholder .. (9,600) --
Proceeds from interest accrued on notes receivable - directors ........................................ 4,300 --
Proceeds from interest accrued on note receivable -
Shareholder ...................................... 1,200 --(2,400)
Changes in operating assets and liabilities:liabilities
Accounts receivable, ................................ 44,500 (17,200)net 134,300 (185,200)
Prepaid expenses and other current assets .......... 13,800 6,000expense (57,000) (135,700)
Accounts payable ................................... 12,100 33,400
Accrued expenses ................................... (38,600) (144,300)
Accrued wages ...................................... 67,300 63,500and accrued expense (150,200) (169,800)
Deferred revenue ................................... 269,800 56,600
------------ ------------(89,200) 62,900
---------------- ----------------
Net Cash Provided By (Used In)Used In Operating Activities ... 266,600 (864,100)
------------ ------------(465,500) (1,084,400)
---------------- ----------------
Cash Flows FromUsed In Investing Activities:
Cash paid for NES acquisition ......................... (697,500) --
Capital expenditures .................................. (55,500) (33,400)---------------------------------------------------
Purchases of equipment (18,200) (13,400)
Other assets .......................................... (4,600) 5,200
------------ ------------(200) -
---------------- ----------------
Net Cash Used In Investing Activities .............. (757,600) (28,200)
------------ ------------(18,400) (13,400)
---------------- ----------------
Cash Flows FromProvided By Financing Activities:
Proceeds from private placement
of preferred stock and warrants ...................... 3,335,000 1,150,000
Costs of private placement of preferred stock
and warrants ......................................... (402,000) (215,200)---------------------------------------------------
Proceeds from sale of common stock under- employee stock
purchase plan ......................... 10,000 9,000
Proceeds from exercise of warrants .................... -- 6,900
------------ ------------3,600 3,800
---------------- ----------------
Net Cash Provided By Financing Activities .......... 2,943,000 950,700
------------ ------------
Effect of exchange rate fluctuations on cash and
cash equivalents ................................... (1,400) 400
------------ ------------3,600 3,800
---------------- ----------------
Net IncreaseDecrease in Cash and Cash Equivalents ............. 2,450,600 58,800(480,300) (1,094,000)
Cash and Cash Equivalents,cash equivalents, beginning of period ........ 675,300 1,025,500
------------ ------------5,260,800 2,937,100
---------------- ----------------
Cash and Cash Equivalents,cash equivalents, end of period .............. $ 3,125,9004,780,500 $ 1,084,300
============ ============1,843,100
================ ================
See accompanying notes to unaudited condensed consolidated financial statements.statements
4
GRAPHON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)GraphOn Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation
The unaudited condensed consolidated financial statements of GraphOn
Corporation (the Company) and its subsidiaries included herein have
been prepared in accordance with accounting principles generally accepted in the
instructions for Form 10-QUnited States ("GAAP") applicable to interim financial information and therefore,the rules
and regulations promulgated by the Securities and Exchange Commission
(the "SEC"). Accordingly, such financial statements do not include all
information and footnotes necessary for a complete presentation
of the Company's results of operations,footnote disclosures required in annual financial position and cash flows.statements.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, (whichwhich include only normal, recurring adjustments, in the
three and nine-month periods ended September 30, 2005 and 2004) that
are, in the opinion of management, necessary to state fairly the results for the
periods presented. This Quarterly Report on Form 10-Q should be read in
conjunction with the Company's audited consolidated financial statements of GraphOn
Corporation (the "Company") contained in the Company's Annual Report on Form
10-K10-KSB for the year ended December 31, 2004,2007, which was filed with the Securities and Exchange Commission (the Commission)SEC on
April 15, 2005.March 31, 2008 ("2007 10-KSB Report"). The interim results presented herein are
not necessarily indicative of the results of operations that may be expected for
the full fiscal year ending December 31, 2005,2008, or any future period.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of AmericaGAAP requires
management to make estimates and assumptions that affect the amounts reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities atin
the date of theunaudited condensed consolidated financial statements and accompanying
notes. While the reported amountsCompany believes that such estimates are fair when considered
in conjunction with the unaudited condensed consolidated financial statements
and accompanying notes, the actual amount of revenue and
expenses during the reporting period. Thesesuch estimates, include the allowance for
doubtful accounts, the estimated lives of intangible assets, depreciation of
fixed assets and accrued liabilities, among others. Actual results could differ
materiallywhen known, will
vary from those estimates.
Intercompany Accounts and Transactions
Significant intercompany accounts and transactions are eliminated upon
consolidation.
2. Patents (Network Engineering Software Acquisition).
On January 31, 2005,Revenue Recognition
The Company markets and licenses products through various means, such as;
channel distributors, independent software vendors ("ISVs"), value-added
resellers ("VARs") (collectively "resellers") and direct sales to enterprise end
users. Its product licenses are generally perpetual. The Company also separately
sells maintenance contracts, which are comprised of license updates and customer
service access, private-label branding kits, software developer kits and product
training services.
Generally, software license revenues are recognized when:
o Persuasive evidence of an arrangement exists, (i.e., when the Company
acquired allsigns a non-cancelable license agreement wherein the customer
acknowledges an unconditional obligation to pay, or upon receipt of
the outstandingcustomer's purchase order) and
o Delivery has occurred or services have been rendered and there are no
uncertainties surrounding product acceptance, (i.e., when title and risk
of loss have been transferred to the customer, which generally occurs when
the media containing the licensed programs is provided to a common stockcarrier
or, in the case of Network Engineering Software ("NES")electronic delivery, when the customer is given access
to the licensed programs) and
o The price to the customer is fixed or determinable, as typically
evidenced in exchange for 9,599,993 sharesa signed non-cancelable contract, or a customer's purchase
order, and
o Collectibility is probable. If collectibility is not considered
probable, revenue is recognized when the fee is collected.
Revenue recognized on software arrangements involving multiple elements is
allocated to each element of the Company's common stock, valued at $3,916,800,arrangement based on vendor-specific objective
evidence ("VSOE") of the fair values of the elements; such elements include
licenses for software products, maintenance, and approximately $897,800 in cash
paymentscustomer training. The Company
limits its assessment of VSOE for each element to settle various claims against NES prioreither the price charged when
the same element is sold separately or the price established by management
having the relevant authority to do so, for an element not yet sold separately.
5
If sufficient VSOE of fair values does not exist so as to permit the allocation
of revenue to the acquisition.
Approximately $665,000various elements of the $897,800 cash payments was made in December
2004 by AIGH Investment Partners, LLC ("AIGH"), an affiliate of a principal
stockholder (Orin Hirschman), to settle, on the Company's behalf, certain third
party litigation against NES. The Company reimbursed this amount through a
partial credit against the price of our securities acquired by AIGH in the 2005
private placement (See Note 3).
The Company incurred $563,500 of transaction costs, resulting in a purchase
price of $5,378,100. The acquisition was accounted for as a business
combination. Accordingly, the assets acquired (primarily consisting of patents,
patent applications, and in-process patent applications) have been recorded at
their estimated fair value.
In connection with the acquisition, the Company recorded a deferred tax
liability of $2,151,200, resulting from a difference between the tax basis and
5
financial statement basis of the assets acquired. Furthermore, the Company has
recorded a corresponding $2,151,200 reduction in its valuation allowance on its
deferred tax assets as of March 31, 2005 to reflect management's estimate that
it is more likely than not that the Company will realize the tax benefits from
utilization of certain of its tax net operating loss carryforwards from future
reversals of the taxable temporary differences arisingarrangement, all revenue from the
NES acquisition.
These amounts have been netted together on the Company's condensed balance
sheet.
The estimated costarrangement is deferred until such evidence exists or until all elements are
delivered. If evidence of the patent related assetsVSOE of all undelivered elements exists but evidence
does not exist for one or more delivered elements, then revenue is being amortized over a
6-year periodrecognized
using the straight-lineresidual method. ForUnder the three and nine-month
periods ended September 30, 2005, approximately $224,200 and $594,700 of
amortization was charged against the cost of the patent related assets. No such
amortization was charged in the corresponding periods of the prior year. The
estimated cost of these assets and their estimated useful lives may change as a
result of the completion of a valuation study and as all direct acquisition
costs are finalized. The final adjustments to the estimated costs of these
assets are not expected to be material.
As of December 31, 2004, prior to the consummation of the acquisition, the
Company had deferred approximately $269,700 of the acquisition costs. These
deferred acquisition costs are included in the transaction costs above.
The following unaudited pro forma information presents the consolidated
results of the Company as if the NES acquisition had occurred at the beginning
of the respective periods. The pro forma information is not necessarily
indicative of what would have occurred had the acquisition been made as of such
period, nor is it indicative of future results of operations. The pro forma
amounts give effect to appropriate adjustments forresidual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement
fee is recognized as revenue.
There are no rights of return granted to resellers or other purchasers of the
Company's software programs.
Revenue from maintenance contracts is recognized ratably over the related
contract period, which generally ranges from one to five years.
Long-Lived Assets
Long-lived assets, which consist primarily of patents, amortization and income taxes.
Nine Months Ended September 30,
2005 2004
-------------- --------------
Revenue $ 3,632,600 $ 2,511,800
Net loss (1,051,400) (2,668,800)
Net loss attributable to
common shareholders (5,051,400) (6,668,800)
Loss per share - basic and
diluted (0.11) (0.14)
3. Stockholders' Equity
Duringare assessed for possible
impairment whenever events or changes in circumstances indicate that the
first quarter of 2005,carrying amounts may not be recoverable, whenever the Company issued 15,489 shares of common
stockhas committed to employees under provisionsa
plan to dispose of the Employee Stock Purchase Plan (the
ESPP), resulting in cash proceeds of approximately $4,600.
During the first quarter of 2005, the Company completedassets or, at a private placement
(the "2005 Private Placement"), which, after the Company's stockholders approved
an amendmentminimum, as it relates to the Company's
Certificate of Incorporation, resulted in the
issuance of 14,814,800 shares of common stock and gross cash proceeds of
approximately $3,335,000, netpatents, annually. Measurement of the $665,000 credit issued to AIGH (See Note 2
and Note 9)).
Also during the first quarter of 2005, the Company issued 9,599,993 shares of
common stock, with a value of $3,916,800, to consummate its acquisition of NES
(See Note 2).
During the first quarter of 2005, the Company reclassified note receivable -
third party from the long-term assets section of its balance sheet to the equity
section under the title note receivable - shareholder to reflect the replacement
of the NES stock that had been collateralizing the note, as of December 31,
2004, with Company stock, upon the consummation of the acquisition of NES (See
Note 2)impairment loss is based on January 31, 2005.
During the first quarter of 2005, the Company received an aggregate of
approximately $54,600 as payment in full of the principal and accrued interest
due from the notes receivable - directors.
During the third quarter of 2005, the Company issued 20,000 shares of common
6
stock to employees under provisions of the ESPP, resulting in cash proceeds of
approximately $5,400.
4. Litigation
The Company is currently not involved in any litigation that it believes
would have a materially adverse affect upon its financial results or financial
position.
5. Stock-Based Incentive Programs
The Company accounts for stock-based compensation under the intrinsic value
method of accounting for stock awards, in accordance with Accounting Principles
Board Opinion number 25, "Accounting for Stock Issued to Employees" (APB 25) as
permitted by Statement of Financial Accounting Standards number 123,
"Stock-Based Compensation" (SFAS 123). The Company has not changed to the fair value
of the assets. Generally, fair value is determined based on appraisals, current
market value, comparable sales value, and undiscounted future cash flows, as
appropriate. Assets to be held and used affected by such impairment loss are
depreciated or amortized at their new carrying amount over the remaining
estimated life; assets to be sold or otherwise disposed of are not subject to
further depreciation or amortization. No such impairment charge was recorded
during either of the three-month periods ended March 31, 2008 or 2007.
Patents
The Company's patents are being amortized over their estimated remaining
economic lives, currently estimated to be until approximately December 31, 2010.
Costs associated with filing, documenting or writing method patents are expensed
as incurred. Contingent legal fees paid in connection with a patent lawsuit, or
settlements thereof, are charged to cost of accounting for stock-based employee compensation. Hadgoods sold. All other non-contingent
legal fees and costs incurred in connection with a patent lawsuit, or
settlements thereof, are charged to general and administrative expense.
3. Stock-Based Compensation
On January 1, 2006 the Company appliedadopted the fair value recognition provisions of
SFASStatement of Financial Accounting Standards No. 123R, "Share-Based Payment," and
related interpretations ("FAS123R") using the modified prospective transition
method. Under that method, compensation cost recognized in the three-month
periods ended March 31, 2008 and 2007 includes (a) compensation cost for all
stock-based awards granted prior to, but not yet vested as of January 1, 2006,
based on the grant date fair value estimated in accordance with the original
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," ("FAS123") and (b) compensation cost for all
stock-based awards granted on or subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of FAS123R.
The valuation provisions of FAS123R apply to new awards and to awards that were
outstanding on the adoption date and subsequently modified or cancelled.
Estimated compensation expense for awards outstanding at the adoption date is
recognized over the remaining service period using the compensation cost
calculated for pro forma disclosure purposes under FAS123.
Results for periods prior to adoption were not restated.
Valuation and Expense Information under FAS123R
The Company recorded stock-based compensation expense of $125,100 and $138,900
in the Company's net lossthree-month periods ended March 31, 2008 and basic2007, respectively. As
required by FAS123R, the Company estimates forfeitures of employee stock-based
awards and diluted loss per share would
have been changed fromrecognizes compensation cost only for those awards expected to vest.
Forfeiture rates are estimated based on an analysis of historical experience and
are adjusted to actual forfeiture experience as needed.
The following table illustrates the "as reported" amounts tostock-based compensation expense recorded
during the "pro forma" amounts as
follows for each of the respective periods:three-month periods ended March 31, 2008 and 2007 by income statement
classification:
6
Three months ended September 30,
---------- ----------
2005 2004
Net loss:March 31,
----------------------------
Income Statement Classification 2008 2007
------------------------------- ------------ ------------
As reported:Cost of revenue $ (359,400)5,300 $ (293,600)
Add: stock-based compensation4,400
Selling and marketing expense included in net loss, net of related
tax effects 500 -
Deduct: total stock-based compensation10,600 10,700
General and administrative expense determined under fair-value
method for all awards, net of related
tax effects (122,600) (51,000)
---------- ----------
Pro forma net loss attributable
to common shareholders:74,900 92,500
Research and development expense 34,300 31,300
------------ ------------
$ (481,500)125,100 $ (344,600)
========== ==========
Basic and diluted loss per share:
As reported $ (0.01) $ (0.01)
Pro forma $ (0.01) $ (0.02)138,900
============ ============
The Company estimated the fair value of each stock-based award granted during
the three-month periods ended March 31, 2008 and 2007 as of the date of grant
using a binomial model, with the assumptions set forth in the following table:
Nine months ended
September 30,
2005 2004Three Expected
Months Annualized Option Estimated Risk-Free
Ended Estimated Forfeiture Term Exercise Interest
March 31, Volatility Rate (Years) Factor Rate Dividends
---------- ------------ ------------ Net loss:------------ ------------ ------------ ------------
As reported:
2008 159.00% 4.00% 7.5 10.00% 3.15% -
2007 155.44% 5.06% 7.5 10.00% 4.58% -
The Company also recognized compensation costs for common shares purchased under
its Employee Stock Purchase Plan ("ESPP") during the three-month periods ended
March 31, 2008 and 2007 applying the same variables as noted in the table above
to the calculation of such costs, except that the expected term was 0.5 years
for each respective period. The time span from the date of grant of ESPP shares
to the date of purchase is six months.
The Company does not anticipate paying dividends on its common stock for the
foreseeable future. Expected volatility is based on the historical volatility of
the Company's common stock over the 7.5 year period ended on the end of each
respective quarterly reporting period noted in the above table.
The approximate risk free interest rate was based on the implied yield available
on U.S. Treasury issues with remaining terms equivalent to the Company's
expected term on its stock-based awards. The expected term of the Company's
stock-based option awards was based on historical award holder exercise patterns
and considered the market performance of the Company's common stock and other
items. The annualized forfeiture rate was based on an analysis of historical
data and considered the impact of events such as the work force reductions the
Company carried out during previous years. The estimated exercise factor was
based on an analysis of historical data and included a comparison of historical
and current share prices.
For stock-based awards granted during the three-month periods ended March 31,
2008 and 2007, exclusive of common shares purchased pursuant to the Company's
ESPP, the weighted average fair values were $0.340 and $0.146, respectively. The
weighted average fair value of common shares purchased pursuant to the Company's
ESPP during the three-month periods ended March 31, 2008 and 2007 were $0.410
and $0.156, respectively.
The following table presents a summary of the status and activity of the
Company's stock option awards for the three-month period ended March 31, 2008.
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Shares Price Term (Years) Value
------------- ------------ ---------------- --------------
Outstanding - December 31, 2007 6,569,286 $ (945,300) $ (1,456,700)
Less: Deemed dividends on
preferred stock (4,000,000)0.46
Granted 915,000 0.38
Exercised - -
Forfeited or expired - -
7
Add: stock-based compensation expense
included in net loss, net of related
tax effects 2,000-------------
Outstanding - Deduct: total stock-based compensation
expense determined under fair-value
method for all awards, net of related
tax effects (316,900) (232,600)
------------ ------------
Pro forma net loss attributable
to common shareholders:March 31, 2008 7,484,286 $ (5,260,200)0.45 6.86 $ (1,689,300)
============ ============
Basic and diluted loss per share:
As reported $ (0.11) $ (0.07)
Pro forma $ (0.11) $ (0.08)391,000
=============
6. CommitmentsOf the options outstanding as of March 31, 2008, 5,729,566 were vested,
1,620,428 were estimated to vest in future periods and Contingencies
In October 2004,134,292 were estimated to
be forfeited prior to their vesting.
All options are exercisable immediately upon grant. Options vest, generally
ratably over a 33-month period commencing in the Company renewed its operating lease for an approximate
3,300 square foot facility in New Hampshire. This lease is cancelable byfourth month after the landlord or the Company upon 30-days written notice. Monthly rental payments for
this facility are approximately $5,300.
The Company currently occupies approximately 1,900 square feet of office
space in Santa Cruz, California. The office space is rented pursuant to a
three-year operating lease, which became effective August 1, 2005. Rent on this
facility will approximate $2,900 per month over the course of the lease.grant
date. The Company has an optionthe right to extendrepurchase exercised options that have not
vested upon their forfeiture at the lease termrespective option's exercise price.
As of March 31, 2008, there was approximately $365,400 of total unrecognized
compensation cost, net of estimated forfeitures, related to stock-based
compensation. That cost is expected to be recognized over a weighted-average
period of approximately one year and three months.
4. Revenue
Revenue for one additional three-year
period.
The Company has been occupying leased facilities in Rolling Hills Estates,
California, on a month-to-month basis since October 2002. Rent on this facility
is approximately $1,000 per month.
The Company has also been renting an office in Berkshire, England, United
Kingdom since December 2002. This operating lease runs through December 2005.
Rent on this office, which can fluctuate depending on exchange rates, is
approximately $400 per month.
As a condition of a private placement that occurred during January 2004 (the
"2004 private placement"), the Company entered into an Investment Advisory
Agreement with Orin Hirschman, a significant stockholderthree-month periods ended March 31, 2008 and 2007 was comprised
as follows:
2008 Over (Under) 2007
----------------------------
Revenue 2008 2007 Dollars Percent
- -------------------------- ---------------- ---------------- ------------- -----------
Product Licenses
Windows $ 429,600 $ 432,800 $ (3,200) -0.74%
Unix 348,200 173,200 175,000 101.04%
---------------- ---------------- -------------
777,800 606,000 171,800 28.35%
---------------- ---------------- -------------
Service Fees
Windows 243,700 219,100 24,600 11.23%
Unix 279,600 221,700 57,900 26.12%
---------------- ---------------- -------------
523,300 440,800 82,500 18.72%
---------------- ---------------- -------------
Other 11,200 90,800 (79,600) -87.67%
---------------- ---------------- -------------
Total Revenue $ 1,312,300 $ 1,137,600 $ 174,700 15.36%
================ ================ =============
5. Patents
Patents consisted of the Company,
pursuant tofollowing:
March 31, 2008 December 31, 2007
---------------- -------------------
Patents $ 5,340,400 $ 5,340,400
Accumulated amortization (2,821,400) (2,599,100)
---------------- -------------------
$ 2,519,000 $ 2,741,300
================ ===================
Patent amortization, which it was agreed that in the event the Company completes a
transaction with a third party introduced by Mr. Hirschman, the Company shall
pay to Mr. Hirschman 5%aggregated $222,300 during each of the valuethree-month
periods ended March 31, 2008 and 2007, is a component of that transaction. The agreement,general and
administrative expenses.
6. Accounts Receivable, Net
Accounts receivable were net of allowances totaling $233,600 and $229,000 as amended, expires on January 29, 2008.of
March 31, 2008 and December 31, 2007, respectively.
7. Supplemental Disclosure of Cash Flow Information
The Company disbursed no cash for the payment of either income taxes during either
the three or nine-month periods ended September 30, 2005 or 2004. The Company
disbursed approximately $2,600 for the payment of interest
expense during either of the three and nine-month period ended September 30, 2005. The Company disbursed no
cash for the payment of interest during the three or nine-monththree-month periods ended September 30, 2004.
In conjunction with its acquisition of NES (See Note 2), the Company issued
9,599,993 shares of its common stock, with a value of $3,916,800.
As of DecemberMarch 31, 2004, the Company had capitalized approximately $179,500
and $31,000 of deferred acquisition costs, related to the NES acquisition, that
8
were included in accounts payable and accrued expenses, respectively.
Additionally, the Company accrued approximately $32,500 of deferred financing
costs, related to the 2005 private placement, as other assets, as of December
31, 2004.
As of September 30, 2005, the Company had capitalized approximately $0 and
$81,800 of costs, related to the NES acquisition, that were included in accounts
payable and accrued expenses, respectively. Additionally, as of September 30,
2005, the Company included approximately $20,000 and $40,100 of costs, related
to the 2005 private placement, in accrued expenses and accounts payable,
respectively.2008 or 2007.
8. Loss Per Share
Potentially dilutive securities have been excluded from the computation of
diluted loss per common share, as their effect is antidilutive. For the
quartersthree-month periods ended September 30, 2005March 31, 2008 and 2004, 19,022,1572007, 21,108,486 and 6,043,95121,248,237
shares, respectively, of common stock equivalents were excluded from the
computation of diluted loss per share since their effect would be antidilutive.
8
9. Deemed Dividends on Preferred Stock
On February 2, 2005, the Company completed the 2005 Private Placement, which
raised a totalSegment Information
SFAS No. 131, "Disclosures about Segments of $4,000,000 (inclusive of the $665,000 credit issued to AIGH,
see Note 2) through the sale of 148,148 shares of Series A preferred stockan Enterprise and five-year warrants to purchase 74,070 shares of Series B preferred stock.
The deemed fair value of the Series A preferred stock was estimatedRelated
Information," establishes standards for reporting information about operating
segments. This standard requires segmentation based on the market priceCompany's internal
organization and underlying numberreporting of common shares they would have
converted into hadrevenue and operating income based on internal
accounting methods. The Company's financial reporting systems present various
data for management to operate the conversion occurred immediately upon their issuance.business prepared in methods consistent with
GAAP. The market price for the Company's common stock on on the commitment datesegments were defined in order to allocate resources internally.
Operating segments are defined as components of the
2005 private placement was $0.46 and the Series A preferred stock would have
converted into 14,814,800 common shares, thus deriving an estimated fair value
of approximately $6,814,800 atenterprise about which
separate financial information is available that date.
The fair value of the warrants was estimated to be $1,877,700 and was
calculated using the Black-Scholes option pricing model with the following
weighted average assumptions: a risk free interest rate of 1.5%, a volatility
factor of 60%, a dividend yield of 0% and a five year contractual life.
Based on the relative fair values of the Preferred Shares and the warrants at
the time of their issuance, the Company allocated $3,136,000 of the $4,000,000
proceeds of the 2005 Private Placement to the Preferred Shares and $864,000 to
the warrants.
The Preferred Shares issuedis evaluated regularly by the
chief operating decision maker, or the decision making group, in deciding how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is its Chief Executive Officer. The Company contained a non-detachable
conversion feature (the "Beneficial Conversion Feature")has determined that
it operates its business in two segments: software and intellectual property.
Segment revenue was in-the-money
upon completionas follows:
Quarter Ended March 31, 2008 2007
----------------------- ------------- -------------
Revenue:
Software $ 1,312,300 $ 1,137,600
Intellectual Property - -
------------- -------------
Consolidated Revenue $ 1,312,300 $ 1,137,600
============= =============
Segment loss from operations was as follows:
Quarter Ended March 31, 2008 2007
--------------------------------- ------------- -------------
Loss From Operations:
Software $ (247,500) $ (612,200)
Intellectual Property (459,100) (447,100)
------------- -------------
Consolidated Loss From Operations $ (706,600) $ (1,059,300)
============= =============
The Company does not allocate interest and other income, interest and other
expense or income tax to its segments.
As of the 2005 Private Placement, in that the deemed fair value of
Common Stock into which the Preferred Shares could be converted exceeded the
allocated value of $3,136,000 by $3,678,800 (using the intrinsic value method).
This discount resulting from recording the Beneficial Conversion Feature was
limited to the allocated proceeds of $3,136,000 and has been recognized as if
this amount had been declared a non-cash dividend to the preferred shareholders
during the quarter ended March 31, 2005.
Additionally,2008, segment fixed assets (long-lived assets) were as follows:
Accumulated
Depreciation Net,
Fixed Assets Cost Basis /Amortization as Reported
-------------- --------------- ---------------
Software $ 1,148,400 $ (1,008,400) $ 140,000
Intellectual Property 5,340,400 (2,821,400) 2,519,000
Unallocated 5,000 - 5,000
-------------- --------------- ---------------
$ 6,493,800 $ (3,829,800) $ 2,664,000
============== =============== ===============
The Company does not allocate other assets, which consists primarily of
deposits, to its segments.
Products and services provided by the approximate $864,000 discount resulting from the allocationsoftware segment include all currently
available versions of the proceeds of the 2005 Private Placement on a relative fair value basisGO-Global for Windows, GO-Global for Unix, OEM private
labeling kits, software developer's kits, maintenance contracts and product
training and support. The intellectual property segment provides licenses to the Series A preferred shares and the warrants issuedour
intellectual property. The Company's two segments do not engage in the 2005 Private
Placement has also been recognized as if this amount had been declared a
9
non-cash dividend to the preferred shareholders during the quarter ended March
31, 2005.cross-segment
transactions.
10. New Accounting Pronouncements
In December 2004,March 2008, the Financial Accounting Standards Board (FASB)("FASB") issued SFAS No.
123R, "Share-Based Payment," which161, "Disclosures about Derivatives Instruments and Hedging Activities, an
Amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 requires companies to expenseenhanced
disclosures about a company's derivative and hedging activities. SFAS is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. The Company is currently evaluating the value
of employee stock options and similar awards. Asimpact of the
effective date,adoption of SFAS 161 and does not expect adoption to have a material impact on
results of operations, cash flows or financial position.
9
In December 2007, the Company will be requiredFASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R") which replaces SFAS No. 141, "Business
Combinations." SFAS 141R establishes principles and requirements for recognizing
and measuring identifiable assets and goodwill acquired, liabilities assumed and
any noncontrolling interest in a business combination at their fair value at
acquisition date. SFAS 141R alters the treatment of acquisition related costs,
business combinations achieved in stages (referred to expense all awards granted, modified, cancelled or
repurchasedas a step acquisition),
the treatment of gains from a bargain purchase, the recognition of contingencies
in business combinations, the treatment of in-process research and development
in a business combination as well as the portiontreatment of prior awardsrecognizable deferred tax
benefits. SFAS 141R is effective for whichbusiness combinations closed in fiscal
years beginning after December 15, 2008. The Company is currently evaluating the
requisite
service has not yet been rendered, based on the grant-date fair valueimpact of those
awards as calculated for pro forma disclosures underSFAS 141R and expects results of operations, cash flows or financial
position would only be impacted in relation to future business combination
activities, if any.
In December 2007, FASB issued SFAS No. 123. The Company
will apply 160, "Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB No. 51" ("SFAS No. 123R using160"), the
objective of which is to improve the relevance, comparability and transparency
of the financial information that a modified versionreporting entity provides in its
consolidated financial statements by establishing accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of prospective application.
Under this method, compensation costa subsidiary. SFAS 160 is recognizedeffective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. The Company is assessing the requiredimpact of SFAS 160, but does not expect it to
have a material impact on results of operations, cash flows or financial
position.
In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities" ("SFAS 159") which permits entities to choose
to measure many financial instruments and certain other items at fair value. The
objective of SFAS 159 is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS 159 is effective as of an entity's
first fiscal year that begins after November 15, 2007. The adoption of SFAS 159
did not have a material impact on results of operations, cash flows or financial
position.
In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
157") which defines fair value, establishes a framework for measuring fair value
in GAAP and expands disclosures about fair value measurements. SFAS 157 applies
under other accounting pronouncements that require or permit fair value
measurements, FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS 157 does not require any new fair value measurements, however,
for some entities; application of SFAS 157 will change current practice. SFAS
157 is effective for financial statements issued for the first fiscal year
beginning after November 15, 2007 and interim periods within those fiscal years.
In February 2008, FASB issued FASB Staff Position No. 157-2 that defers the
effective date of SFAS 157 for the portion of outstanding awardsnonfinancial assets and nonfinancial liabilities,
except for which the requisite
service has not yet been rendered, based on the grant-dateitems that are recognized or disclosed at fair value in the financial
statements on a recurring basis, to fiscal years beginning after November 15,
2008. In addition, FASB also agreed to exclude from the scope of those
awards calculated underFASB 157 fair
value measurements made for purposes of applying SFAS No. 12313, "Accounting for
either recognitionLeases" and related interpretive accounting pronouncements. The adoption of SFAS
157 did not have a material impact on results of operations, cash flows or
pro forma
disclosures.financial position.
In May 2008, FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"), which is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with GAAP for nongovernmental entities. SFAS 162 is
effective 60 days following SEC's approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles." The Company expectsis
currently evaluating the impact of adoption of SFAS 162 and does not expect
adoption to adopt Statement 123(R)have a material impact on January 1, 2006.results of operations, cash flows or
financial position.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The following discussion of our financial condition and results of operations
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Actual results and the timing of certain events could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors. Such factors, including:
10
o our history of operating losses, and expectation that those losses will
continue;
o the uncertainty as to whether or not we will realize the anticipated
benefits of acquiring NES;
o that a significant portion of our revenue has been and continues to be
earned from a very limited number of significant customers;
o that our stock price has been volatile and you could lose your
investment; and
o other factors, including those set forth under "RiskItem 6. "Management's
Discussion and Analysis or Plan of Operation - Risk Factors" in our
Annual2007 10-KSB Report on
Form 10-K for the year ended December 31, 2004 and in other documents we filed with the Securities
and Exchange Commission, could have a material adverse effect upon our
business, results of operations and financial condition.
Overview
We are developers of business connectivity software, including Unix, Linux and
Windows server-based software, with an immediate focus on web-enabling
applications for use and/or resale by independent software vendors (ISVs), application service
providers (ASPs)("ISVs"),
corporate enterprises, governmental and educational institutions, and others.
Server-based computing, sometimes referred to as thin-client computing, is a
computing model where traditional desktop software applications are relocated to
run entirely on a server, or host computer. This centralized deployment and
10
management of applications reduces the complexity and total costs associated
with enterprise computing. Our software architecture provides application
developers with the ability to relocate applications traditionally run on the
desktop to a server, or host computer, where they can be run over a variety of
connections from remote locations to a variety of display devices. With our
server-based software, applications can be web enabled,web-enabled, without any modification
to the original application software required, allowing the applications to be
run from browsers or portals. Our server-based technology can web-enable a
variety of Unix, Linux or Windows applications.
On January 31, 2005, we acquired NES, which is engaged in the development and
patenting of proprietary technologies relating to the submission, storage,
retrieval and security of information remotely accessed by computers, typically
through computer networks or the Internet. In a contemporaneous transaction, we
issued, in the 2005 private placement Series A Preferred Stock and warrants to
purchase Series B Preferred Stock.
These transactions are described in our Current Report on Form 8-K, filed
with the Securities and Exchange Commission (SEC) on February 4, 2005.
In order to ensure that we will be able to realize our assets and settle our
liabilities within the normal course of our business operations, we must
consider several aggressive strategic initiatives aimed at increasing revenue or
securing additional alternative sources of financing. If we were unsuccessful in
increasing revenues or finding additional alternative sources of financing, we
would face a severe constraint on our ability to sustain operations in a manner
that would create future growth and viability, and we may need to cease
operations entirely.
Critical Accounting Policies
The preparation of financial statementsWe believe that several accounting policies are important to understanding our
historical and related disclosures in conformity
with accounting principlesfuture performance. We refer to these policies as "critical"
because these specific areas generally accepted in the United States of America
requiresrequire us to make judgments assumptions and
estimates about matters that affectare uncertain at the amounts
reportedtime we make the estimates,
and different estimates, which also would have been reasonable, could have been
used, which would have resulted in the Condensed Financial Statementsdifferent financial results. Our critical
accounting policies are identified in our 10-KSB Report, and accompanying notes. Estimates
are used for, but not limited to, the accounting forincluded: revenue
recognition, the allowance for doubtful accounts, revenue recognition, thepatents, long-lived assets,
capitalized software development costs, impairment of intangible assets, loss
contingencies and other special charges and taxes. Actual results could differ
materially from these estimates.stock-based compensation expense. The following operating
results should be read in conjunction with our critical accounting policies are
impacted significantly by judgments, assumptions and estimates used in the
preparation of the Condensed Consolidated Financial Statements.
Revenue Recognition
Generally, software license revenues are recognized when a non-cancelable
license agreement has been signed and the customer acknowledges an unconditional
obligation to pay, the software product has been delivered, there are no
uncertainties surrounding product acceptance, the fees are fixed or determinable
and collection is considered probable. Delivery is considered to have occurred
when title and risk of loss have been transferred to the customer, which occurs
when the customer is given access to the licensed programs. If collectibility is
not considered probable, revenue is recognized when the fee is collected.
Revenue earned on software arrangements involving multiple elements is
allocated to each element arrangement based on the relative fair values of the
elements. If there is no evidence ofpolicies.
Stock-Based Compensation
On January 1, 2006, we adopted the fair value for all the elements in a
11
multiple element arrangement, all revenue from the arrangement is deferred until
such evidence exists or until all elements are delivered. We recognize revenue
from the salerecognition provisions of software licenses when all the following conditions are met:
o Persuasive evidence of an arrangement exists;
o Delivery has occurred or services have been rendered;
o Our price to the customer is fixed or determinable; and
o Collectibility is reasonably assured.
Revenues recognized from multiple-element software arrangements are allocated
to each element of the arrangement based on the fair values of the elements,
such as licenses for software products, maintenance or customer training. The
determination of fair value is based on objective evidence. We limit our
assessment of objective evidence for each element to either the price charged
when the same element is sold separately or the price established by management
having the relevant authority to do so, for an element not yet sold separately.
If evidence of fair value of all undelivered elements exists but evidence does
not exist for one or more delivered elements, then revenue is recognized using
the residual method. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement
fee is recognized as revenue.
Certain of our Independent Software Vendors ("ISVs"), Value-Added Resellers
("VARs") or Application Service Provider ("ASPs") customers (who we refer to as
"resellers") prepay for licenses they intend to resell. Upon receipt of the
prepayment, if all other revenue recognition criteria outlined above have been
met, we recognize licensing revenue when the reseller is given access to the
licensed programs. The resellers provide monthly sell-through reports that
detail, for the respective month, the number of licenses purchased from us, the
number they have sold to other parties, the ending balance of licenses they hold
as inventory available for future sale and in some cases certain information
pertaining to their customers such as customer name, licenses purchased,
purchase date and contact information. We monitor and reconcile the resellers'
inventory records to our records via the monthly sell-through reports.
Other resellers will only purchase licenses from us when they have already
closed a deal to sell the product(s) to another party. These resellers will
typically submit a purchase order in order to receive product that they can
deliver to their customer. In these cases, assuming all other revenue
recognition criteria, as set forth above, have been satisfied, we recognize
licensing revenue when the reseller has been given access to the licensed
programs. There are no rights of return granted to resellers or other purchasers
of our software programs.
We recognize revenue from service contracts ratably over the related contract
period, which generally ranges from 1-5 years.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our historical experience, our estimates of
the recoverability of amounts due us could be adversely affected.
12
Capitalized Software Development Costs
Software development costs incurred in the research and development of new
products are expensed as incurred until technological feasibility, in the form
of a working model, has been established, at which time such costs are typically
capitalized until the product is available for general release to customers.
Capitalized costs are amortized based on either estimated current and future
revenue for the product or straight-line amortization over the shorter of three
years or the remaining estimated life of the product, whichever produces the
higher expense for the period.
Patents
The estimated cost of the patents and patent-related assets acquired in the
NES acquisition is being amortized over a 6-year period using the straight-line
method. The estimated cost of these assets and their estimated useful lives may
change as a result of the completion of a valuation study and as all direct
acquisition costs are finalized. The final adjustments to the estimated costs of
these assets are not expected to be material.
Impairment of Intangible Assets
We perform impairment tests on our intangible assets on an annual basis or
when circumstances indicate that a potential impairment may have occurred. In
response to changes in industry and market conditions, we may strategically
realign our resources and consider restructuring, disposing of, or otherwise
exiting businesses, which could result in an impairment of intangible assets.
Loss Contingencies
We are subject to the possibility of various loss contingencies arising in
the ordinary course of business. We consider the likelihood of the loss or
impairment of an asset or the incurrence of a liability as well as our ability
to reasonably estimate the amount of loss in determining loss contingencies. An
estimated loss contingency is accrued when it is probable that a liability has
been incurred or an asset has been impaired and the amount of the loss can be
reasonably estimated. We regularly evaluate current information available to us
to determine whether such accruals should be adjusted.
Stock Compensation
We apply Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations thereof (hereinafter
collectively referred to as APB 25) when accounting for our employee and
directors stock options and employee stock purchase plans. In accordance with
APB 25, we apply the intrinsic value method in accounting for employee stock
options. Accordingly, we generally recognize no compensation expense with
respect to stock-based awards to employees.
We have determined pro forma information regarding net income and earnings
per share as if we had accounted for employee stock options under the fair value
method as required by
Statement of Financial Accounting Standards (SFAS)No. 123R, "Share-Based Payment,"
("FAS123R") and related interpretations using the modified prospective
transition method. Under that method, compensation cost recognized in the
three-month periods ended March 31, 2008 and 2007 includes (a) compensation cost
for all stock-based awards granted prior to, but not yet vested as of January 1,
2006 based on the grant date fair value estimated in accordance with the
original provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" as amended by SFAS 148
(hereinafter collectively referredCompensation," ("FAS123") and (b) compensation cost
for all stock-based awards granted on or subsequent to as SFAS 123).January 1, 2006, based on
the grant-date fair value estimated in accordance with the provisions of
FAS123R.
The valuation provisions of FAS123R apply to new awards and to awards that were
outstanding on the adoption date and subsequently modified or cancelled.
Estimated compensation expense for awards outstanding at the adoption date is
recognized over the remaining service period using the compensation cost
calculated for pro forma disclosure purposes under FAS123.
11
The valuation of employee stock options is an inherently subjective process
since market values are generally not available for long-term, non-transferable
employee stock options. Accordingly, an option pricing model is utilized to
derive an estimated fair value. In calculating the estimated fair value of these
stock-based awards to employees was estimated using the Black-Scholes
13
option-pricing model. Had compensation cost for our
stock options, we used a binomial pricing model which requires the consideration
of the following variables for purposes of estimating fair value:
o the expected volatility of our common stock,
o the annualized forfeiture/termination rate,
o the prior forfeiture/termination rate,
o the expected term of the option,
planso the exercise factor for optionees,
o the risk free interest rate for the expected option term, and
employeeo expected dividends on our common stock purchase plan been determined consistent(we do not anticipate paying
dividends for the foreseeable future).
Of the variables above, the selection of an expected term, an annualized
forfeiture rate and expected stock price volatility are the most subjective. In
estimating our stock price volatility for stock option grants awarded during the
three-month periods ended March 31, 2008 and 2007, we analyzed our historic
volatility over the period commensurate with SFAS 123,the expected life of the options,
by reference to actual stock prices, and calculated an estimated volatility of
approximately 159.00% and 154.44%, respectively. Our estimate of the expected
option term was 7.5 years, for each period, and was derived based on our
reported net lossanalysis of historical data and net loss common per share would have been changedfuture projections. We derived an annualized
forfeiture rate of 4.00% and 5.06%, respectively, and a prior forfeiture rate of
5.3% and 5.5%, respectively, by analyzing our historical forfeiture data,
including consideration of the impact of certain non-recurring events, such as
reductions in work force. We believe that each of these estimates is reasonable
in light of the data we analyzed. However, as with any estimate, the ultimate
accuracy of these estimates is only verifiable over time.
We applied the same variables to the amounts discussed elsewhere in this Form 10-Q.
Loss Per Sharevaluation of Commonshares purchased under our
Employee Stock Basic loss per share includes no dilution andPurchase Plan ("ESPP"), except that the expected term was 0.5
years, as the time span from the date of grant of ESPP shares to the date of
purchase is computed by dividing loss
attributablesix months.
We expect that stock-based compensation expense will continue to common shareholders by the weighted-average number of common
shares outstandinghave a material
impact on our financial results for the period. Diluted loss per share reflectsremainder of the potential
dilution of securities by adding other common stock equivalents, including
common stock options, warrants and redeemable convertible preferred stock, in
the weighted average number of common shares outstanding for a period, if
dilutive. Potentially dilutive securities have been excluded from the
computation, as their effect is antidilutive.fiscal year. For the
quarters ended September
30, 2005 and 2004, 19,022,157 and 6,043,951 shares, respectively,remainder of common
stock equivalents were excluded from the computationfiscal 2008 we expect to incur stock-based compensation expense of
diluted loss per share
since their effect would be antidilutive.approximately $231,000.
Results of Operations for the Three and Nine-MonthThree-Month Periods Ended September 30,
2005 VersusMarch 31, 2008 and 2007.
Revenue
Our software revenue has historically been primarily derived from product
licensing fees and service fees from maintenance contracts. Other sources of
software revenue include sales of software development kits and training.
Software development kits are tools that allow end users to develop, interface
and brand their own applications for use in conjunction with either our Windows
or Unix/Linux products. Currently, we do not generate a significant amount of
revenue from either the Three and Nine-Month Periods Ended September 30, 2004.sale of software development kits nor do we anticipate
generating a significant amount from them during 2008.
Revenue
Product line revenue for the three-month periods ended September 30, 2005March 31, 2008 and 2004,2007 was as
follows:
Change in
Product licenses 2005 20042008 Over (Under) 2007
----------------------------
Revenue 2008 2007 Dollars Percent
- -------------------------- ---------------- ---------------- ------------- -----------
----------- ------------ ---------Product Licenses
Windows $ 580,100429,600 $ 284,900432,800 $ 295,200 103.6%(3,200) -0.74%
Unix 249,600 283,900 (34,300) (12.1)
----------- ----------- ------------
829,700 568,800 260,900 45.9
----------- ----------- ------------348,200 173,200 175,000 101.04%
---------------- ---------------- -------------
777,800 606,000 171,800 28.35%
---------------- ---------------- -------------
Service feesFees
Windows 174,100 126,900 47,200 37.2243,700 219,100 24,600 11.23%
Unix 163,900 130,800 33,100 25.3
----------- ----------- ------------
338,000 257,700 80,300 31.2
----------- ----------- ------------279,600 221,700 57,900 26.12%
---------------- ---------------- -------------
523,300 440,800 82,500 18.72%
---------------- ---------------- -------------
Other (1) 8,700 105,000 (96,300) (91.7)
----------- ----------- ------------11,200 90,800 (79,600) -87.67%
12
---------------- ---------------- -------------
Total Revenue $ 1,176,4001,312,300 $ 931,5001,137,600 $ 244,900 26.3%
=========== =========== ============174,700 15.36%
================ ================ =============
(1) Amortization of private labeling and other fees. Private labeling fees
are derived when we contractually agree to allow a customer to brand our
product with their name. We defer these fees upon contract signing and
recognize the revenue ratably over the initial term of the contract,
typically, three years. 2004 includes $100,000 from the sale of a software
developer's kit ("SDK"). SDKs allow customers to add value by integrating
additional software layers with our products.
Product line revenue for the nine-month periods ended September 30, 2005 and
2004, was as follows:
Change in
Product licenses 2005 2004 Dollars Percent
---------------- ------------ ------------ ------------ ---------
Windows $ 1,721,200 $ 893,800 $ 827,400 92.6%
Unix 945,700 752,000 193,700 25.8
------------ ------------ ------------
2,666,900 1,645,800 1,021,100 62.0
------------ ------------ ------------
Service fees
Windows 478,400 380,100 98,300 25.9
Unix 461,000 371,600 89,400 24.1
------------ ------------ ------------
939,400 751,700 187,700 25.0
------------ ------------ ------------
Other (1) 26,300 114,300 (88,000) (77.0)
------------ ------------ ------------
Total Revenue $ 3,632,600 $ 2,511,800 $ 1,120,800 44.6%
============ ============ ============
14
(1) Amortization of private labeling and other fees and the sale of a
software developer's kit.
The changes in both Windows and Unix-based product licenses revenue for the
three and nine-month periodsthree-month period ended September 30, 2005,March 31, 2008 as compared with the same periods in 2004,period of 2007
were reflective of how such revenue variescan vary from period to period because a
significant portion of this revenue has historically been earned, and continues
to be earned, from a limited number of significant customers, most of whom are
VARs.resellers. Consequently, if any of these significant customers change their
order level, or fail to order during the reporting period, our product licensing
revenue could be materially adversely impacted. We expect this situation to continue
throughout 2005.
Duringthe next several quarterly reporting periods.
The increase in Unix product license revenue for the three-month period ended
September 30, 2005, three of our
significant Windows customers purchased approximately an aggregate $208,100 more
product licenses than they did during the same period of 2004. Also during the
three-month period ended September 30, 2005, one of our large Unix enterprise
customers made no Unix product purchases, as compared with approximately $68,000
in the same period of 2004. This decrease was partially offset by an increase of
approximately $47,800 in Unix product purchases during the three-month period
ended September 30, 2005 from one of our large Unix VARs,March 31, 2008, as compared with the same period of 2004.
The remainder of the changes in third quarter 2005 Windows and Unix-based
product revenue, as compared with the third quarter of 2004,prior year, was
primarily due to a
combination of the demand by and compositionincreased purchases from just two customers, including
Ericsson, one of our various smaller customers.
During the nine-month period ended September 30, 2005, six of our significant
Windowsstrategic partners. These two customers purchased approximately an
aggregate $734,700 more$160,200 of Unix product licenses than they did during the same period, in 2004. Included in thisan increase wereof
$150,700 over their purchases of $72,000 and $25,000 received from new Windows customers during
the nine-month period ended September 30, 2005. Partially offsetting this
increase was an aggregate decrease of approximately $103,000 resulting from
reduced product purchases from three significant Windows customers.
During the nine-month period ended September 30, 2005, three of our
significant Unix customers increased their aggregate product purchases by
approximately $282,700 as compared with the similar period in 2004. Partially
offsetting this increase was a decrease in aggregate product purchases of
approximately $137,500 received from three significant Unix customers during the
nine-month period ended September 30, 2005 as compared with the same period in
2004.
The remainder of the changes in Windows and Unix-based product revenue for
the first nine months of 2005, as compared with the same period of 2004, was due
to a combination of the demand by and composition of our various smaller
customers.prior year.
Our customers typically purchase a maintenance contract at the time they license
our product. Our Windows-based maintenance contracts are primarily for a
one-year time period and generally are renewed upon expiration. Our Unix-basedSuch maintenance contracts vary in term from one to five years and
generally are renewed upon expiration. Service fees associated with maintenance
contracts are deferred and recognized as revenue ratably over the underlying
service period of the maintenance contract.
The increase in both Windows and Unix-based service fees for the three and
nine-month periodsthree-month period ended September 30, 2005,March 31, 2008, as
compared with the same periods
15
period of the prior year wasis primarily due to the higher
levelslevel of maintenance contract purchases that began approximately during the third quarter of 2004 and have continued throughout 2005.
The decrease in otheroccurred since March 31, 2007.
We expect aggregate service fees revenue for both2008 to exceed those of 2007.
Segment Revenue
For the three and nine-monththree-month periods ended September 30, 2005, as comparedMarch 31, 2008 and 2007 all of our revenue was
derived from our software segment. Revenues from our intellectual property
segment are non-predictable and are dependent upon the outcome of pending
litigation and the results of licensing discussions with the respective periods of the prior year,
was duecompanies potentially
infringing upon our patents. As a result, we expect all 2008 revenue to the sale of an SDK during the three-month period ended September 30,
2004. No SDK was sold during either the three or nine-month periods ended
September 30, 2005.be
earned from our software segment.
Cost of Revenue
Cost of revenue consistsis comprised primarily of service costs, which represent the
amortizationcosts of capitalized
technology developed in-house and customer service, and product costs. Shipping andWe incur no shipping or packaging
materials are immaterialcosts as virtually all of our deliveries are made via electronic means over the Internet.
Under accounting principles generally
accepted in the United States,GAAP, research and development costs for new product development, after
technological feasibility is established, are recorded as "capitalized software"
on our balance sheet. Such capitalized costs are subsequently amortized as cost
of revenue over the shorter of three years or the remaining estimated life of
the products.
Cost of revenue decreasedincreased by $31,800,$39,700 or 21.6%33.4%, to $115,300$158,600, for the third
quarter of 2005, from $147,100 for the third quarter of 2004. Product costs
decreased by $7,000, or 11.7%, to $53,000 for the third quarter of 2005, from
$60,000 for the third quarter of 2004. Service costs decreased by $24,800, or
28.5%, to $62,300 for the third quarter of 2005, from $87,100 for the third
quarter of 2004.
Cost of revenue decreased by $394,900, or 51.8%, to $367,000 for the ninethree months
ended September 30, 2005,March 31, 2008, from $761,900$118,900 for the same period of 2004.
Product costs decreased by $360,300, or 69.7%, to $156,8002007. Cost of revenue
was 12.1% and 10.5% of revenue for the ninethree months ended September 30, 2005, from $517,100 forMarch 31, 2008 and
2007, respectively.
Factors contributing to the sameincrease in cost of revenue included service costs,
which increased by $35,400 during the three-month period of 2004. Service
costs decreased by $34,600, or 14.1%, to $210,200 for the nine months ended September 30, 2005, from $244,800 for the same period of 2004.
The decrease in product costs for both the three and nine-month periods ended
September 30, 2005,March 31, 2008,
as compared with the same periodsperiod in 2004 was because2007, resulting primarily from increased
engineering time spent performing customer service, in order to better meet the
needs of our purchased technology became fully amortized as of June 30, 2004. Product costs
incurred during both the three and nine-month periods ended September 30, 2005
primarily consisted of the amortization of capitalized software development
costs.customers. We expect theseservice costs to remain consistenthigher throughout
2005.
The decrease2008, as compared with 2007, as we plan on having a higher number of engineers
providing such services.
Included in service costs for the three and nine-monththree-month periods ended September 30, 2005,March 31, 2008 and
2007 was non-cash stock-based compensation costs aggregating approximately
$5,300 and $4,400, respectively.
Also contributing to the increased costs of revenue were product costs, which
increased by $4,300 during the three-month period ended March 31, 2008, as
compared with the same periodsperiod in 2004, resulted2007, primarily due to costs associated with
the expansion of our GO-Global for Unix product's ability to web-enable various
Linux platforms as well as increased costs from our supplier of certain
engineers spending more time in other engineering-related tasks than
customer service in 2005, as compared with 2004. The amount of time our
engineers spend in customer service is a function of the number of customer
service inquiries received,licensing technology that we incorporate into both GO-Global for Windows and
their complexity. Whenever the resolution of
customers' inquiries permit, engineers whose first priority is customer service
will assist with other engineering-related tasks.
We expect costs of revenue to remain fairly constant over the next few
reporting periods. Cost of revenue was approximately 9.8% and 15.8% of revenueGO-Global for the third quarter of 2005 and 2004, respectively, and 10.1% and 30.3% of
revenue for the nine-month periods ended September 30, 2005 and 2004,
respectively.
16Unix.
13
Selling and Marketing Expenses
Selling and marketing expenses primarily consist of employee costs consulting(inclusive of
non-cash stock-based compensation expense), outside services and travel and
entertainment.entertainment expense.
Selling and marketing expenses decreased by $24,000, or 5.6%, to $408,500, for
the third quarter of 2005 decreased by $19,600, or 5.5%, to $337,100three-month period ended March 31, 2008, from $356,700$432,500 for the third quartersame period
of 2004.2007. Selling and marketing expenses were 31.1% and 38.0% of revenue for the
first nine months of 2005three-month periods ended March 31, 2008 and 2007, respectively.
Factors contributing to the decrease in selling and marketing expenses included
outside services, which decreased by $105,500, or 9.4%, to $1,014,000 from
$1,119,500 for$20,100 during the first nine months of 2005.
Expense categories that were primary contributors to the net decrease in the
third quarter of 2005 as compared with the third quarter of 2004 are summarized
as follows:
Increase
(Decrease)
Expense From 2004
------- ---------
Employees costs $ (49,800)
Commissions and bonuses 52,300
Consulting services (16,200)
Other items (5,900)
---------
$ (19,600)
=========
Expense categories that were primary contributors to the net decrease in the
first nine months of 2005three-month period ended
March 31, 2008, as compared with the same period in 2007, primarily as the
result of 2004changes in the mixture of the outside services provided. Outside
services charged to selling and marketing expense are summarizedprimarily related to
marketing activities such as follows:
Increase
(Decrease)
Expense From 2004
------- ----------
Employees costs $ (106,800)
Commissionsdeveloping marketing collateral and bonuses 159,800
Consulting services (95,200)
Recruitment (17,000)
Travel & entertainment (19,900)
Other items (26,400)
----------
$ (105,500)
==========
Theexternal web
site enhancements and also includes certain legal fees associated with sales
contracts review.
Also contributing to the overall decrease in employee costs forselling and marketing expense was
travel and entertainment, which decreased by $9,900 during the three and nine-month periodsthree-month
period ended September 30, 2005,March 31, 2008, as compared with the same periods in 2004, resulted
primarily from having two fewer sales representatives during these periods of
2005 as compared with 2004.
The increase in commissions and bonuses for the three and nine-month periods
ended September 30, 2005, as compared with the same periods in 2004, resulted
from an increase in new orders during these periods in 2005, as compared with
2004, and the attainment of certain performance objectives during each of these
periods in 2005, respectively.
Consulting services were decreased during both the three and nine-month
periods ended September 30, 2005, as compared with the same periods in 2004, as
we began deferring certain planned selling and marketing activities towards the
end of the fourth quarter of 2004 and have continued doing so in 2005 as we
strive to determine the most cost effective use of our marketing expenditures.
Recruitment expenses were lower during the three and nine-month periods ended
September 30, 2005, as compared with the same periods in 2004, as we did not
fill either of the two positions of the terminated sales representatives,
discussed above.
17
Cumulative travel and entertainment expense for the first nine months of 2005
is lower than that for the same period in 20042007, primarily
as a result of having twoone less sales representative.
Partially offsetting these decreases were higher employee costs, which increased
by $17,500 during the three-month period ended March 31, 2008, as compared with
the same period in 2007, primarily as a result of higher commissions earned by a
sales representative as a result of obtaining quota, which was partially offset
by having one fewer sales representatives, as discussed above.representative. Included in employee costs for the
three-month periods ended March 31, 2008 and 2007 were non-cash stock-based
compensation costs aggregating approximately $10,600 and $10,700, respectively.
We anticipate that sellingcurrently expect our full-year 2008 sales and marketing expenses for 2005expense will
approximate 20042007 levels. Selling and marketing expenses were 28.7% and 38.3% of revenue for
the third quarter of 2005 and 2004, respectively, and 27.9% and 44.6% of revenue
for the first nine months of 2005 and 2004, respectively.
General and Administrative Expenses
General and administrative expenses primarily consist of employee costs
(inclusive of non-cash stock-based compensation expense), amortization and
depreciation, legal, professional and other outside services amortization and depreciation,(including those
related to realizing benefits from our patent-related assets), travel and
entertainment, certain costs associated with being a publicly held corporation,
and bad debts expense.
Additionally included in general and
administrative costs are the costs associated with deriving economic benefits
from the patent-related assets acquired from NES. General and administrative expenses decreased by $8,600, or 0.9%, to $965,400,
for the third quarter of 2005 increased by $399,900, or 112.0%, to
$756,900three-month period ended March 31, 2008, from $357,000 for the third quarter of 2004, and by $1,382,300, or
158.9%, to $2,252,000 for the first nine months of 2005, as compared with
$869,700$974,000 for the same
period of 2004.
Expense categories that2007. General and administrative expenses were primary contributorsapproximately 73.6% and
85.6% of revenues for the three-month periods ended March 31, 2008 and 2007,
respectively.
Factors which contributed to the net increasedecrease in general and administrative expense
included lower legal and accounting fees. During the three-month period ended
March 31, 2007 we filed various reports with the SEC that were not required to
be filed during the same period of 2008. Because of this, legal and accounting
fees for the third quarter 2005three-month period ended March 31, 2008, as compared with 2004 are summarized as follows:
Increase
(Decrease)
Expense From 2004
------- ----------
Employee costs $ 188,400
Professional services (35,400)
Depreciation and amortization 225,200
Other items 21,700
----------
$ 399,900
==========
Expense categories that2007,
were primary contributors$14,100 lower.
Also contributing to the net increase inlower general and administrative expense were outside
services for the first nine months of 2005three-month period ended March 31, 2008, which decreased by
$19,100, as compared with the same period of the prior year, as neither of the
two active patent infringement lawsuits had progressed far enough to require the
use of outside consultants with expertise in 2004 are summarized as follows:
Increase
(Decrease)
Expense From 2004
------- -----------
Employee costs $ 410,200
Professional services 270,600
Depreciationpatents and amortization 588,600
Bad debts expense 15,200
Other items 97,700
-----------
$ 1,382,300
===========
Thepatent infringement
lawsuits.
Partially offsetting these decreases was an overall increase in employee costs.
General and administrative employee costs infor the three and nine-monththree-month periods ended
September 30, 2005, as compared withMarch 31, 2008 and 2007 included non-cash stock-based compensation costs
aggregating approximately $74,900 and $92,500, respectively. The decrease in
non-cash stock-based compensation costs were offset by increases in other
elements of employee costs including salary adjustments and benefits. Overall,
employee costs for the three-month period ended March 31, 2008 were $8,500
higher than those for the same periods in 2004, was primarily due
to having five more employees. Twoperiod of these employees, hired2007.
Also partially offsetting the decreases noted above were increased costs
associated with being a publicly-held company, which increased $7,800 during the
first
quarter of 2005, have been tasked with developing revenue opportunities for the
patents and patent applications we acquired in conjunction with the NES
acquisition as well as developing additional patent applications. Two employees
were hired into the accounting department during 2005, one of whom replaced an
outside consultant.
18
Professional services decreased during the third quarter of 2005 as compared
with the third quarter of 2004 primarily as a result of the due diligence and
other general services provided by our attorneys during the third quarter of
2004 related to our evaluation of NES as a potential acquisition target prior to
our acquisition of NES. No such comparable services were performed during the
third quarter of 2005.
The primary reason for the increase in professional services for the
nine-monththree-month period ended September 30, 2005,March 31, 2008, as compared with the same period in
2004, was legal fees relatedof
2007, primarily due to having one additional meeting of our board of directors
during the administration of the patent portfolio,
which we began incurring upon the consummation of the NES acquisition in January
2005.
Depreciation and amortization expense increased in both the three and
nine-month periodsthree-month period ended September 30, 2005,March 31, 2008 as compared with the same
periods
in 2004, primarily due to the commencementperiod of amortization2007.
14
Costs associated with other major components of the patent-related
assets acquired from NES in January 2005. We expectgeneral and administrative
expense, notably; depreciation and amortization, to beinsurance, and rent, did not
change significantly higher forduring the remainder of 2005,three-month period ended March 31, 2008, as
compared with the comparable periods in 2004, due to the amortizationsame period of the patent-related assets.
As a result of the increased volume of new business and related
uncertainties, we increased our allowance for doubtful accounts during the
nine-month period ended September 30, 2005.prior year.
We anticipate that aggregatecurrently expect 2008 general and administrative expenses for 2005
will be substantially higher than 2004, primarily due to the additional
personnel, the amortization of the patent-related assets and the professional
costs associated with the process of realizing the anticipated benefits of the
NES acquisition. General and administrative expenses were approximately 64.3%
and 38.3% of revenues for the third quarter of 2005 and 2004, respectively, and
approximately 62.0% and 34.6% of revenue for the nine-month periods ended
September 30, 2005 and 2004, respectively.approximate 2007
levels.
Research and Development Expenses
Research and development expenses consist primarily of employee costs (inclusive
of stock-based compensation expense), payments to contract programmers rent, depreciation and computer related
supplies.rent.
Research and development expenses decreased by $185,100, or 27.6%, to $486,400,
for the third quarter of 2005
decreased by $33,600, or 9.2%, to $333,200three-month period ended March 31, 2008, from $366,800 for the third quarter
of 2004, and by $256,500, or 20.9%, to $969,900 for the first nine months of
2005, as compared with $1,226,400$671,500 for the same
period in 2004.of 2007. Research and development expenses were approximately 37.1% and
59.0% of revenues for the three-month periods ended March 31, 2008 and 2007,
respectively.
Under accounting principles generally accepted in the United States,GAAP, all costs of product development incurred once technological
feasibility has been established, but prior to general release of the product,
are typically capitalized and amortized to expense over the estimated life of
the underlying product, rather than being charged to expense in the period
incurred. No such product development costs were capitalized during either of
the three or nine-monththree-month periods ended September 30, 2005March 31, 2008 or 2004.
Expense categories that were primary contributors2007.
Employee costs for the three-month periods ended March 31, 2008 and 2007 are net
of $144,800 and $109,400, respectively, which related to the net decrease in
third quarter 2005costs of
engineering time spent performing customer service. Customer service costs are
reported as compared with 2004 are summarized as follows:
Increase
(Decrease)
Expense From 2004
------- ---------
Employee costs $ (34,700)
Contract programmers 15,500
Depreciation (9,500)
19
Other items (4,900)
---------
$ (33,600)
=========
Expense categories that were primary contributors to the net decrease in the
first nine monthsa component of 2005 as compared with the period in 2004 are summarized as
follows:
Increase
(Decrease)
Expense From 2004
------- ----------
Employee costs $ (159,700)
Contract programmers (27,500)
Depreciation (41,100)
Other items (28,200)
----------
$ (256,500)
==========
The decreasecost of revenue. Included in employee costs for the
three and nine-monththree-month periods ended September 30, 2005,March 31, 2008 and 2007 were non-cash stock-based
compensation costs aggregating $34,300 and $31,300, respectively.
Factors contributing to the decrease in research and developments costs were
employee costs, which decreased by $166,800 during the three-month period ended
March 31, 2008 as compared with the same periodsrespective period of 2004, was2007, primarily due to
having the equivalent of four fewer engineers as a result of terminations that
occurred at various times subsequent to March 31, 2007, the hiring two fewer engineers.
The increaseengineers
during the three-month period ended March 31, 2008 as well as a full-time
engineer during the prior year switching to part-time status in contract programmersthe current
year.
Our use of outside services for the third quarter of 2005, as
compared with the third quarter of 2004, was due to the timing of work we
contracted the programmers to perform. Conversely, the decrease in contract
programmers for the nine-month periodsthree-month period ended September 30, 2005,March 31, 2008, as
compared with the same period of 2004, wasthe prior year, decreased primarily due to the
non-renewalcompletion of certain contracts
upon their expiration. Once certain elementsassignments, including assignments by consultants who were
involved in providing engineering services for the upgraded version of GO-Global
for Windows, which was released during the work being performed for us
was completed,second quarter of 2007. The reduction
in outside services also contributed to the underlying programmers' contracts were not renewed as their
services were not immediately required. We believe that we will be able to enter
into new contracts with these engineers, or ones with similar talents, without
difficultydecrease in the future, should we need their services again. We chose not to
immediately renew their contracts in effort to reduce our cash expenditures in
order use our research and development
dollars most efficiently.
Depreciation expense was lower incosts as outside services decreased by $20,400 for the both the three and nine-month periodsthree-month period ended
September 30, 2005,March 31, 2008, as compared with the same periodsperiod of 2004, because
during 2003 and 2004, we purchased virtually no new capitalizable assets in
support of our research and development efforts. Since the beginning of 2003,
various assets have become fully depreciated more quickly than we have replaced
them and hence, depreciation expense has steadily declined.prior year.
We currently expect to make
more fixed asset purchases in 2005 than we did in 2004, however, we do not
expect to replace all the assets that have, or will, become fully depreciated.
Consequently, we expect depreciation expense for 2005 to remain lower than 2004
levels.
We anticipate that2008 research and development expenses to be higher as
compared with 2007 levels as we plan on increasing our engineering staff and our
overall investment in this area.
Segment Operating Loss
Segment operating loss for 2005 will be lower
than those incurred during 2004,the three-month periods ended March 31, 2008 and 2007
was as follows:
Increase (Decrease)
----------------------------
2008 2007 Dollars Percentage
------------ ------------ ------------ ------------
Software $ (247,500) $ (612,200) $ (364,700) -59.6%
Intellectual Property (459,100) (447,100) 12,000 2.7%
------------ ------------ ------------
Consolidated Loss From Operations $ (706,600) $(1,059,300) $ (352,700) -33.3%
============ ============ ============
The $364,700 decrease in the operating loss we experienced from our software
segment for the three-month period ended March 31, 2008, as compared with same
period of the prior year was primarily due to the lower number of engineers$174,700 increase in software
revenue and lower depreciation, as outlined above. Researchthe $185,100 decrease in research and development expenses
were approximately 28.3% and 39.4% of revenuesexpense, each
discussed elsewhere in this Form 10-Q.
The $12,000 increase in the operating loss from our intellectual property
segment for the third quarterthree-month period ended March 31, 2008, as compared with the
same period of 20052007, was primarily due to a $33,500 increase in legal fees that
resulted from having two active patent infringement lawsuits underway during the
current year, as compared with only one in the prior year. Partially offsetting
the increased legal fees was a $14,000 decrease in outside services, which
15
resulted from having fewer outside consultants with expertise in patents and
2004, respectively, and approximately 26.7% and 48.8%patent infringement suits engaged during the current year, as compared with the
prior year, as discussed elsewhere in this Form 10-Q. Also, stock-based
compensation expense incurred by our intellectual property segment decreased by
$14,500 during the three-month period ended March 31, 2008, as compared with the
same period of revenue for the nine-monthprior year, as a significant portion of options underlying
such compensation expense became full vested.
Other Income
During the three-month periods ended September 30, 2005March 31, 2008 and 2004, respectively.
Interest and other income
During the three and nine-month periods ended September 30, 2005, interest
and other income consisted primarily of interest income on excess cash and note
receivable - shareholder. During the three and nine-month periods ended
September 30, 2004, interest and2007, other income
consisted primarily of interest income on excess cash. AlsoDuring the three-month
period ended March 31, 2007, other income also included interest income on note
receivable - shareholder. The increases in other income were primarily as a
result of higher cash balances throughout the three-month period ended March 31,
2008, as compared with the same period of 2007, as a result of the
Autotrader.com settlement that occurred in December 2007.
We anticipate that interest and other income for the
nine-month period ended September 30, 2004 was interest income on notes
receivable - directors.
20
Interest and other income for the third quarter of 2005 increased by $7,700,
or 308.0%, to $10,200 from $2,500 for the third quarter of 2004. Interest and
other income for the first nine months of 2005 increased by $21,000, or 233.3%,
to $30,000 from $9,000 for the same period of 2004.
Interest income on excess cash for both the three and nine-month periods
ended September 30, 2005, approximately $10,200 and $30,000, respectively, as
compared with the same periods of 2004, approximately $2,500 and $9,000,
respectively, was higher, primarily due to higher average cash balances and
rates of interest being earned on those balances in 2005 as compared with 2004.
The increase in the average cash balances in 2005, as compared with 2004, was
primarily due to the net proceeds of the 2005 private placement, approximately
$2,933,000, as compared with the net proceeds of the 2004 private placement,
approximately $934,800. Our excess cash is held in interest bearing money market
accounts.
Interest income on the note receivable - shareholder was approximately $3,200
and $9,600 for the three and nine-month periods ended September 30, 2005. No
such note receivable was outstanding during the same three and nine-month
periods of 2004.
We anticipate that interest income for the remainder of 20052008 will be higher
than comparable periods from 2004exceed 2007 levels as
we expect that we will continue to haveanticipate having higher average cash balances for the remainder of the year, as compared with the
prior year.
Net Loss
As a result of the foregoing items, net loss for the third quarterthree-month period ended
March 31, 2008 was $671,900, a decrease of 2005
was $359,400, an increase of $65,700,$369,500, or 22.4%35.5%, from a net loss
of $293,700 for
the third quarter of 2004. Net loss for the first nine months of 2005 was
$945,300, a decrease of $511,000, or 35.1%, from a net loss of $1,456,300$1,041,400 for the same period of 2004. As a result of our continued operating loss we intend2007. We currently do not expect to continue to pursue revenue growth opportunities through all available means.
Net loss attributable to common shareholdersbe
profitable during or for the third quarter of 2005
was $359,400, an increase of $65,800, or 22.4%, from a net loss attributable to
common shareholders of $293,700 for the third quarter of 2004. Net loss
attributable to common shareholders for the first nine months of 2005 was
$4,945,300, an increase of $3,489,000, or 239.6%, from a net loss attributable
to common shareholders of $1,456,300 for the same period in 2004. The increase
in net loss attributable to common shareholders for the first nine months of
2005 was due to the deemed dividends on preferred stock, as discussed below.
Deemed Dividends on Preferred Stock
On February 2, 2005, we completed the 2005 private placement, which raised a
total of $4,000,000 through the sale of 148,148 shares of Series A preferred
stock and five-year warrants to purchase 74,070 shares of Series B preferred
stock.
The deemed fair value of the Series A preferred stock was estimated based on
the market price and underlying number of common shares they would have
converted into had the conversion occurred immediately upon their issuance. The
market price for our common stock on February 2, 2005 was $0.46 and the Series A
preferred stock would have converted into 14,814,800 common shares, thus
deriving an estimated fair value of approximately $6,814,800 at that date.
21
The fair value of the warrants was estimated to be $1,877,700 and was
calculated using the Black-Scholes option pricing model with the following
weighted average assumptions: a risk free interest rate of 1.5%, a volatility
factor of 60%, a dividend yield of 0% and a five year contractual life.
Based on the relative fair values of the Preferred Shares and the warrants at
the time of their issuance, we allocated $3,136,000 of the $4,000,000 proceeds
of the 2005 Private Placement to the Preferred Shares and $864,000 to the
warrants.
The Preferred Shares we issued contained a non-detachable conversion feature
(the "Beneficial Conversion Feature") that was in-the-money upon completion of
the 2005 Private Placement, in that the deemed fair value of Common Stock into
which the Preferred Shares could be converted exceeded the allocated value of
$3,136,000 by $3,678,800 (using the intrinsic value method). This discount
resulting from recording the Beneficial Conversion Feature was limited to the
allocated proceeds of $3,136,000 and has been recognized as if this amount had
been declared a non-cash dividend to the preferred shareholders during the
quarter ended MarchDecember 31, 2005.
Additionally, the approximate $864,000 discount resulting from the allocation
of the proceeds of the 2005 Private Placement on a relative fair value basis to
the Series A preferred shares and the warrants issued in the 2005 Private
Placement has also been recognized as if this amount had been declared a
non-cash dividend to the preferred shareholders during the quarter ended March
31, 2005.2008.
Liquidity and Capital Resources
We continueare planning to manageincrease investments in our operations during 2008 and to
bring our cash expenditures in line
with our revenues in order to determine the most cost effective use offund these increases through our cash on hand.hand as of March 31, 2008 and our 2008
anticipated revenue streams. We are simultaneouslyaggressively looking at ways to improve our
revenue stream.
Additionally, westream, including through the development of new products and further
acquisitions. We continue to review potential mergeracquisition opportunities as they
present themselves to us and at such time as a merger might make financial sense
and add value for our shareholders, we will pursue that merger opportunity.us. We believe that improving or maintaining our current revenue
stream, coupled with our cash on hand, including the cash raised in the 2005 private placement will sufficientlybe sufficient to support our
operations during 2005.
On Januaryoperational plans for 2008.
During the three-month periods ended March 31, 2005, we acquired NES for 9,599,993 shares of common stock,
the assumption of approximately $232,800 of NES' indebtedness2008 and the
reimbursement to AIGH Investment Partners, LLC ("AIGH"), an affiliate of a
principal stockholder (Orin Hirschman), of $665,000 for its advance on2007 our
behalf of a like sum in December 2004 to settle certain third party litigation
against NES. We reimbursed the advance through a partial credit against the
price of our securities acquired by AIGH in the 2005 private placement.
The 2005 private placement, which was consummated on February 2, 2005, raised
a total of $4,000,000, inclusive of the $665,000 credit issued to AIGH. As of
September 30, 2005 we had consumed approximately $402,000 and $730,000 of the
cash raised paying for expenses related to the 2005 private placement and the
NES acquisition, respectively. We estimate that we will disburse an additional
$60,100 and $81,800 of cash paying for expenses related to the 2005 private
placement and the NES acquisition, respectively, however, there can be no
guarantees that these amounts will be final.
We anticipate incurring further costs associated with the development of the
patents and patent-related assets acquired from NES for the next several
22
reporting periods. We expect to fund these development costs through working
capital.
Until the revenues we derive from either the sale of software products or the
licensing of patents are sufficient enough to generate positive cash flows from
operations, we will continue to experience operating losses. Although we believe
that we will be able to attain sufficient sales levels to meet our operational
needs, there can be no certainty that we will be able to do so. Should the cash
flows generated from sales and working capital be insufficient to satisfy short
term operating needs, or should we be unsuccessful in securing alternative
sources of financing, we may have to significantly curtail the current nature of
our operations.
As of September 30, 2005, cash and cash
equivalents totaled $3,125,900, an
increasebalances decreased by $480,300 and $1,094,000, respectively,
primarily as a result of $2,450,600, or 362.9%, from $675,300our operations consuming approximately $465,500 and
$1,084,400 of cash during the respective periods. During the three-month periods
ended March 31, 2008 and 2007 our reported net losses of $671,900 and $1,041,400
respectively, included two significant non-cash items, namely; depreciation and
amortization of $238,800 and $243,500, respectively, which were primarily
related to amortization of our patents, and stock-based compensation expense of
$125,100 and $138,900, respectively.
During the three-month periods ended March 31, 2008 and 2007 we closely
monitored our investing activities, spending approximately a net $18,400 and
$13,400, respectively, in those activities. Our investing activities were
primarily comprised of fixed asset purchases, mainly office furniture and
computer equipment. Our financing activities during the three-month periods
ended March 31, 2008 and 2007 were comprised of sale of stock to our employees
under the terms of our employee stock purchase plan.
Cash and Cash Equivalents
As of March 31, 2008, cash and cash equivalents were $4,780,500, as compared
with $5,260,800 as of December 31, 2004.2007, a decrease of $480,300, or 9.1%. The
increase inmajority of this decrease was due to the consumption of $465,500 of cash and
cash equivalents was primarily attributable to the
$2,933,000 net cash infusion from the 2005 private placement, which comprises
the majority of the cash provided by our financing activities for the first nine
months of 2005. The balance of theoperations. We anticipate that our cash provided by our financing activities was
derived from the sale of stock to employees through our employee stock purchase
program.
Our net loss for the first nine months of 2005 was $945,300. Included in the
net loss were non-cash charges, comprised of depreciation and amortization,
which aggregated approximately $779,300. Our operating assets and liabilities
provided approximately $368,900 of cash
for our operations during the first nine
months of 2005, primarily resulting from a $269,800 increase in aggregate
deferred revenue.
Accounts Receivable
The decrease in accounts receivable was primarily due to the timing and
collection of various sales transactions. The decrease in accounts receivable
also included an increase in our allowance for doubtful accounts, which resulted
from the increased volume of new business and related uncertainties.
Deferred Revenue
The increase in total deferred revenue, aggregate short and long-term,
generated $269,800 of cash flow during the first nine months of 2005. Included
in deferred revenueequivalents as of September 30, 2005, were deferred private labeling and
other fees, aggregating approximately $43,800, which we expect to recognize asMarch 31, 2008, together with revenue generally, over the underlying term of the respective private labeling
agreement. These agreements typically are for a three-year period and the
revenue is recognized on a straight-line basis over such period.
Also included in deferred revenue at September 30, 2005 was approximately
$14,100 of deferred licensing sales. Generally, product sales that do not
satisfy all criteria for revenue recognition at the time of the transaction are
deferred until all such criteria are met. We anticipate recognizing this revenue
during the next twelve months.
Accounts Payable
Accounts payable as of September 30, 2005 decreased by $127,300, or 50.9%, to
$122,900 from $250,200 as of December 31, 2004. Accounts payable as of September
30, 2005 were primarily comprised of various operating expenses. Accounts
payable as of December 31, 2004 were comprised of operating expenses and
significant costs associated with the NES acquisition and the 2005 private
23
placement. The amounts related to the NES acquisition and the 2005 private
placement were paid during the first quarter of 2004 and their payment was the
primary reason for the decrease in accounts payable.
Accrued Expenses
Accrued expenses as of September 30, 2005 approximated those as of December
31, 2004. Accrued expenses are charges for services rendered for which an
invoice has not yet been received and typically include legal, accounting and
outside consultant fees, utilities and other items.
Accrued Wages
Accrued wages as of September 30, 2005 increased by $67,300, or 25.9%, to
$327,400 from $260,100 as of December 31, 2004. The increase was primarily due
to hiring five new general and administrative employees during the first nine
months of 2005, an increase in commissions and bonuses, based on third quarter
2005 sales, as well as an increase in the costs of employee benefits.
Deferred Compensation
During the first nine months of 2005, we deferred, and amortized,
compensation totaling approximately $8,900 and $2,000, respectively, related to
stock options granted to our interim Chief Executive Officer, Robert Dilworth.
We are amortizing this amount monthly on the straight-line method, to
compensation expense over a three-year period ending in January 2008.
Notes Receivable - Directors
During the first quarter of 2005, we received payment in full of our notes
receivable - directors, generating operating cash of $50,300. Also during the
first quarter of 2005, we received a $2,600 principal repayment of the note
receivable - shareholder.
Working Capital
As of September 30, 2005, we had current assets of $3,595,400 and current
liabilities of $1,500,200, which netted to working capital of $2,095,200.
Included in current liabilities was the current portion of deferred revenue of
$818,800.
We have been successful in significantly reducing operating costs through a
series of strategic restructurings and work force reductions that began in
September of 2001. Based on our current operating revenues and reduced operating
cost structure, and the cash raised in the 2005 private placement, we believe
that we will be able to support our operational needs with currently available
resources for at least the next twelve months. However, due to inherent
uncertainties associated with predicting future2008 operations there can be no
assurances that these resources
will be sufficient to fund our anticipated expenses during the next twelve
months.
16
Accounts Receivable, net
At March 31, 2008 and December 31, 2007, we had approximately $747,700 and
$886,600, respectively, in accounts receivable, net of allowances totaling
$233,600 and $229,000, respectively. From time to time, we could maintain
individually significant accounts receivable balances from one or more of our
significant customers. If the financial condition of any of these significant
customers should deteriorate, our operating results could be materially
affected.
Working Capital
As of March 31, 2008, we had current assets of $5,627,800 and current
liabilities of $2,133,500, which netted to working capital of $3,494,300.
Included in current liabilities was the current portion of deferred revenue of
$1,416,500.
Segment Fixed Assets
As of March 31, 2008, segment fixed assets (long-lived assets) were as follows:
Accumulated
Depreciation Net,
Fixed Assets Cost Basis /Amortization as Reported
-------------- --------------- ---------------
Software $ 1,148,400 $ (1,008,400) $ 140,000
Intellectual Property 5,340,400 (2,821,400) 2,519,000
Unallocated 5,000 - 5,000
-------------- --------------- ---------------
$ 6,493,800 $ (3,829,800) $ 2,664,000
============== =============== ===============
New Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board ("FASB") issued SFAS No.
161, "Disclosures about Derivatives Instruments and Hedging Activities, an
Amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 requires enhanced
disclosures about a company's derivative and hedging activities. SFAS is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. We are currently evaluating the impact of the adoption of
SFAS 161 and do not expect adoption to have a material impact on results of
operations, cash flows or financial position.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R") which replaces SFAS No. 141, "Business
Combinations." SFAS 141R establishes principles and requirements for recognizing
and measuring identifiable assets and goodwill acquired, liabilities assumed and
any noncontrolling interest in a business combination at their fair value at
acquisition date. SFAS 141R alters the treatment of acquisition related costs,
business combinations achieved in stages (referred to as a step acquisition),
the treatment of gains from a bargain purchase, the recognition of contingencies
in business combinations, the treatment of in-process research and development
in a business combination as well as the treatment of recognizable deferred tax
benefits. SFAS 141R is effective for business combinations closed in fiscal
years beginning after December 15, 2008. We are currently evaluating the impact
of SFAS 141R and expect that results of operations, cash flows or financial
position would only be impacted in relation to future business combination
activities, if any.
In December 2007, FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB No. 51" ("SFAS 160"), the
objective of which is to improve the relevance, comparability and transparency
of the financial information that a reporting entity provides in its
consolidated financial statements by establishing accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. We are assessing the impact of SFAS 160, but do not expect it to have a
material impact on results of operations, cash flows or financial position.
In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities" ("SFAS 159") which permits entities to choose
to measure many financial instruments and certain other items at fair value. The
objective of SFAS 159 is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS 159 is effective as of an entity's
17
first fiscal year that begins after November 15, 2007. The adoption of SFAS 159
did not have a material impact on results of operations, cash flows or financial
position.
In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
157") which defines fair value, establishes a framework for measuring fair value
in GAAP and expands disclosures about fair value measurements. SFAS 157 applies
under other accounting pronouncements that require or permit fair value
measurements, FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS 157 does not require any new fair value measurements, however,
for some entities; application of SFAS 157 will change current practice.
SFAS 157 is effective for financial statements issued for the first fiscal year
beginning after November 15, 2007 and interim periods within those fiscal years.
In February 2008, FASB issued FASB Staff Position No. 157-2 that defers the
effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis, to fiscal years beginning after November 15,
2008. In addition, FASB also agreed to exclude from the scope of FASB 157 fair
value measurements made for purposes of applying SFAS No. 13, "Accounting for
Leases" and related interpretive accounting pronouncements. The adoption of
SFAS 157 did not have a material impact on results of operations, cash flows or
financial position.
In May 2008, FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"), which is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with GAAP for nongovernmental entities. SFAS 162 is
effective 60 days following SEC's approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles." We are currently
evaluating the impact of adoption of SFAS 162 and do not expect adoption to have
a material impact on results of operations, cash flows or financial position.
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk
We are currently not exposed to any significant financial market risks from
changes in foreign currency exchange rates or changes in interest rates and do
not use derivative financial instruments. A substantial majority of our revenue
and capital spending is transacted in U.S. dollars. However, in the future, we
may enter into transactions in other currencies. An adverse change in exchange
rates would result in a decline in income before taxes, assuming that each
24
exchange rate would change in the same direction relative to the U.S. dollar. In
addition to the direct effects of changes in exchange rates, such changes
typically affect the volume of sales or foreign currency sales price as
competitors' products become more or less attractive.Not applicable
ITEM 4. Controls and Procedures
Our management carried out an evaluation,Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, ofwe evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934) as of September 30, 2005.the end of the period
covered by this report. Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Actas of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the
Securities and Exchange Commission.March 31, 2008.
There has not been any change in our internal control over financial reporting
(as defined in connection with the evaluation required by Rule 13a-15(d)13a-15(f) under the Exchange Act that occurredAct) during the quarter ended
September 30, 2005March 31, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
18
PART II--OTHERII. OTHER INFORMATION
ITEM 1. Legal Proceedings
On August 28, 2007, we filed a proceeding against Juniper Networks, Inc.
("Juniper") in the United States District Court in the Eastern District of Texas
alleging that certain of Juniper's products infringe three of our patents,
namely; U.S. Patent Nos. 5,826,014, 6,061,798 and 7,028,336, (the "'014," "'798"
and "'336" patents, respectively) which protect our fundamental network security
and firewall technologies. We seek preliminary and permanent injunctive relief
along with unspecified damages and fees. Juniper filed its Answer and
Counterclaims on October 26, 2007 seeking a declaratory judgment that it does
not infringe the `014, `798 and `336 patents and that all three of these patents
are invalid and unenforceable. Subsequent to October 26, 2007 and through the
date hereof, we and Juniper have filed further replies and responses addressing
the issues raised in our original complaint and Juniper's Answer and
Counterclaims.
On March 10, 2008, we initiated a proceeding against Classified Ventures, LLC;
IAC/InterActiveCorp; Match.com (an operating business of IAC/InterActiveCorp);
Yahoo! Inc.; eHarmony.com; and CareerBuilder, LLC in the United States District
Court in the Eastern District of Texas alleging infringement of four of our
patents, namely; U.S. Patent Nos. 6,324,538, 6,850,940, 7,028,034 and
7,269,591, which protect our unique method of maintaining an automated and
network-accessible database. The suit alleges that the named companies infringe
our patents on each of their Web sites. The suit seeks permanent injunctive
relief along with unspecified damages.
ITEM 1A. Risk Factors
Not Applicable
ITEM 2. Unregistered Sales of Equity Securities and Use of
Proceeds
During the three-month period ended September 30, 2005,March 31, 2008, we
granted the following stock options:options and awards:
o stock options to purchase an aggregate 85,000465,000 shares
of common stock, at exercise prices ranging from $0.35$0.32 to $0.40 per share,$0.38, were
granted to twovarious non-executive employees;employees.
o stock options to purchase an aggregate 425,000 shares of common stock,
at an exercise price of $0.38, were granted to our directors and
executive employees.
o stock options to purchase an aggregate 25,000 shares of common stock,
at an exercise price of $0.38 were granted to an outside consultant.
The grant of such stock options to the above-listed persons was not registered
under the Securities Act of 1933, because the stock options either did not
involve an offer or sale for purposes of Section 2(a)(3) of the Securities Act,
in reliance on the fact that the stock options were granted for no
consideration, or were offered and sold in transactions not involving a public
offering, exempt from registration under the Securities Act pursuant to Section
4(2).
ITEM 3. Defaults Upon Senior Securities
Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits
Exhibit 31 - Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32 - Section 1350 Certifications
2519
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GraphOn Corporation
(Registrant)
Date: November 21, 2005May 15, 2008
By: /s/ Robert Dilworth
----------------------------------------------------
Robert Dilworth
Chief Executive Officer (Interim) and
Chairman of the Board
(Principal Executive Officer)
Date: November 21, 2005May 15, 2008
By: /s/ William Swain
--------------------------------------------------
William Swain
Chief Financial Officer
(Principal Financial Officer and
Principal(Principal Accounting Officer)
26