UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2013
![](https://capedge.com/proxy/10-Q/0001140361-13-032152/image00001.jpg)
(Exact name of registrant as specified in its charter)
Delaware | 13-3899021 | |
(State of incorporation) | (IRS Employer | |
Identification No.) |
Campbell, CA 95008
(Address of principal executive offices)
Registrant’s telephone number:
(800) GRAPHON
(408) 688-2674
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a 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.
Large accelerated filer | o | Accelerated filer | o | |
Non-accelerated filer | o | 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 o No x
As of August 12, 2013, there were issued and outstanding 98,118,901 shares of the registrant’s common stock, par value $0.0001.
GraphOn Corporation
FORM 10-Q
PART I. | FINANCIAL INFORMATION | PAGE | ||
Item 1. | Financial Statements | |||
2 | ||||
3 | ||||
4 | ||||
5 | ||||
7 | ||||
Item 2. | 22 | |||
Item 3. | 31 | |||
Item 4. | 31 | |||
PART II. | OTHER INFORMATION | |||
Item 1. | 32 | |||
Item 1A. | 32 | |||
Item 2. | 32 | |||
Item 3. | 32 | |||
Item 4. | 32 | |||
Item 5. | 32 | |||
Item 6. | 32 | |||
Signatures | 33 |
Forward-Looking Information
This report includes, in addition to historical information, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. This act provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact we make in this report are forward-looking statements. In particular, the statements regarding industry prospects and our future results of operations or financial position are forward-looking statements. Such statements are based on management's current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ significantly from those described in the forward looking statements. Factors that may cause such a difference include the following:
· | the success of our new products depends on a number of factors including market acceptance and our ability to manage the risks associated with product introduction; |
· | Local, regional, and national and international economic conditions and events, and the impact they may have on us and our customers; |
· | our revenue could be adversely impacted if any of our significant customers reduces its order levels or fails to order during a reporting period; and |
· | other factors, including, but not limited to, those set forth under Item 1A, “Risk Factors” in our Annual Report, as amended, on Form 10-K/A for the year ended December 31, 2012, which was filed with the SEC on April 12, 2013, and in other documents we have filed with the SEC. |
Statements included in this report are based upon information known to us as of the date that this report is filed with the SEC, and we assume no obligation to update or alter our forward-looking statements made in this report, whether as a result of new information, future events or otherwise, except as otherwise required by applicable federal securities laws.
PART I. FINANCIAL INFORMATION
GraphOn Corporation
Assets | (Unaudited) June 30, 2013 | December 31, 2012 | ||||||
Current Assets: | ||||||||
Cash | $ | 4,761,000 | $ | 3,960,600 | ||||
Accounts receivable, net | 752,900 | 865,900 | ||||||
Prepaid expenses | 104,000 | 150,200 | ||||||
Total Current Assets | 5,617,900 | 4,976,700 | ||||||
Capitalized software development costs, net | 604,500 | 223,100 | ||||||
Property and equipment, net | 354,500 | 358,900 | ||||||
Other assets | 32,400 | 46,900 | ||||||
Total Assets | $ | 6,609,300 | $ | 5,605,600 | ||||
Liabilities and Stockholders’ Equity (Deficit) | ||||||||
Current Liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 866,400 | $ | 739,100 | ||||
Deferred revenue | 2,759,800 | 2,921,600 | ||||||
Severance liability | 206,400 | 209,500 | ||||||
Deferred rent | 28,800 | 26,700 | ||||||
Total Current Liabilities | 3,861,400 | 3,896,900 | ||||||
Warrants liability | 1,317,500 | 7,390,100 | ||||||
Deferred revenue | 517,800 | 570,400 | ||||||
Severance liability | — | 52,900 | ||||||
Deferred rent | 112,400 | 127,500 | ||||||
Total Liabilities | 5,809,100 | 12,037,800 | ||||||
Commitments and contingencies | ||||||||
Stockholders' Equity (Deficit): | ||||||||
Preferred stock, $0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding | — | — | ||||||
Common stock, $0.0001 par value, 195,000,000 shares authorized, 94,062,517 and 82,616,750 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively | 9,400 | 8,300 | ||||||
Additional paid-in capital | 70,254,500 | 62,425,400 | ||||||
Accumulated deficit | (69,463,700 | ) | (68,865,900 | ) | ||||
Total Stockholders' Equity (Deficit) | 800,200 | (6,432,200 | ) | |||||
Total Liabilities and Stockholders' Equity (Deficit) | $ | 6,609,300 | $ | 5,605,600 |
See accompanying notes to unaudited condensed consolidated financial statements
GraphOn Corporation
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Revenue | $ | 1,393,800 | $ | 1,570,900 | $ | 3,010,800 | $ | 3,181,500 | ||||||||
Costs of revenue | 137,300 | 132,400 | 249,100 | 270,900 | ||||||||||||
Gross profit | 1,256,500 | 1,438,500 | 2,761,700 | 2,910,600 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling and marketing | 561,200 | 604,800 | 1,060,200 | 1,179,300 | ||||||||||||
General and administrative | 780,700 | 1,440,800 | 1,526,700 | 2,484,800 | ||||||||||||
Research and development | 1,375,600 | 964,800 | 2,088,800 | 2,017,900 | ||||||||||||
Total operating expenses | 2,717,500 | 3,010,400 | 4,675,700 | 5,682,000 | ||||||||||||
Loss from operations | (1,461,000 | ) | (1,571,900 | ) | (1,914,000 | ) | (2,771,400 | ) | ||||||||
Other income - change in fair value of warrants liability | 4,767,900 | 666,500 | 1,319,200 | 607,900 | ||||||||||||
Other income (expense), net | (200 | ) | 1,100 | (300 | ) | 3,500 | ||||||||||
Income (loss) from continuing operations before provision for income tax | 3,306,700 | (904,300 | ) | (595,100 | ) | (2,160,000 | ) | |||||||||
Provision for income tax | 1,600 | 1,000 | 2,700 | 2,000 | ||||||||||||
Income (loss) from continuing operations | $ | 3,305,100 | $ | (905,300 | ) | $ | (597,800 | ) | $ | (2,162,000 | ) | |||||
Loss from discontinued operations | — | (90,900 | ) | — | (121,300 | ) | ||||||||||
Net income (loss) | 3,305,100 | (996,200 | ) | (597,800 | ) | (2,283,300 | ) | |||||||||
Earnings (loss) per share: | ||||||||||||||||
Continuing operations – basic | $ | 0.04 | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | |||||
Discontinued operations – basic | $ | - | $ | (0.00 | ) | $ | - | $ | (0.00 | ) | ||||||
Basic earnings (loss) per share | $ | 0.04 | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | |||||
Continuing operations – diluted | $ | 0.03 | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | |||||
Discontinued operations – diluted | $ | — | $ | (0.00 | ) | $ | — | $ | (0.00 | ) | ||||||
Diluted earnings (loss) per share – diluted | $ | 0.03 | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | |||||
Average weighted common shares outstanding – basic | 85,823,258 | 81,961,071 | 84,488,583 | 81,937,732 | ||||||||||||
Average weighted common shares outstanding – diluted | 101,323,745 | 81,961,071 | 84,488,583 | 81,937,732 |
See accompanying notes to unaudited condensed consolidated financial statements
GraphOn Corporation
Six Months Ended June 30, | ||||||||
2013 | 2012 | |||||||
(Unaudited) | (Unaudited) | |||||||
Preferred stock – shares outstanding | ||||||||
Beginning balance | — | — | ||||||
Ending balance | — | — | ||||||
— | — | |||||||
Common stock – shares outstanding | ||||||||
Beginning balance | 82,616,750 | 81,886,926 | ||||||
Employee stock option issuances | 751,378 | 130,813 | ||||||
Exercise of warrants | 9,917,500 | — | ||||||
Vesting of restricted stock awards | 776,889 | — | ||||||
Ending balance | 94,062,517 | 82,017,739 | ||||||
Common stock - amount | ||||||||
Beginning balance | $ | 8,300 | $ | 8,200 | ||||
Exercise of employee stock options | 100 | — | ||||||
Exercise of warrants | 800 | — | ||||||
Vesting of restricted stock awards | 200 | — | ||||||
Ending balance | $ | 9,400 | $ | 8,200 | ||||
Additional paid-in capital | ||||||||
Beginning balance | $ | 62,425,400 | $ | 61,398,600 | ||||
Stock-based compensation expense | 427,200 | 328,100 | ||||||
Stock-based compensation expense – severance agreement | — | 237,400 | ||||||
Proceeds from exercise of employee stock options | 112,400 | 8,100 | ||||||
Proceeds from exercise of warrants | 2,550,200 | — | ||||||
Issuance of new warrants, per exercise agreement | 514,800 | — | ||||||
New warrants recorded as cost of exercise agreement | (514,800 | ) | — | |||||
Reclassification of warrants liability to equity from exercise of warrants | 348,300 | — | ||||||
Reclassification of warrants liability to equity from amendment of warrants | 4,391,000 | — | ||||||
Ending balance | $ | 70,254,500 | $ | 61,972,200 | ||||
Accumulated deficit | ||||||||
Beginning balance | $ | (68,865,900 | ) | $ | (60,689,200 | ) | ||
Net loss | (597,800 | ) | (2,283,300 | ) | ||||
Ending balance | $ | (69,463,700 | ) | $ | (62,972,500 | ) | ||
Total Stockholders’ Equity (Deficit) | $ | 800,200 | $ | (992,100 | ) |
See accompanying notes to unaudited condensed consolidated financial statements
GraphOn Corporation
Six Months Ended June 30, | ||||||||
2013 | 2012 | |||||||
Cash Flows Provided By (Used In) Operating Activities: | (Unaudited) | (Unaudited) | ||||||
Net Loss | $ | (597,800 | ) | $ | (2,283,300 | ) | ||
Loss from discontinued operations | — | 121,300 | ||||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 135,500 | 124,500 | ||||||
Stock-based compensation expense | 390,500 | 565,500 | ||||||
Change in fair value of derivative instruments - warrants | (1,319,200 | ) | (607,900 | ) | ||||
Change in fair value of warrants liability for consulting services | (14,100 | ) | 14,500 | |||||
Revenue deferred to future periods | 1,839,400 | 2,789,800 | ||||||
Recognition of deferred revenue | (2,053,800 | ) | (2,340,100 | ) | ||||
Changes in severance liability | (56,000 | ) | 408,500 | |||||
Changes in deferred rent | (13,000 | ) | 26,400 | |||||
Changes to allowance for doubtful accounts | (9,300 | ) | 12,900 | |||||
Loss on disposal of fixed assets | — | 600 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 122,300 | (123,100 | ) | |||||
Prepaid expenses | 46,200 | 5,900 | ||||||
Accounts payable and accrued expenses | 127,300 | (140,000 | ) | |||||
Other long term assets | 14,500 | 10,200 | ||||||
Net Cash Used In Continuing Operations | (1,387,500 | ) | (1,414,300 | ) | ||||
Net Cash Used in Discontinued Operations | — | (37,000 | ) | |||||
Net Cash Used in Operating Activities | (1,387,500 | ) | (1,451,300 | ) | ||||
Cash Flows Used In Investing Activities: | ||||||||
Capital expenditures | (48,000 | ) | (238,700 | ) | ||||
Capitalized software development costs | (427,800 | ) | — | |||||
Net Cash Used In Investing Activities - Continuing Operations | (475,800 | ) | (238,700 | ) | ||||
Net Cash Used In Investing Activities - Discontinued Operations | — | — | ||||||
Net Cash Used In Investing Activities | (475,800 | ) | (238,700 | ) | ||||
Condensed Consolidated Statements of Cash Flows (Continued) |
Six Months Ended June 30, | ||||||||
2013 | 2012 | |||||||
(Unaudited) | (Unaudited) | |||||||
Cash Flows Provided By Financing Activities: | ||||||||
Proceeds from exercise of warrants | 2,551,300 | — | ||||||
Proceeds from exercise of employee stock options | 112,400 | 8,100 | ||||||
Net Cash Provided By Financing Activities from Continuing Operations | 2,663,700 | 8,100 | ||||||
Net Cash Provided By Financing Activities from Discontinued Operations | — | — | ||||||
Net Cash Provided By Financing Activities | 2,663,700 | 8,100 | ||||||
Net Increase (Decrease) in Cash | 800,400 | (1,681,900 | ) | |||||
Cash - Beginning of Period | 3,960,600 | 7,237,500 | ||||||
Cash - End of Period | $ | 4,761,000 | $ | 5,555,600 |
See accompanying notes to unaudited condensed consolidated financial statements
GRAPHON CORPORATION
1. Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of GraphOn Corporation and its subsidiaries (collectively, “we”, “us” or “our”); significant intercompany accounts and transactions are eliminated upon consolidation. The unaudited condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) applicable to interim financial information and the rules and regulations promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, such unaudited condensed consolidated financial statements do not include all information and footnote disclosures required in annual financial statements.
The unaudited condensed consolidated financial statements included herein reflect all adjustments, which include only normal, recurring adjustments, except for the effect of the amendment to warrants (Note 4), that are, in our opinion, necessary to state fairly the results for the periods presented. This Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements contained in our Annual Report, as amended, on Form 10-K/A for the year ended December 31, 2012, which was filed with the SEC on April 12, 2013 (“2012 10-K/A 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, 2013 or any future period.
During September 2012, we reached settlement and licensing agreements that effectively ended all of our then on-going intellectual property litigation. Having been approached by the respective counter-parties to each of our lawsuits, and in consultation with our board of directors, we determined that it was in our best long-term strategic interests to settle each lawsuit in order to move forward and shift our focus to our software products, including our new product initiatives. We do not intend to pursue intellectual property litigation as an integral part of our strategy to fund our future operations. Accordingly for all periods presented, the results of operations and cash flows related to our former intellectual property segment has been segregated and reported as “Discontinued Operations”. See Note 17 to our Notes to Unaudited Condensed Consolidated Financial Statements.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates include: the amount of stock-based compensation expense; the allowance for doubtful accounts; the estimated lives, valuation, and amortization of intangible assets (including capitalized software); depreciation of long-lived assets; valuation of warrants; post-employment benefits, and accruals for liabilities. While we believe that such estimates are fair, actual results could differ materially from those estimates.
Revenue Recognition
We market and license our products indirectly through channel distributors, independent software vendors (“ISVs”), value-added resellers (“VARs”) (collectively, “resellers”) and directly to corporate enterprises, governmental and educational institutions and others. Our product licenses are perpetual. We also separately sell intellectual property licenses, maintenance contracts, which are comprised of license updates and customer service access, as well as other products and services.
Software license revenues are recognized when:
· | Persuasive evidence of an arrangement exists, (i.e., when we sign a non-cancellable license agreement wherein the customer acknowledges an unconditional obligation to pay, or upon receipt of the customer’s purchase order), and |
· | 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 occurs when the media containing the licensed program(s) is provided to a common carrier or, in the case of electronic delivery, when the customer is given access to the licensed program(s)), and |
· | The price to the customer is fixed or determinable, as typically evidenced in a signed non-cancellable contract, or a customer’s purchase order, and |
· | Collectability is probable. If collectability is not considered probable, revenue is recognized when the fee is collected. |
· | Collectability is probable. If collectability is not considered probable, revenue is recognized when the fee is collected. |
Revenue recognized on software arrangements involving multiple deliverables is allocated to each deliverable based on vendor-specific objective evidence (“VSOE”) or third party evidence of the fair values of each deliverable; such deliverables include licenses for software products, maintenance, private labeling fees, and customer training. We limit our assessment of VSOE for each deliverable to either the price charged when the same deliverable is sold separately or the price established by management having the relevant authority to do so, for a deliverable not yet sold separately.
If sufficient VSOE of the fair value does not exist so as to permit the allocation of revenue to the various elements of the arrangement, all revenue from the arrangement is deferred until such evidence exists or until all elements are delivered. If VSOE of the fair value does not exist, and the only undelivered element is maintenance, then we recognize revenue on a ratable basis. If VSOE of the fair value of all undelivered elements exists but 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 resellers (“stocking resellers”) purchase product licenses that they hold in inventory until they are resold to the ultimate end user (an “inventory stocking order”). At the time that a stocking reseller places an inventory stocking order, no product licenses are shipped by us to the stocking reseller; rather, the stocking reseller’s inventory is credited with the number of licenses purchased and the stocking reseller can resell (issue) any number of licenses from their inventory at any time. Upon receipt of an order to issue a license(s) from a stocking reseller’s inventory (a “draw down order”), we will ship the license(s) in accordance with the draw down order’s instructions. We defer recognition of revenue from inventory stocking orders until the underlying licenses are sold and shipped to the end user, as evidenced by the receipt and fulfillment of the stocking reseller’s draw down order, assuming all other revenue recognition criteria have been met.
There are no rights of return granted to resellers or other purchasers of our software products.
Revenue from maintenance contracts is recognized ratably over the related contract period, which generally ranges from one to five years.
All of our software licenses are denominated in U.S. dollars.
Deferred Rent
The lease for our office in Campbell, California, contains free rent and predetermined fixed escalations in our minimum rent payments. We recognize rent expense related to this lease on a straight-line basis over the term of the lease. We record any difference between the straight-line rent amounts and amounts payable under the lease as part of deferred rent in current or long-term liabilities, as appropriate.
Incentives that we received upon entering into the lease agreement are recognized on a straight-line basis as a reduction to rent over the term of the lease. We record the unamortized portion of these incentives as a part of deferred rent in current or long-term liabilities, as appropriate.
Postemployment Benefits (Severance Liability)
Nonretirement postemployment benefits, including salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits and continuation of benefits such as health care benefits, are recognized as a liability and a loss when it is probable that the employee(s) will be entitled to such benefits and the amount can be reasonably estimated. The cost of termination benefits recognized as a liability and an expense includes the amount of any lump-sum payments and the present value of any expected future payments. During 2012, we recorded $721,800 of severance expense, including stock compensation expense. Such expense was recorded as a result of a separation agreement and a release with Robert Dilworth in connection with Mr. Dilworth’s resignation as our Chief Executive Officer and as a member of our board of directors. In addition during the three-month period ended June 30, 2013 we recorded $75,700 of severance expense as a result of a separation and release with a former vice president-level employee (as further discussed in Note 5 to Unaudited Condensed Consolidated Financial Statements). An aggregate of $206,400 and $262,400 is reflected as a severance liability, at June 30, 2013 and December 31, 2012, respectively.
Software Development Costs
We capitalize software development costs incurred from the time technological feasibility of the software is established until the software is available for general release, in accordance with GAAP. Such capitalized costs are subsequently amortized as costs of revenue over the shorter of three years or the remaining estimated useful life of the product.
Research and development costs and other computer software maintenance costs related to the software development are expensed as incurred.
Long-Lived Assets
Long-lived assets are assessed for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable, whenever we have committed to a plan to dispose of the assets or, at a minimum, annually. Typically, for long-lived assets to be held and used, measurement of an impairment loss is based on the fair value of such assets, with fair value being determined based on appraisals, current market value, comparable sales value, and discounted future cash flows, among other variables, as appropriate. Assets to be held and used (which assets are affected by an impairment loss) are depreciated or amortized at their new carrying amount over their 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-or six month periods ended June 30, 2013 or 2012.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts that reflects our best estimate of potentially uncollectible trade receivables. The allowance is based on assessments of the collectability of specific customer accounts and the general aging and size of the accounts receivable. We regularly review the adequacy of our allowance for doubtful accounts by considering such factors as historical experience, credit worthiness, and current economic conditions that may affect a customer’s ability to pay. We specifically reserve for those accounts deemed uncollectible. We also establish, and adjust, a general allowance for doubtful accounts based on our review of the aging and size of our accounts receivable.
The following table sets forth the details of the Allowance for Doubtful Accounts for the three and six-month periods ended June 30, 2013 and 2012:
Beginning Balance | Charge Offs | Recoveries | Provision | Ending Balance | ||||||||||||||||
Three Months Ended June 30, | ||||||||||||||||||||
2013 | $ | 15,600 | $ | — | $ | — | $ | 9,000 | $ | 24,600 | ||||||||||
2012 | 25,200 | — | — | 12,700 | 37,900 | |||||||||||||||
Six Months Ended June 30, | ||||||||||||||||||||
2013 | $ | 33,900 | $ | — | $ | — | $ | (9,300 | ) | $ | 24,600 | |||||||||
2012 | 25,000 | — | — | 12,900 | 37,900 |
Concentration of Credit Risk
For the three and six-month periods ended June 30, 2013 and 2012 respectively, we considered the customers listed in the following table to be our most significant customers. The table sets forth the percentage of sales attributable to each customer for the three and six-month periods ended June 30, 2013 and 2012, and the respective customer’s ending accounts receivable balance as a percentage of reported accounts receivable, net, as of June 30, 2013 and 2012.
Three Months Ended June 30, 2013 | Three Months Ended June 30, 2012 | |||||||||||||||
Customer | Sales | Accounts Receivable | Sales | Accounts Receivable | ||||||||||||
GE | 8.2 | % | 14.4 | % | 6.7 | % | 14.0 | % | ||||||||
Ericsson | 7.7 | % | 36.7 | % | 7.2 | % | 15.1 | % | ||||||||
GAD | 7.3 | % | 0.0 | % | 26.0 | % | 1.0 | % | ||||||||
Intellisis | 6.5 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||
Total | 29.7 | % | 51.1 | % | 39.9 | % | 30.1 | % |
Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 | |||||||||||||||
Customer | Sales | Accounts Receivable | Sales | Accounts Receivable | ||||||||||||
Ericsson | 10.2 | % | 36.7 | % | 7.0 | % | 15.1 | % | ||||||||
Alcatel-Lucent | 7.1 | % | 8.3 | % | 3.8 | % | 8.8 | % | ||||||||
GE | 5.3 | % | 14.4 | % | 7.3 | % | 14.0 | % | ||||||||
IDS | 5.0 | % | 0.0 | % | 4.0 | % | 0.0 | % | ||||||||
Total | 27.6 | % | 59.4 | % | 21.1 | % | 37.9 | % |
Derivative Financial Instruments
We currently do not have a material exposure to either commodity prices or interest rates; accordingly, we do not currently use derivative instruments to manage such risks. We evaluate all of our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. All derivative financial instruments are recognized in the balance sheet at fair value. Changes in fair value are recognized in earnings if they are not eligible for hedge accounting or in other comprehensive income if they qualify for cash flow hedge accounting.
Fair Value of Financial Instruments
The fair value of our accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the relative short maturities of these items.
The fair value of warrants at issuance and for those recorded as a liability at each reporting date are determined in accordance with the Financial Account Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurement,” which establishes a fair value hierarchy that prioritizes the assumptions (inputs) to valuation techniques used to price assets or liabilities that are measured at fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The guidance for fair value measurements requires that assets, liabilities and certain equity instruments measured at fair value be classified and disclosed in one of the following categories:
· | Level 1: Defined as observable inputs, such as quoted (unadjusted) prices in active markets for identical assets or liabilities. |
· | Level 2: Defined as observable inputs other than quoted prices included in Level 1. This includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
· | Level 3: Defined as unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation. |
As of June 30, 2013, all of our $1,317,500 Warrants Liability reported at fair value was categorized as Level 3 inputs (See Note 4).
Recent Accounting Pronouncements
In February 2013, FASB issued ASU No. 2013-02 “Other Comprehensive Income” (ASU 2013-02). The objective of ASU 2013-02 is to improve the reporting of reclassifications out of other comprehensive income. This objective is reached by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. ASU 2013-02 is effective and is to be applied prospectively to reporting periods beginning after December 15, 2012.We currently have no amounts that would meet the criteria to be reclassified; accordingly, the adoption of ASU 2013-02 did not have a material impact on our results of operations, cash flows or financial position. Comprehensive income and loss equals net loss for the each of the three and six-month periods ended June 30, 2013 and 2012, respectively.
In July 2012, FASB issued ASU No. 2012-02 “Intangibles – Goodwill and Other” (ASU 2012-02). The objective of ASU 2012-02 is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. ASU 2012-02 is effective for fiscal years beginning after September 15, 2012. Early adoption is permitted. We currently have no goodwill or indefinite-lived intangible assets; accordingly, the adoption of ASU 2012-02 did not have a material impact on our results of operations, cash flows or financial position.
3. Property and Equipment
Property and equipment was:
June 30, 2013 | December 31, 2012 | |||||||
Equipment | $ | 1,219,900 | $ | 1,171,900 | ||||
Furniture | 380,200 | 380,200 | ||||||
Leasehold improvements | 147,500 | 147,500 | ||||||
1,747,600 | 1,699,600 | |||||||
Less: accumulated depreciation and amortization | 1,393,100 | 1,340,700 | ||||||
$ | 354,500 | $ | 358,900 |
Aggregate property and equipment depreciation and amortization expense was $27,000 during the three-month period ended June 30, 2013 and $52,400 during the six-month period ended June 30, 2013. During the six-month period ended June 30, 2013, we capitalized the following costs: equipment; $48,000.
4. Liability Attributable to Warrants
On June 17, 2013, we entered into, and subsequently consummated, an Exercise Agreement (the “Exercise Agreement”) with five of the largest investors in our September 1, 2011 private placement of common stock and warrants (the “2011 Transaction”), providing for the exercise for cash by such investors of warrants to purchase an aggregate 9 million shares of our common stock, out of the approximately 17 million shares of common stock subject to warrants issued to the investors in the 2011 Transaction that remained outstanding as of such date. The approximately 5 million shares of common stock subject to warrants issued to the placement agent in the 2011 Transaction that remained outstanding as of such date were not part of the Exercise Agreement. The Company agreed under the Exercise Agreement to subsequently commence a tender offer (the “Offer to Exercise”) to provide these holders of other warrants that remained outstanding from the 2011 Transaction with the same opportunity to exercise as provided under the Exercise Agreement (See Note 18).
The warrants exercised had a remaining term of approximately 38 months, and had an exercise price of $0.26 per warrant, which was the original exercise price. We received cash proceeds of $2.34 million as a result of the warrants exercised. In consideration for the early exercise of these warrants, we issued to the five investors an aggregate of 4.5 million warrants to purchase common stock at an exercise price of $1.00 per warrant, with a term of five years from issuance (the “New Warrants”). The New Warrants were issued on June 18, 2013, are substantially similar to the investor warrants that were exercised, and, after giving effect to the amendments to such warrants described below. Such warrants have been recorded as a component of equity (additional paid-in capital “APIC”) at Level 3 fair value. Using a binomial pricing model, we calculated the fair value of the New Warrants to be $514,800. We used the following assumptions in the binomial pricing model: estimated volatility - 185%; annualized forfeiture rate - 0%; expected term – 5 years; estimated exercise factor – 1.5, risk free interest rate – 1.07%; and dividends – 0. The New Warrants were accounted for as a cost of the exercise of the warrants issued pursuant to the Exercise Agreement, as a result a $514,800 reduction of APIC was also recorded. Accordingly there was no net effect on equity because of the issuance of the new warrants.
Immediately prior to the exercise for cash, the five investors, who held a majority of the outstanding warrants issued in the 2011 Transaction to investors (Investors Warrants), agreed to amend the entire series of such warrants to delete the following provisions: (1) the price-based anti-dilution clause; (2) our right to lower the exercise price in our discretion; and (3) a clause that mandated that we buy the warrants for cash at their Black-Scholes value in the event of certain extraordinary transactions. By virtue of a majority-rule clause in the warrants, the elimination of these provisions from the investor warrants issued in the 2011 Transaction eliminated the warrant derivative liability classification related to all of the investor warrants issued in the 2011 Transaction including those held by investors who did not exercise their warrants at the date of the amendment. The table below shows the calculation of the reduction of the warrants derivative liability
The warrants issued to the placement agent and to an intellectual property consulting firm (ipCapital Group, Inc.) were not included in the Exercise Agreement or affected by the amendment described above. The exercise price of such warrants could, in certain circumstances, be reset to below-market value. Accordingly, unlike the amended investor warrants, we have concluded that ��the warrants issued to the placement agent and ipCapital Group, Inc. are not indexed to our common stock; therefore, the fair value of these warrants were, and continue to be, recorded as a liability.
Under ASC 820, “Fair Value Measurement,” we re-measure the fair value of the warrants classified as a liability at every balance sheet date. As an integral part of the re-measurement process, we reevaluate each of the assumptions used, and when circumstances change or we become aware of new information affecting any of our assumptions, we adjust those assumptions accordingly. During the three months ended March 31, 2013 two investors in the 2011 private placement exercised an aggregate 462,500 warrants. While closing our books for the three months ended March 31, 2013, we reevaluated our internal assumptions based on historic and recent exercise patterns and analysis of our stock performance. Based on the work performed, we concluded that a lowering of our estimated exercise factor for the warrants issued in conjunction with the 2011 transaction from 10 to 4 was appropriate (see the assumptions used, as set forth in the tables, below).
Changes in fair value of the warrants liability are recognized in other expense, except for changes in the fair value of the warrants issued to ipCapital which are recognized as a component of general and administrative expense in the condensed consolidated statement of operations.
We used the exercise price of the warrants, as well as the fair market value of our common stock, to determine the fair value of our warrants. The exercise price for warrants issued in conjunction with the 2011 Transaction, including those issued to the placement agent ranged between $0.20 and $0.26, per share, and was $0.26 per share for the warrants issued to ipCapital. The fair market value of our common stock was $0.36 and $0.15 per share as of June 30, 2013 and 2012, respectively.
We used a binomial pricing model to determine the fair value of our warrants liability as of June 30, 2013 and December 31, 2012, the balance sheet dates, using the following assumptions:
2011 Transaction | ipCapital | |||||||||||||||
June 30, 2013 | December 31, 2012 | June 30, 2013 | December 31, 2012 | |||||||||||||
Estimated volatility | 136 | % | 159 | % | 135 | % | 163 | % | ||||||||
Annualized forfeiture rate | — | — | — | — | ||||||||||||
Expected option term (years) | 3.17 | 3.67 | 3.29 | 3.79 | ||||||||||||
Estimated exercise factor | 4 | 10 | 4 | 10 | ||||||||||||
Risk-free interest rate | 0.72 | % | 0.45 | % | 0.77 | % | 0.65 | % | ||||||||
Dividends | — | — | — | — |
The following table is a reconciliation of the warrants liability measured at fair value using significant unobservable inputs (Level 3) for the six months ended June 30, 2013:
Warrants liability – December 31, 2012 fair value | $ | 7,390,100 | ||
Change in fair value of warrant liability recorded in other expenses | (1,319,200 | ) | ||
Change in fair value of warrant liability recorded in general and administrative expense | (14,100 | ) | ||
Reclassification of warrants liability to equity from exercise of warrants (1) | (348,300 | ) | ||
Reclassification of warrants liability to equity from amendment to warrants (1) | (4,391,000 | ) | ||
Warrants liability – June 30, 2013 fair value | $ | 1,317,500 |
(1) | During the six-month period ended June 30, 2013, in addition to the warrant amendment, we also reduced our warrants liability by $348,300 as a result of the exercise of 917,500 warrants during such period, prior to the amendment to the warrants. The aggregate reduction in the liability, combining the warrant amendment and this exercise, was $4,739,300. See Note 13. |
The following table reconciles the number of warrants outstanding for the periods ended June 30, 2013 and 2012, respectively.
For the Three-Month Period Ended June 30, 2013 | ||||||||||||||||
Beginning Outstanding | Issued | Exercised | Ending Outstanding | |||||||||||||
2011 Transaction | 22,612,500 | — | 9,455,000 | 13,157,500 | ||||||||||||
ipCapital | 400,000 | — | — | 400,000 | ||||||||||||
Exercise Agreement | — | 4,500,000 | — | 4,500,000 | ||||||||||||
Total | 23,012,500 | 4,500,000 | 9,455,000 | 18,057,500 |
For the Six-Month Period Ended June 30, 2013 | ||||||||||||||||
Beginning Outstanding | Issued | Exercised | Ending Outstanding | |||||||||||||
2011 Transaction | 23,075,000 | — | 9,917,500 | 13,157,500 | ||||||||||||
ipCapital | 400,000 | — | — | 400,000 | ||||||||||||
Exercise Agreement | — | 4,500,000 | — | 4,500,000 | ||||||||||||
Total | 23,475,000 | 4,500,000 | 9,917,500 | 18,057,500 |
For the Three and Six-Month Period Ended June 30, 2012 | ||||||||||||||||
Beginning Outstanding | Issued | Exercised | Ending Outstanding | |||||||||||||
2011 Transaction | 23,075,000 | — | — | 23,075,000 | ||||||||||||
ipCapital | 400,000 | — | — | 400,000 | ||||||||||||
Total | 23,475,000 | — | — | 23,475,000 |
5. Severance Liability
On April 12, 2012, we entered into a separation agreement and a release with Robert Dilworth in connection with Mr. Dilworth’s resignation as our Chief Executive Officer and as a member of our board of directors. Subject to the terms of the separation agreement, effective April 20, 2012 (the “Release Effective Date”) we paid or provided Mr. Dilworth the following:
· | On the Release Effective Date, Mr. Dilworth’s outstanding unvested options became fully vested and exercisable, and his outstanding vested options were modified to extend the exercise period. All options will remain exercisable until the earlier of (i) the expiration dates of each of such options or (ii) the date that is 30 months after the Release Effective Date. The number of shares of common stock issuable upon exercise of such outstanding options is 2,000,000. We recognized $172,700 of non-cash stock-based compensation expense during 2012, as a result of the modification of Mr. Dilworth’s outstanding stock options. No expense was recognized during the three and six-month periods ended June 30, 2013 as a result of the modifications. |
· | On the Release Effective Date, Mr. Dilworth was granted an option to purchase 500,000 shares of common stock at an exercise price of $0.20 per share. Such option has a term of 30 months from the date of grant and will vest and become exercisable at a rate of 62,500 shares per quarter commencing on July 1, 2012. We recognized $64,700 of non-cash stock-based compensation expense during 2012 as a result of the issuance of this stock option to Mr. Dilworth. No expense was recognized during the three and six-month periods ended June 30, 2013 as a result of the issuance. |
· | From May 2012 through April 2013, Mr. Dilworth will be paid $27,300 per month. From May 2013 through April 2014, Mr. Dilworth will be paid $13,600 per month. During the three-month period ended June 30, 2012, we recognized $433,700 compensation expense related to Mr. Dilworth’s separation agreement, which we recorded as a liability. Such amount represented the present value of the future salary and medical insurance (discussed below) continuation payments due Mr. Dilworth under the terms of the separation agreement. During the three-month and six month periods ended June 30, 2013, we made salary continuation payments aggregating $54,500 and $136,300, respectively, to Mr. Dilworth. As of June 30, 2013, the aggregate present value of the remaining future salary and medical insurance coverage continuation payments was $130,700, which was reported as a current liability. All interest expense associated with the salary and medical insurance continuation payments made are charged to general and administrative expenses as incurred. During the three and six-month periods ended June 30, 2013, we incurred interest charges of $5,700 and $13,800 respectively. |
· | From May 2012 through October 2013, we will pay the premium costs to continue medical coverage for Mr. Dilworth and his spouse under the Employment Retirement Income Security Act of 1974. Such premiums aggregated $5,800 for May 2012 and June 2012, and will approximate $1,300 per month thereafter. During the three and six-month periods ended June 30, 2013 we made medical insurance coverage continuation payments of $3,900 and $7,900 respectively. During the three and six-month periods ended June 30, 2013, we incurred interest charges of $300 and $700, respectively. |
· | We paid Mr. Dilworth $15,000 as reimbursement for a portion of his legal fees in connection with negotiation of the separation agreement and the release. |
Mr. Dilworth’s participation in the Key Employee Severance Plan and the Director Severance Plan was automatically terminated on the Release Effective Date. In addition, the separation agreement contains confidentiality and non-disparagement provisions subject to the terms set forth therein. Pursuant to the terms of the release, Mr. Dilworth provided as of the Release Effective Date a release of claims in connection with his employment and resignation. As a result of the separation agreement, we recognized an aggregate $721,800 of additional operating expenses, as summarized above of which all such expense was recognized contemporaneously with the consummation of Mr. Dilworth’s separation agreement during the second quarter of 2012.
We estimated the fair value of each stock-based award set forth above, which were included as part of Mr. Dilworth’s separation agreement during 2012, using a binomial model with the assumptions set forth in the following table:
Estimated Volatility | Annualized Forfeiture Rate | Expected Option Term (Years) | Estimated Exercise Factor | Risk-Free Interest Rate | Dividends | |||||||||||||||||||
Modified options | 70% - 157 | % | 0.00 | % | 0.25 – 2.5 | 10 | 0.08% - 0.29 | % | — | |||||||||||||||
New option | 157 | % | 0.00 | % | 2.5 | 10 | 0.29 | % | — |
Expected volatility is based on the historical volatility of our common stock over the expected option term period ended on the last business day of each respective quarterly reporting period. The estimated forfeiture rate was set to zero as Mr. Dilworth is not obligated to perform any services for us under the terms of the separation agreement. The expected term was based on the actual expiration date of each of the options in the separation agreement. The estimated exercise factor was based on an analysis of historical data; historical exercise patterns; and a comparison of historical and current share prices. The approximate risk free interest rate was based on the implied yield available on U.S. Treasury issues with remaining terms equivalent to our expected term on our stock-based awards. We do not anticipate paying dividends on our common stock for the foreseeable future.
We discounted the initial aggregate remaining cash salary continuation payments due Mr. Dilworth and medical premiums to be paid on his behalf of $458,600 under the terms of the separation agreement using a 14.3% discount factor, with such factor representing our average cost of capital, which we derived by analyzing the costs we incurred in the various private placement transactions we have closed since 2004.
On July 17, 2013 we entered into a separation agreement and release with a former vice president-level employee who left the Company on June 7, 2013. Subject to the terms of the separation agreement, which became effective July 17, 2013 (the “Effective Date”) we accrued $75,700 of severance liability at June 30, 2013.
The following table summarizes the salary continuation and medical coverage payments during the six-month period ended June 30, 2013.
Compensation | Medical Coverage | Total | ||||||||||
Balance at December 31, 2012 | $ | 250,100 | $ | 12,300 | $ | 262,400 | ||||||
Separation agreement entered into in 2013 | 60,000 | 15,700 | 75,700 | |||||||||
Accrued interest | 13,800 | 700 | 14,500 | |||||||||
Payments | (136,300 | ) | (9,900 | ) | (146,200 | ) | ||||||
Balance at June 30, 2013 | $ | 187,600 | $ | 18,800 | $ | 206,400 |
6. Deferred Rent
As of June 30, 2013 deferred rent was:
Component | Current Liabilities | Long-Term Liabilities | Total | |||||||||
Deferred rent expense | $ | 4,800 | $ | 40,400 | $ | 45,200 | ||||||
Deferred rent benefit | 24,000 | 72,000 | 96,000 | |||||||||
$ | 28,800 | $ | 112,400 | $ | 141,200 |
As of December 31, 2012 deferred rent was:
Component | Current Liabilities | Long-Term Liabilities | Total | |||||||||
Deferred rent expense | $ | 2,700 | $ | 43,500 | $ | 46,200 | ||||||
Deferred rent benefit | 24,000 | 84,000 | 108,000 | |||||||||
$ | 26,700 | $ | 127,500 | $ | 154,200 |
Deferred rent expense represents the remaining balance of the aggregate free rent we received from the landlord and escalations that are being recognized over the life of the lease as a component of rent expense. Deferred rent benefit relates to the unamortized portion of the leasehold improvements provided to us by our landlord (i.e., incentives) that we are recognizing on a straight-line basis as a reduction to rent expense over the term of the lease.
7. Stock-Based Compensation
The following table summarizes the stock-based compensation expense, net of amounts capitalized, we recorded in our Unaudited Condensed Consolidated Statements of Operations for the three and six-month periods ended June 30, 2013 and 2012, respectively, by classification:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
Statement of Operations Classification | 2013 | 2012 | 2013 | 2012 | ||||||||||||
Costs of revenue | $ | 1,700 | $ | 4,100 | $ | 3,800 | $ | 10,400 | ||||||||
Selling and marketing expense | 38,400 | 25,200 | 78,900 | 51,600 | ||||||||||||
General and administrative expense | 84,600 | 260,600 | 179,500 | 333,700 | ||||||||||||
Research and development expense | 80,000 | 86,200 | 128,300 | 169,800 | ||||||||||||
$ | 204,700 | $ | 376,100 | $ | 390,500 | $ | 565,500 |
The following table presents summaries of the status and activity of our stock option awards for the three-month period ended June 30, 2013.
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Terms (Years) | Aggregate Intrinsic Value | |||||||
Outstanding – March 31, 2013 | 13,742,500 | $ | 0.20 | |||||||
Granted | — | — | ||||||||
Exercised | (319,878 | ) | 0.15 | |||||||
Forfeited or expired | (154,406 | ) | 0.21 | |||||||
Cancellation of unearned performance option | (133,818 | ) | 0.19 | |||||||
Outstanding – June 30, 2013 | 13,134,398 | $ | 0.20 | 6.67 | $2,082,500 |
The following table presents summaries of the status and activity of our stock option awards for the six-month period ended June 30, 2013.
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Terms (Years) | Aggregate Intrinsic Value | |||||||
Outstanding – December 31, 2012 | 14,174,000 | $ | 0.20 | |||||||
Granted | — | — | ||||||||
Exercised | (751,378 | ) | 0.15 | |||||||
Forfeited or expired | (154,406 | ) | 0.21 | |||||||
Cancellation of unearned performance option | (133,818 | ) | 0.23 | |||||||
Outstanding – June 30, 2013 | 13,134,398 | $ | 0.19 | 6.67 | $2,082,500 |
Of the options outstanding as of June 30, 2013, 8,177,325 were vested, 4,786,187 were estimated to vest in future periods and 170,886 were estimated to be forfeited prior to their vesting. As of June 30, 2013, there was approximately $342,800 of total unrecognized compensation cost, net of estimated forfeitures, related to stock-based compensation attributable to unvested stock options. Such cost is expected to be recognized over a weighted-average period of approximately eleven months.
All options are exercisable immediately upon grant. Options vest, ratably over a 33-month period commencing in the fourth month after the grant date. We have the right to repurchase common stock issued upon the exercise of an option upon an optionee’s termination of service to us prior to full vesting at the option’s exercise price.
During the three and six-month periods ended June 30, 2013, we awarded 145,000 and 580,000 shares of restricted common stock respectively, which vest ratably, over a 33-month period; however, no shares vest until after three months from the date of the restricted stock award. We include the common stock underlying the restricted stock award in shares outstanding once the common stock underlying the restricted stock award has vested and the restriction has been removed (“releases” or “released”).
The following table presents summaries of the status and activity of our restricted stock awards for the three-month period ended June 30, 2013. We did not issue any restricted stock awards during the three-month period ended June 30, 2012.
Number of Shares | Weighted Average Grant Date Fair Value | Weighted Average Remaining Recognition Period (Years) | Unrecognized Compensation Cost Remaining | |||||||
Unreleased – March 31, 2013 | 4,066,092 | $ | 0.21 | |||||||
Awarded | 145,000 | 0.40 | ||||||||
Released | (414,858 | ) | 0.21 | |||||||
Forfeited | — | — | ||||||||
Outstanding – June 30, 2013 | 3,796,234 | $ | 0.22 | 2.17 | $ 747,200 |
The following table presents summaries of the status and activity of our restricted stock awards for the six-month period ended June 30, 2013.
Number of Shares | Weighted Average Grant Date Fair Value | Weighted Average Remaining Recognition Period (Years) | Unrecognized Compensation Cost Remaining | |||||||
Unreleased – December 31, 2012 | 4,043,123 | $ | 0.18 | |||||||
Awarded | 580,000 | 0.43 | ||||||||
Released | (776,889 | ) | 0.20 | |||||||
Forfeited | (50,000 | ) | 0.36 | |||||||
Outstanding – June 30, 2013 | 3,796,234 | $ | 0.22 | 2.17 | $ 747,200 |
As of June 30, 2013, there was approximately $706,200 of total unrecognized compensation cost, net of estimated forfeitures, related to stock-based compensation attributable to the unreleased restricted stock awards. That cost is expected to be recognized over a weighted-average period of approximately twenty-six months.
Revenue for the three-month periods ended June 30, 2013 and 2012 was:
Three Months Ended June 30, | 2013 Over (Under) 2012 | |||||||||||||||
Revenue | 2013 | 2012 | Dollars | Percent | ||||||||||||
Software Licenses | ||||||||||||||||
Windows | $ | 473,700 | $ | 637,900 | $ | (164,200 | ) | -25.7 | % | |||||||
UNIX/Linux | 183,400 | 226,600 | (43,200 | ) | -19.1 | % | ||||||||||
657,100 | 864,500 | (207,400 | ) | -24.0 | % | |||||||||||
Software Service Fees | ||||||||||||||||
Windows | 499,200 | 444,400 | 54,800 | 12.3 | % | |||||||||||
UNIX/Linux | 232,500 | 234,900 | (2,400 | ) | -1.0 | % | ||||||||||
731,700 | 679,300 | 52,400 | 7.7 | % | ||||||||||||
Other | 5,000 | 27,100 | (22,100 | ) | -81.5 | % | ||||||||||
Total Revenue | $ | 1,393,800 | $ | 1,570,900 | $ | (177,100 | ) | -11.3 | % |
Revenue for the six-month periods ended June 30, 2013 and 2012 was:
Six Months Ended June 30, | 2013 Over (Under) 2012 | |||||||||||||||
Revenue | 2013 | 2012 | Dollars | Percent | ||||||||||||
Software Licenses | ||||||||||||||||
Windows | $ | 1,113,800 | $ | 1,270,500 | $ | (156,700 | ) | -12.3 | % | |||||||
UNIX/Linux | 454,200 | 490,100 | (35,900 | ) | -7.3 | % | ||||||||||
1,568,000 | 1,760,600 | (192,600 | ) | 10.9 | % | |||||||||||
Software Service Fees | ||||||||||||||||
Windows | 960,400 | 869,600 | 90,800 | 10.4 | % | |||||||||||
UNIX/Linux | 459,800 | 472,300 | (12,500 | ) | -2.6 | % | ||||||||||
1,420,200 | 1,341,900 | 78,300 | 5.8 | % | ||||||||||||
Other | 22,600 | 79,000 | (56,400 | ) | -71.4 | % | ||||||||||
Total Revenue | $ | 3,010,800 | $ | 3,181,500 | $ | (170,700 | ) | -5.4 | % |
9. Cost of Revenue
Cost of revenue for the three-month periods ended June 30, 2013 and 2012 was:
Three Months Ended June 30, | 2013 Over (Under) 2012 | |||||||||||||||
2013 | 2012 | Dollars | Percent | |||||||||||||
Software service costs | $ | 64,200 | $ | 62,500 | $ | 1,700 | 2.7 | % | ||||||||
Software product costs | 73,100 | 69,900 | 3,200 | 4.6 | % | |||||||||||
$ | 137,300 | $ | 132,400 | $ | 4,900 | 3.7 | % |
Cost of revenue for the six-month periods ended June 30, 2013 and 2012 was :
Six Months Ended June 30, | 2013 Over (Under) 2012 | |||||||||||||||
2013 | 2012 | Dollars | Percent | |||||||||||||
Software service costs | $ | 127,800 | $ | 135,500 | $ | (7,700 | ) | -5.7 | % | |||||||
Software product costs | 121,300 | 135,400 | (14,100 | ) | -10.4 | % | ||||||||||
$ | 249,100 | $ | 270,900 | $ | (21,800 | ) | -8.0 | % |
10. Capitalized Software Development Costs
Capitalized software development costs consisted of the following:
June 30, 2013 | December 31, 2012 | |||||||
Software development costs | $ | 1,037,600 | $ | 573,100 | ||||
Accumulated amortization | (433,100 | ) | (350,000 | ) | ||||
$ | 604,500 | $ | 223,100 |
Amortization of capitalized software development costs is a component of costs of revenue. Capitalized software development costs amortization aggregated $41,500 and $83,100 during each of the three-and six month periods ended June 30, 2013 and 2012, respectively. We did not record any capitalized software development costs during the three month periods ended June 30, 2013 and 2012, respectively. We recorded $464,500 and $0 of capitalized software development costs during the six-month periods ended June 30, 2013 and 2012, respectively. Such costs capitalized during the six -month period ended June 30, 2013 were associated with the development of our new product hopTo, a beta form of which was released on April 15, 2013. We anticipate releasing the first commercial version of hopTo in the late third quarter/early fourth quarter time frame and will begin amortizing its capitalized software development costs accordingly. Had these costs not met the criteria for capitalization, they would have been expensed.
11. Stockholders’ Equity
Stock Repurchase Program
During each of the three-and six month periods ended June 30, 2013 and 2012, we did not repurchase any of our common stock under the terms of our Board-approved $1,000,000 stock repurchase program (“stock repurchase program”). As of June 30, 2013, approximately $782,600 remained available for future purchases under this program. We are not obligated to repurchase any specific number of shares and the stock repurchase program may be suspended or terminated at our discretion.
12. Commitments and Contingencies
Our corporate headquarters currently occupies 4,413 square feet of office space in Campbell, California, under a five-year lease that expires June 30, 2017. The following table sets forth the minimum lease payments we will be required to make throughout the remainder of this lease:
Year | Amount | |||
Remainder of 2013 | $ | 70,400 | ||
2014 | 144,200 | |||
2015 | 148,600 | |||
2016 | 153,000 | |||
2017 | 78,400 | |||
$ | 594,600 |
We have begun to look for larger office space for our corporate headquarters as our current staffing levels put us near maximum capacity for our current space. We have entered into preliminary discussions with our landlord regarding available space in the office complex where we are currently located. We cannot yet reasonably determine if we would lease larger space or what the costs of a larger space might be, or whether or when we actually acquire such space; however, we expect that they would not be lower than those set forth in the preceding table.
13. Supplemental Disclosure of Cash Flow Information
We did not disburse any cash for the payment of interest expense during the six-month periods ended June 30, 2013 or 2012.
We disbursed $1,800 and $1,700 for the payment of income taxes during the six-month periods ended June 30, 2013 and 2012, respectively. All such disbursements were for the payment of foreign income taxes related to the operation of our Israeli subsidiary, GraphOn Research Labs Ltd.
During the six-month period ended June 30, 2013, we capitalized $36,700 of stock-based compensation expense for which no cash was disbursed, as a component of capitalized software development costs. We did not capitalize any stock based compensation expense costs during the six month period ended June 30, 2013.
During the six-month period ended June 30, 2013, we reduced our warrants liability by $6,072,600, of which $1,319,200 of the reduction was recorded in the Condensed Consolidated Statement of Operations. The remaining reduction amount, which was reclassified to equity occurred as a result of the amendment to the warrants and exercise of 917,500 warrants prior to the amendment. No cash was disbursed in conjunction with these items (see Note 4).
During the three-month period ended June 30, 2012 we incurred costs associated with discontinued intellectual property operations activities of $90,900 of which $14,000 was disbursed, and the balance reported as component of accounts payable. During the six month period ended June 30, 2012 we incurred costs associated with discontinued intellectual property operations activities of $121,300 of which $37,000 was disbursed, and the balance reported as a component of accounts payable. During the six-month period ended June 30, 2012, we capitalized $143,000 of property and equipment for which no cash was disbursed. We recorded $104,100 of such amount to long term liabilities – deferred rent and the balance to accounts payable and accrued liabilities. – deferred rent $24,000 of such amount to current liabilities – deferred rent, and the balance to accounts payable. Also, we reported approximately $1,600 as other assets for which no cash was disbursed. We reported this amount as a component of accounts payable as of June 30, 2012.
Earnings or loss per share is calculated by dividing the net income or loss for the period by the weighted average number of shares of common stock outstanding during the period. Diluted earnings or loss per share (“Diluted EPS”) is calculated by dividing the net income or loss for the period by the total of the weighted average number of shares of common stock outstanding during the period plus the effects of any dilutive securities. Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of such potential shares of common stock would have an anti-dilutive effect. During all periods presented in our Condensed Consolidated Statements of Operations, potentially dilutive securities included shares of common stock potentially issuable upon exercise of stock options and exercise of warrants. During the three and six-month periods ended June 30, 2013, potentially dilutive securities also included common stock potentially issuable upon the release (future vesting) of unvested restricted stock awards. Diluted EPS excludes the impact of potential issuance of shares of common stock related to our stock options in periods in which the exercise price of the stock option is greater than the average market price of our common stock during such periods.
The following table sets forth the computation of basic and diluted earnings per share for the three months ended June 30, 2013:
Numerator | ||||
Net income from continuing operations | $ | 3,305,100 | ||
Loss from discontinued operations, net of tax | $ | — | ||
Denominator | ||||
Basic earnings per share - weighted-average shares outstanding | 85,823,258 | |||
Effect of dilutive stock options | 8,968,770 | |||
Effect of dilutive warrants | 6,531,717 | |||
Diluted earnings per share - weighted-average shares outstanding | 101,323,745 | |||
Earnings (Loss) per share - Continuing Operations | ||||
Basic earnings per share | $ | 0.04 | ||
Diluted earnings per share | $ | 0.03 | ||
Earnings (Loss) per share - Discontinued Operations | ||||
Basic earnings per share | $ | — | ||
Diluted earnings per share | $ | — |
For the three-month period ended June 30, 2012, 37,636,715 shares of common stock equivalents were excluded from the computation of dilutive loss per share since their effect would be antidilutive.
For the six-month periods ended June 30, 2013 and 2012, 34,782,222 and 37,636,715 shares of common stock equivalents, respectively, were excluded from the computation of dilutive loss per share since their effect would be antidilutive.
15. Segment Information
FASB has established guidance for reporting information about operating segments that require segmentation based on our internal organization and reporting of revenue and operating income, based on internal accounting methods. Our financial reporting systems present various data for management to operate the business prepared in methods consistent with such guidance.
During 2012, we entered into settlement and licensing agreements that effectively ended all of our then ongoing intellectual property litigation activities (Note 17). As a result of these agreements, we will no longer be pursuing patent litigation as an integral funding strategy for our operations.
We will continue to pursue the intellectual property initiatives we have undertaken in conjunction with our relationship with ipCapital, however we believe that these initiatives do not comprise a reporting segment as the intent of these initiatives is to support and leverage our current software products and those in development.
Also, effective for the quarter ended December 31, 2012, we added a new segment (hopTo) and identified that we currently operate our business in two segments; namely GO-Global and hopTo. Currently, GO-Global is the only segment that generates revenue.
Segment revenue for the three-month periods ended June 30, 2013 and 2012 was as follows:
Increase (Decrease) | ||||||||||||||||
2013 | 2012 | Dollars | Percentage | |||||||||||||
GO-Global | $ | 1,393,800 | $ | 1,570,900 | $ | (177,100 | ) | -11.3 | % | |||||||
hopTo | — | — | — | n/ | a | |||||||||||
Consolidated Total | $ | 1,393,800 | $ | 1,570,900 | $ | (177,100 | ) | -11.3 | % |
Segment revenue for the six-month periods ended June 30, 2013 and 2012 was as follows:
Increase (Decrease) | ||||||||||||||||
2013 | 2012 | Dollars | Percentage | |||||||||||||
GO-Global | $ | 3,010,800 | $ | 3,181,500 | $ | (170,700 | ) | -5.4 | % | |||||||
hopTo | — | — | — | n/ | a | |||||||||||
Consolidated Total | $ | 3,010,800 | $ | 3,181,500 | $ | (170,700 | ) | -5.4 | % |
Segment income (loss) from continuing operations for the three and six-month periods ended June 30, 3013 and 2012 was as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
GO-Global | $ | (243,300 | ) | $ | (1,189,500 | ) | $ | (205,300 | ) | $ | (1,989,400 | ) | ||||
hopTo | (1,217,700 | ) | (382,400 | ) | (1,708,700 | ) | (782,000 | ) | ||||||||
Total | $ | (1,461,000 | ) | $ | (1,571,900 | ) | $ | (1,914,000 | ) | $ | (2,771,400 | ) |
We do not allocate interest, other income, other expense, or income tax to our segments.
As of June 30, 2013 segment fixed assets (long-lived assets) were as follows:
Accumulated | ||||||||||||
Depreciation | ||||||||||||
Cost Basis | /Amortization | Net | ||||||||||
GO-Global | $ | 1,866,800 | $ | (1,742,800 | ) | $ | 124,000 | |||||
hopTo | 918,400 | (83,400 | ) | 835,000 | ||||||||
Total from continuing operations | 2,785,200 | (1,826,200 | ) | 959,000 | ||||||||
Discontinued operations | 2,839,000 | (2,839,000 | ) | — | ||||||||
Unallocated | 32,400 | — | 32,400 | |||||||||
Total | $ | 5,656,600 | $ | (4,665,200 | ) | $ | 991,400 |
We do not maintain any significant long-lived assets outside of the United States.
Products and services provided by the GO-Global segment include all currently available versions of the GO-Global family of products, OEM private labeling kits, software developer’s kits, maintenance contracts, and product training and support. The hopTo segment, which is under development, will provide mobile end-users with a productivity workspace for their mobile devices that will allow users to manage, share, view, and edit their documents, regardless of where they are stored. We launched the first public release of hopTo through Apple’s App Store in April 2013. The two segments do not engage in cross-segment transactions.
Amounts pertaining to our ipCapital initiatives are included in the GO-Global software segment.
Go-Global software revenue by country for the three-and six month periods ended June 30, 2013 and 2012 was as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
Revenue by Country | 2013 | 2012 | 2013 | 2012 | ||||||||||||
United States | $ | 564,800 | $ | 556,100 | $ | 1,208,400 | $ | 1,313,100 | ||||||||
Germany | 81,200 | 210,400 | 269,600 | 443,600 | ||||||||||||
Other Countries | 747,800 | 804,400 | 1,532,800 | 1,424,800 | ||||||||||||
Total | $ | 1,393,800 | $ | 1,570,900 | $ | 3,010,800 | $ | 3,181,500 |
16. Related Party Transactions
Tamalpais Partners LLC
Steven Ledger, the Chairman of our Board of Directors, is the founder and managing partner of Tamalpais Partners LLC, (“'Tamalpais”) a business consulting firm. On February 1, 2012, we entered into a one year consulting agreement with Tamalpais under which Tamalpais will provide us with advisory services focused on capital and business issues, including assistance on raising capital, mergers, acquisitions, business development and investor relations/positioning. We renewed the consulting agreement for an additional year upon its expiration. We paid Tamalpais $18,000 during each of the three-month periods ended June 30, 2013 and 2012, respectively for services rendered to us under the terms of this consulting agreement. We paid Tamalpais $36,00 and $30,000 during each of the six month periods ended June 31, 2013 and 2012, respectively for services rendered to us under the terms of this consulting agreement. No amounts were due to Tamalpais at June 30, 2013.
ipCapital Group, Inc.
On October 11, 2011, we engaged ipCapital Group, Inc. (“ipCapital”), an affiliate of John Cronin, who is one of our directors, to assist us in the execution of our strategic decision to significantly strengthen, grow and commercially exploit our intellectual property assets. Our engagement agreement with ipCapital, which has been amended three times, affords us the right to request ipCapital to perform a number of diverse services, employing its proprietary processes and methodologies, to facilitate our ability to identify and extract from our current intellectual property base new inventions, potential patent applications, and marketing and licensing opportunities.
For the three and six-month periods ended June 30, 2013 we paid ipCapital an aggregate of $10,000 and $20,000, respectively, for services performed under the engagement agreement, as amended. For the three and six-month periods ended June 30, 2012 we paid ipCapital an aggregate $50,000 and $80,000, respectively for services performed under the engagement agreement, as amended. Prior to entering into the engagement agreement with ipCapital in 2011, ipCapital performed an analysis of our intellectual property and the potential methods we could employ to strengthen our intellectual property on a consulting basis. We paid ipCapital $50,000 for this analysis in the six-month period ended June 30, 2012. All amounts paid to ipCapital in 2013 and 2012 have been reported within general and administrative expense.
In addition to the fees we agreed to pay ipCapital for its services, we issued ipCapital a five-year warrant to purchase up to 400,000 shares of our common stock at an initial price of $0.26 per share. Half of the warrant (200,000 shares) has a time-based vesting condition, with such vesting to occur in three equal annual installments. The first vesting installment occurred on October 11, 2012, with the remaining two to occur on October 11, 2013 and 2014, respectively. The remaining 200,000 shares became fully vested upon the completion to our satisfaction of all services that we requested from ipCapital under the engagement agreement, prior to the signing of the amendments. Such performance was deemed satisfactory during 2012. We believe that these fees, together with the issuance of the warrant, constitute no greater compensation than we would be required to pay an unaffiliated person for performing substantially similar services.
The exercise price of the warrant issued to ipCapital could be reset to below-market value. Consequently, we have concluded that such warrant is not indexed to our common stock; thus, we accrete (reduce) the fair value of the warrant as a liability over the anticipated service period. We recognized ($87,600) and ($4,200) as a component of general and administrative expense during the three-month periods ended March 31, 2013 and 2012, respectively, and ($14,100) and $14,500 during the six-month periods ended June 30, 2013 and 2012, respectively, resulting from the change in fair value. In accordance with the liability method of accounting, we re-measure the fair value of the outstanding warrants at each balance sheet date and recognize the change in fair value as general and administrative compensation expense. (See Note 7)
ipCapital Licensing Company I, LLC
On February 4, 2013, we entered into an IP Brokerage agreement with ipCapital Licensing Company I, LLC (ipCLC). John Cronin is a partner at ipCLC. Pursuant to the agreement, we have engaged ipCLC, on a no-retainer basis, to identify and present us with candidates who may be seeking to acquire a certain limited group of our patents unrelated to our current business strategy. If during the applicable term we enter into an agreement with any candidate presented by ipCLC to acquire or otherwise exploit the covered patents, we will pay ipCLC a fee of ten percent (10%) of the royalties, fees, and other consideration paid over the life of the agreement.
The agreement is effective as of February 4, 2013, and will end 18 months after we or ipCLC serve 60 days written notice of termination to the other party (with earlier termination possible in the event of a material breach). The agreement provides for customary confidentiality undertakings, limitations on ipCLC’s total liability and mutual indemnification provisions.
We believe the terms of the Agreement are fair and reasonable to us and are at least as favorable as those that we could be obtained on an arms’ length basis.
17. Discontinued Operations
During 2012, we reached settlement agreements that effectively ended all of our then on-going intellectual property litigation. With the settlement of such litigation activities we ceased actively pursuing intellectual property litigation as an integral part of our strategy to fund our operations. Accordingly, for all periods presented, the results of operations and cash flows related to our former intellectual property segment has been segregated and reported as “Discontinued Operations”. There was no revenue derived from our intellectual property litigation in either of the three or six month periods ended June 30, 2013 or 2012. During the three month period ended June 30, 2012 we incurred costs of $90,900 related to this discontinued operation. During the six month period ended June 30, 2012 we incurred costs of $121,300 related to this discontinued operation.
We will continue to make significant investments in our intellectual property during the remainder of 2013. We believe such investments will be an asset that will leverage our product strategy and protect our long-term growth strategies. We do not intend to pursue intellectual property litigation as an integral part of our strategy to fund our future operations.
As of June 30, 2013 and 2012, all of our patents were fully amortized. Additionally, we have characterized the NES patents as “held for sale” and will be pursuing reasonable sales opportunities for such patents as they become known to us.
18. Subsequent Events
On June 17, 2013, we entered into, and subsequently consummated, an Exercise Agreement (the “Exercise Agreement”) with five of the largest investors in our September 1, 2011 private placement of common stock and warrants (the “2011 Transaction”), providing for the exercise for cash by such investors of warrants to purchase an aggregate 9 million shares of our common stock, out of the approximately 17 million shares of common stock subject to warrants issued to the investors in the 2011 Transaction that remained outstanding as of such date. We received cash proceeds of $2.34 million as a result of the warrants exercised. In consideration for the early exercise of these warrants, we issued to the five investors an aggregate of 4.5 million warrants to purchase common stock at an exercise price of $1.00 per warrant, with a term of five years from issuance (the “New Warrants”). Each of the warrant holders represented to us that there were “accredited investors.” The issuance of such common stock upon exercise and the issuance of the New Warrants was not registered under the Securities Act of 1933 because such securities were offered and sold in transactions not involving a public offering, exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) and in compliance with Rule 506 thereunder.
On August 9, 2013, we consummated an offer to exercise warrants made to holders of warrants in the 2011 Transaction who were not parties to the Exercise Agreement. We were obligated to conduct the Offer to Exercise under the terms of the Exercise Agreement entered into in connection with the June 17, 2013 transaction. In connection with the Offer to Exercise, warrants to purchase an aggregate of 305,000 shares of our common stock were exercised for which we received cash proceeds of $64,000. In consideration for the early exercise of these warrants, we issued an aggregate of 152,500 New Warrants at an exercise price of $1.00 per warrant, with a term of five years from issuance. Each of the warrant holders represented to us that there were “accredited investors.” The issuance of such common stock upon exercise and the issuance of the New Warrants was not registered under the Securities Act of 1933 because such securities were offered and sold in transactions not involving a public offering, exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) and in compliance with Rule 506 thereunder.
Introduction
We are developers of software productivity products for mobile devices such as tablets and smartphones, and application publishing software solutions. Our newest product, which is called hopTo, will be marketed to both consumers and businesses. hopTo will provide mobile end-users with a productivity workspace for their mobile devices that will allow users to manage, share, view, and edit their documents, regardless of where they are stored. hopTo will be developed by and marketed through hopTo Inc., which is one of our wholly-owned subsidiaries. We launched the first public release of hopTo through Apple’s App Store on April 15, 2013. This release is targeted at Apple’s tablet devices, the iPad and the iPad Mini. Future releases will be targeted at other devices such as Apple’s iPhone, as well as competing devices such as those based on Google’s Android platform.
In addition to hopTo, we also sell a family of products under the brand name GO-Global, which is a software application publishing business and is our sole revenue source at this time. GO-Global is an application access solution for use and/or resale by independent software vendors (ISVs), corporate enterprises, governmental and educational institutions, and others, who wish to take advantage of cross-platform remote access and Web-enabled access to their existing software applications, as well as those who are deploying secure, private cloud environments.
Over the years, we have also made significant investments in intellectual property (IP). We have filed many patents designed to protect the new technologies embedded in hopTo, and we plan to continue to aggressively invest in the creation and protection of new IP as we continue to develop hopTo and other products.
Recent Developments
On April 15, 2013, we announced the launch of the public beta of hopTo, our new mobile productive device.
Corporate Background
We are a Delaware corporation, founded in May 1996. Our headquarters are located at 1901 S. Bascom Avenue, Suite 660, Campbell, California, 95008 and our phone number is 1-800-GRAPHON (1-800-472-7466). We also have an office in Concord, New Hampshire. Additionally, we have remote employees located in various states, as well as internationally in the United Kingdom and Israel. Our corporate Internet Website is http://www.graphon.com. The information on our Website is not part of this quarterly report.
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports filed with or furnished to the SEC under sections 13(a) or 15(d) of the Securities Exchange Act of 1934 are made available free of charge on our corporate Internet Website (click the “Investors” link under the “About GraphOn” tab and then click “View all GraphOn SEC filings on SEC Website”) as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.
The hopTo Product
The premise of hopTo is that mobile users have a need to access files stored on their home or office PC. We call this type of usage “personal cloud,” whereby a PC that has local storage and is connected to the Internet is accessed remotely from another computer or mobile device; its storage capacity is essentially used as cloud storage. This is similar to cloud storage services such as Dropbox, except that the end-user typically owns the storage device being used (their personal PC), thereby potentially increasing the privacy and security of the data. We believe that an advantage of a personal cloud is that PCs often have much larger storage capacities, compared to cloud storage services such as Dropbox, or at least in their base configurations, thereby allowing users to store far greater amounts of data while having the data accessible from the Internet.
A core assumption of hopTo is that mobile users have a need for the capabilities of PC productivity tools such as Microsoft Office. We believe that the existing mobile productivity solutions do not satisfy those needs because of the inherent user interface challenges described above. hopTo is being designed to address these issues.
hopTo presents mobile users with an easy to use workspace environment designed to browse, view, edit, and share their documents, independent of their storage location. hopTo currently runs on Apple’s iPad family of devices, and we plan to make it available in the future for other devices, such as Apple’s iPhone and for devices based on Google’s Android platform. hopTo allows users to connect their mobile device to their PCs, and to access files stored on their PCs or on cloud storage services such as Dropbox and Box. It leverages the capabilities of Microsoft Windows applications, such as Microsoft Office, and allows users to edit their documents from within the mobile device’s workspace, but without the inherent user interface challenges that exist with our competitor’s products.
hopTo is based in part on core technologies from GO-Global, which has been in development for over a decade and is a highly robust and mature technology. We believe that by relying on such proven, proprietary technology, we are positioning hopTo ahead of its competitors.
Our Intellectual Property
We believe that intellectual property (IP) is a business tool that potentially maximizes our competitive advantages and product differentiation, grows revenue opportunities, encourages collaboration with key business partners, and protects our long-term growth opportunities. Strategic IP development is therefore a critical component of our overall business strategy. It is a business function that consistently interacts with our research and development, product development, and marketing initiatives to generate further value from those operations.
We rely primarily on trade secret protection, copyright law, confidentiality, and proprietary information agreements to protect our proprietary technology and registered trademarks. Despite our precautions, it may be possible for unauthorized third parties to copy portions of our products, or to obtain information we regard as proprietary. The loss of any material trade secret, trademark, trade name or copyright could have a material adverse effect on our results of operations and financial condition. We intend to defend our proprietary technology rights; however, we cannot give any assurance that our efforts to protect our proprietary technology rights will be successful.
We do not believe our products infringe on the rights of any third parties, but we can give no assurance that third parties will not assert infringement claims against us in the future, or that any such assertion will not result in costly litigation or require us to obtain a license to proprietary technology rights of such parties.
ipCapital Group, Inc.
On October 11, 2011, we engaged ipCapital Group, Inc., an affiliate of John Cronin, who is one of our directors, to assist us in the execution of our strategic decision to significantly strengthen, grow and commercially exploit our intellectual property assets. Our engagement agreement with ipCapital, which has been amended three times, affords us the right to request ipCapital to perform a number of diverse services, employing its proprietary processes and methodologies, to facilitate our ability to identify and extract from our current intellectual property base new inventions, potential patent applications, and marketing and licensing opportunities.
As a result of ipCapital’s work under the engagement agreement, as amended, as of March 22, 2013, 127 new patent applications have been filed, of which 120 pertain to our GraphOn technology and 7 pertain to our NES patent portfolio. We expect to file more applications throughout 2013.
ipCapital Licensing Company I, LLC
On February 4, 2013, we entered into an IP Brokerage agreement with ipCapital Licensing Company I, LLC (ipCLC). John Cronin is a partner at ipCLC. Pursuant to the agreement, we have engaged ipCLC, on a no-retainer basis, to identify and present us with candidates who may be seeking to acquire a certain limited group of our patents unrelated to our current business strategy. If during the applicable term we enter into an agreement with any candidate presented by ipCLC to acquire or otherwise exploit the covered patents, we will pay ipCLC a fee of ten percent (10%) of the royalties, fees, and other consideration paid over the life of the agreement.
Our GO-Global Software Products
Our GO-Global product offerings, which currently are our only revenue source, can be categorized into product families as follows:
· | GO-Global for Windows: Allows access to Windows-based applications from remote locations and a variety of connections, including the Internet and dial-up connections. The Windows applications run on a central computer server along with GO-Global Windows Host software. This allows the applications to be accessed remotely via GO-Global Client software, or a Web browser, over many types of data connections, regardless of the bandwidth or operating system. Web-enabling is achieved without modifying the underlying application’s code or requiring costly add-ons. |
· | GO-Global for UNIX: Allows access to UNIX and Linux-based applications from remote locations and a variety of connections, including the Internet and dial-up connections. The UNIX/Linux applications run on a central computer server along with the GO-Global for UNIX Host software. This allows the applications to be accessed and run remotely via GO-Global Client software or a Web browser without having to modify the application’s code or requiring costly add-ons. |
· | GO-Global Client: We offer a range of GO-Global Client software that allows remote application access from a wide variety of local, remote and mobile platforms, including Windows, Linux, UNIX, Apple OS X and iOS, and Google Android. We plan to continue to develop GO-Global Client software for new portable and mobile devices. We released GO-Global Client products for the iPad and Android tablets in June 2011 and February 2012, respectively. |
Critical Accounting Policies
We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as “critical” because these specific areas require us to make judgments and estimates about matters that are uncertain at the time we make the estimates. Actual results may differ from these estimates. For a summary of our critical accounting policies, please refer to our 2012 10-K/A Report and Note 2 to our Notes to Unaudited Condensed Consolidated Financial Statements.
The following operating results should be read in conjunction with our critical accounting policies.
Revenue for the three-month periods ended June 30, 2013 and 2012 was:
Three Months Ended June 30, | 2013 Over (Under) 2012 | |||||||||||||||
Revenue | 2013 | 2012 | Dollars | Percent | ||||||||||||
Software Licenses | ||||||||||||||||
Windows | $ | 473,700 | $ | 637,900 | $ | (164,200 | ) | -25.7 | % | |||||||
UNIX/Linux | 183,400 | 226,600 | (43,200 | ) | -19.1 | % | ||||||||||
657,100 | 864,500 | (207,400 | ) | -24.0 | % | |||||||||||
Software Service Fees | ||||||||||||||||
Windows | 499,200 | 444,400 | 54,800 | 12.3 | % | |||||||||||
UNIX/Linux | 232,500 | 234,900 | (2,400 | ) | -1.0 | % | ||||||||||
731,700 | 679,300 | 52,400 | 7.7 | % | ||||||||||||
Other | 5,000 | 27,100 | (22,100 | ) | -81.5 | % | ||||||||||
Total Revenue | $ | 1,393,800 | $ | 1,570,900 | $ | (177,100 | ) | -11.3 | % |
Revenue for the six month periods ended June 30, 2013 and 2012 was:
Six Months Ended June 30, | 2013 Over (Under) 2012 | |||||||||||||||
Revenue | 2013 | 2012 | Dollars | Percent | ||||||||||||
Software Licenses | ||||||||||||||||
Windows | $ | 1,113,800 | $ | 1,270,500 | $ | (156,700 | ) | -12.3 | % | |||||||
UNIX/Linux | 454,200 | 490,100 | (35,900 | ) | -7.3 | % | ||||||||||
1,568,000 | 1,760,600 | (192,600 | ) | 10.9 | % | |||||||||||
Software Service Fees | ||||||||||||||||
Windows | 960,400 | 869,600 | 90,800 | 10.4 | % | |||||||||||
UNIX/Linux | 459,800 | 472,300 | (12,500 | ) | -2.6 | % | ||||||||||
1,420,200 | 1,341,900 | 78,300 | 5.8 | % | ||||||||||||
Other | 22,600 | 79,000 | (56,400 | ) | -71.4 | % | ||||||||||
Total Revenue | $ | 3,010,800 | $ | 3,181,500 | $ | (170,700 | ) | -5.4 | % |
Revenue
Our software revenue, historically, has been primarily derived from product licensing fees and service fees from maintenance contracts. The majority of this revenue has been earned, and continues to be earned, from a limited number of significant customers, most of whom are resellers. Many of our resellers (a “stocking reseller”) purchase software licenses that they hold in inventory until they are resold to the ultimate end user. We defer recognition of revenue from these sales (on our Condensed Consolidated Balance Sheet under the caption “Deferred Revenue”) until the stocking reseller sells the underlying software licenses to the ultimate end user. Consequently, if any of our significant stocking resellers materially change the rate at which they resell our software licenses to the ultimate end user, our software licenses revenue could be materially impacted.
When a software license is sold directly to an end user by us, or by one of our resellers who does not stock licenses into inventory, revenue is recognized immediately upon shipment, assuming all other criteria for revenue recognition are met. Consequently, if any significant end user customer substantially changes its order level, or fails to order during the reporting period, whether the order is placed directly with us or through one of our non-stocking resellers, our software licenses revenue could be materially impacted.
Almost all stocking resellers maintain inventories of our Windows products; few stocking resellers maintain inventories of our UNIX products.
Software Licenses
The decrease in Windows software licenses revenue for the three and six-month periods ended June 30, 2013, as compared with the same periods of the prior year, were primarily due to lower aggregate revenue derived from our stocking resellers. Adding to the decrease was lower revenue recognized in 2013 associated with two maintenance transactions entered into with an end-user customer during 2012. All revenue from both of these transactions had previously been deferred. We recognized the revenue from each transaction, ratably, over each transaction’s respective maintenance period. As the maintenance period for the first of these two transactions was expired prior to the three-month period ended June 30, 2013, we completed recognition of the revenue related thereto, and as a result we only recognized revenue from the second of these two transactions during the three month period ended June 30, 2013. The decreases described above were partially offset by higher license sales to other end user customers.
Software licenses revenue from our UNIX/Linux products decreased during the three and six-month periods ended June 30, 2013, as compared with the same periods of the prior year, primarily due to lower aggregate revenue from our resellers and end users, particularly our European telecommunications customers.
We expect aggregate software license revenue in 2013 to be lower than 2012 levels due to lower aggregate revenue from our stocking resellers and our European telecommunications customers, which may offset revenue from new and/or upgraded GO-Global products we expect to introduce during the remainder of 2013.
Software Service Fees
The increase in software service fees revenue attributable to our Windows products during the three and six-month periods ended June 30, 2013, as compared to the same periods of the prior year, was the result of the continued growth of the number of Windows maintenance contracts purchased by our end-user customers on new license installations and the renewal of maintenance contracts on currently installed software licenses.
The decrease in service fees revenue attributable to our UNIX products for the three and six-month periods ended June 30, 2013, as compared with the same periods of the prior year, was primarily the result of the low level of our UNIX product sales throughout the current and prior year and a decrease in maintenance contract renewals. We believe that these decreases reflect the continued economic malaise and the competitive challenges facing the telecommunications industry, particularly in Europe. The majority of this decrease was attributable to our European telecommunications customers.
We expect that software service fees for 2013 will modestly increase over those for 2012, as we expect to see continued strength in the sale and renewal of Windows maintenance contracts.
Other
The decrease in other revenue for the three and six -month periods ended June 30, 2013, as compared with the same period of the prior year was primarily due to a decrease in private labeling fees. We typically recognize private labeling fees revenue only when such services are requested by a new stocking reseller; they sign a contract with us, simultaneously place their first stocking order and ultimately, when they sell through their entire first stocking order, we recognize the private labeling fees revenue. Private labeling fees do not comprise a material portion of our revenue streams, and they can vary from period to period.
Software Costs of revenue are comprised primarily of software service costs, which represent the costs of customer service, and software product costs, which are primarily comprised of the amortization of capitalized software development costs, and costs associated with licenses for third party software included in our product offerings. We incur no shipping or packaging costs as all of our deliveries are made via electronic means over the Internet.
Under accounting principles generally accepted in the United States (“GAAP), development costs for new product development, after technological feasibility is established, are recorded as “capitalized software” on our Condensed Consolidated Balance Sheet. Such capitalized costs are subsequently amortized as cost of revenue (software product costs) over the shorter of three years or the remaining estimated life of the product. During the three-month periods ended June 30, 2013 and 2012, we did not capitalize any software development costs. During the six-month periods ended June 30, 2013 and 2012, we capitalized $464,500 and $0, respectively, of software development costs.
Amortization of capitalized software development costs was $41,500 during each of the three-month periods ended June 30, 2013 and 2012, respectively. Amortization of capitalized software development costs was $83,000 during each of the six-month periods ended June 30, 2013 and 2012, respectively.
Software Cost of revenue was 9.9% and 8.4% of total revenue for the three months ended June 30, 2013 and 2012, respectively. Software cost of revenue was 8.3% and 8.5% of total revenue for the six months ended June 30, 2013 and 2012, respectively.
Software Cost of revenue for the three-month periods ended June 30, 2013 and 2012 was as follows:
2013 Over (Under) 2012 | ||||||||||||||||
2013 | 2012 | Dollars | Percent | |||||||||||||
Software service costs | $ | 64,200 | $ | 62,500 | $ | 1,700 | 2.7 | % | ||||||||
Software product costs | 73,100 | 69,900 | 3,200 | 4.6 | % | |||||||||||
$ | 137,300 | $ | 132,400 | $ | 4,900 | 3.7 | % |
Cost of revenue for the six-month periods ended June 30, 2013 and 2012 was comprised as follows:
2013 Over (Under) 2012 | ||||||||||||||||
2013 | 2012 | Dollars | Percent | |||||||||||||
Software service costs | $ | 127,800 | $ | 135,500 | $ | (7,700 | ) | -5.7 | % | |||||||
Software product costs | 121,300 | 135,400 | (14,100 | ) | -10.4 | % | ||||||||||
$ | 249,100 | $ | 270,900 | $ | (21,800 | ) | -8.0 | % |
Software service costs were relatively flat during the three-month period ended June 30, 2013, as compared with the same period of the prior year. Software service costs decreased during the six-month period ended June 30, 2013, as compared with the same period of the prior year, primarily as a result of less time being spent on customer service issues. We expect software service costs to remain lower during the remainder of 2013, as compared with the prior year.
Software service costs include non-cash stock-based compensation. Such costs were, in the aggregate, approximately $1,700 and $4,100 for the three-month periods ended June 30, 2013 and 2012, respectively and $3,800 and $10,400 for the six-month periods ended June 30, 2013 and 2012, respectively. No new stock awards were issued to customer service personnel in either 2013 or 2012; thus, the decreases in both the three and six-month periods ended June 30, 2013, as compared with the similar periods of the prior year, resulted from less stock-based compensation expense being recognized from the outstanding stock awards held by such employees.
Software product costs increased in the three-month period ended June 30, 2012 compared with the same period in 2012 due to an increase in costs associated with third party software we license into our products. For the six-month period ended June 30, 2013 software product costs decreased compared to the same period in 2012 due to a decrease in costs associated with third party software we license into our products.
We expect that software costs of revenue for 2013 will be lower than 2012 levels, primarily due to decreased customer service costs.
Selling and marketing expenses primarily consist of employee costs (inclusive of non-cash stock-based compensation expense), outside services, and travel and entertainment expense.
Selling and marketing expenses for the three-month periods ended June 30, 2013 decreased by $43,600, or 7.2%, to $561,200, from $604,800 for the same period of 2012, which represented approximately 40.3% and 38.5% of revenue during these periods, respectively. Selling and marketing expenses for the six-month period ended June 30, 2013 decreased by $119,100 or 10.1% to $1,060,200 from $1,179,300 for the same period in 2012, which represented approximately 35.2% and 37.1% of revenue during those periods, respectively.
The decrease in selling and marketing expenses during the three and six-month periods ended June 30, 2013, as compared with the same periods of the prior year, was mainly due to lower commissions, bonuses, and marketing services costs partially offset by higher wages and employee severance costs.
Selling and marketing employee costs included non-cash stock-based compensation costs aggregating approximately $38,400 and $25,200 for the three-month periods ended June 30, 2013 and 2012, respectively. The same costs for the six-month periods ended June 30, 2013 and 2012 were approximately $78,900 and $51,600, respectively. The increase in these costs resulted from stock awards issued in 2012.
We currently expect our full-year 2013 selling and marketing expense to decrease compared to 2012 levels as we expect to enact certain cost cutting measures aimed at generating greater operational efficiencies throughout the remainder of the year.
General and Administrative Expenses
General and administrative expenses primarily consist of employee costs (inclusive of non-cash stock-based compensation expense), depreciation and amortization, legal, accounting, other professional services (including those related to realizing benefits from our patents), rent, travel and entertainment and insurance. Certain costs associated with being a publicly held corporation are also included in general and administrative expenses, as well as bad debts expense.
General and administrative expenses decreased by $660,100, or 45.8%, to $780,700, for the three-month period ended June 30, 2013, from $1,440,800 for the same period of 2012, which represented approximately 56.0% and 91.7% of revenue during these periods, respectively.
The decrease in general and administrative expense in the three-month period ended June 30, 2013 was primarily due to the cost of the severance agreement with our former chief executive officer and chairman, which, as described in Note 5, resulted in a one-time charge of $721,800 that was recognized in the three-month period ended June 30, 2012. Also, we had fewer employees and lower legal and outside services costs in 2013.
General and administrative expenses decreased by $958,100, or 38.6%, to $1,526,700 for the six-month period ended June 30, 2013, from $2,484,800 for the same period of 2012, which represented approximately 50.7% and 78.1% of revenue during these periods, respectively.
The decrease in general and administrative expense in the six-month period ended June 30, 2013 was primarily due to same reasons described above for the three-month period ended June 30, 2013.
Included in general and administrative employee costs was non-cash stock-based compensation expense aggregating $84,600 and $260,600 for the three-month periods ended June 30, 2013 and 2012, respectively. Non-cash stock-based compensation expense included in general and administrative costs aggregated $179,500 and $333,700 for the six-month periods ended June 30, 2013 and 2012, respectively. The decrease in these costs resulted from such expense associated with the separation agreement with our former chief executive officer and chairman in 2012 which was partially offset by the expenses associated with stock awards issued in 2012.
We expect that general and administrative expense for 2013 will be lower than 2012 levels, primarily as a result of the one-time costs incurred in connection with the separation agreement we entered into during April 2012 with our former chief executive officer and chairman and the legal fees incurred related thereto, and the stock-based compensation expense associated with the restricted stock awards granted during 2012. We also expect to have fewer employees in our patent group. See Note 5 of Notes to Unaudited Condensed Consolidated Financial Statements for further information regarding the separation agreement. Such savings will be partially offset by costs of certain system upgrades we expect to enact, aimed at generating greater administrative efficiencies, over the course of the next several months.
Research and Development Expenses
Research and development expenses consist primarily of employee costs (inclusive of non-cash stock-based compensation expense), payments to contract programmers, travel and entertainment for all our engineers, and all rent for our leased engineering facilities.
Research and development expenses increased by $410,800, or 42.6%, to $1,375,600, for the three-month period ended June 30, 2013, from $964,800 for the same period of 2012, which represented approximately 98.7% and 61.4% of revenue for these periods, respectively.
The increase in research and development expense for the three-month period ended June 30, 2013, as compared with the same periods of the prior year, was primarily due to higher staffing levels and recruitment fees for the new product development team in Campbell, California, and higher outside services costs.
Research and development expenses increased by $70,900, or 3.5%, to $2,088,800, for the six-month period ended June 30, 2013, from $2,017,900 for the same period of 2012, which represented approximately 69.4% and 63.4% of revenue for these periods, respectively.
The increase in research and development expense for the six-month period ended June 30, 2013, as compared with the same periods of the prior year, was primarily due to higher staffing levels and recruitment fees for the new product development team in Campbell, California and higher outside services costs. These costs were partially offset by the capitalization of software development costs relating to hopTo, and having fewer employees in the Concord, New Hampshire engineering office.
Included in research and development employee costs was non-cash stock-based compensation expense totaling $80,000 and $86,200 for the three-month periods ended June 30, 2013 and 2012, respectively. Non-cash stock-based compensation expense was $128,300 and $169,800 for the six-month periods ended June 30, 2013 and 2012, respectively. The decrease in non-cash stock-based compensation costsfor the three-month period ended June 30, 2013, as compared with the same period of the prior year was due to a decrease in the number of shares awarded to research and development employees in 2013, as compared with 2012. The decrease in stock-based compensation expense for the six-month period ended June 30, 2013, as compared with the same period of 2012 was primarily the result of the capitalization of $36,700 of stock-based compensation costs, attributable to the development of hopTo, as well as the decrease in the number of shares awarded during 2013, as compared with 2012.
During the six-month period ended June 30, 2013 , we capitalized $464,500 of software development costs associated with the development of hopTo, which, had they not met the criteria for capitalization, would have otherwise been expensed. Such costs were inclusive of the $36,700 of stock-based compensation costs referred to in the preceding paragraph. No such development costs were capitalized during the corresponding period of the prior year.
We expect 2013 research and development expenses to be significantly higher than those for 2012. The main driver of the increased costs will be the costs associated with our new products development team, which will be primarily comprised of employee costs, recruitment fees, rent, equipment and supplies for the team.
During the three-month periods ended June 30, 2013 and 2012, we reported non-cash income related to the change in fair value of our Warrants Liability of $4,767,900 and $666,500, respectively. During the six-month periods ended June 30, 2013 and 2012, we reported non-cash income related to the change in fair value of our Warrants Liability of $1,319,200 and $607,900, respectively. Such changes in 2013 resulted from the decrease in the market value for our common stock. For further information regarding our Warrants Liability, see Note 4 to the Notes to Unaudited Condensed Consolidated Financial Statements.
As a result of the foregoing items, we reported income from continuing operations of $3,305,100 for the three-month period ended June 30, 2013 and a loss from continuing operations of - $905,300 for the three-month period ended June 30, 2012. We reported losses from continuing operations of $597,800 and $2,162,000 for the six-month periods ended June 30, 2013 and 2012, respectively.
Loss from Discontinued Operations
During September 2012, we reached settlement and licensing agreements that effectively ended all of our then on-going intellectual property litigation. Having been approached by the respective counter-parties to each of our lawsuits, and in consultation with our board of directors, we determined that it was in our best long-term strategic interests to settle each lawsuit in order to move forward and shift our focus to our software products, including our new product initiatives. We do not intend to pursue intellectual property litigation as an integral part of our strategy to fund our future operations. Accordingly for all periods presented the results of operations and cash flows related to our former intellectual property segment has been segregated and reported as “Discontinued Operations”. See Note 17 to our Notes to Unaudited Condensed Consolidated Financial Statements.
As a result of this decision, we reported losses from discontinued operations of $0 and $90,900 for the three-month periods ended June 30, 2013 and 2012, respectively and losses of $0 and $121,300 for the six-month periods ended June 30, 2013 and 2012, respectively.
During 2013, we expect to continue to prioritize the investment of our resources into the development of various new products, with our primary focus being on hopTo. Although we believe that as a result of the introduction of GO-Global 4.5 for Windows in 2012, and the expected introduction of new and/or upgraded GO-Global products slated for 2013, our revenue may modestly increase, we also believe that any such increases might be offset if we experience continued weakness in revenue derived from our stock resellers and our European telecommunications customers. Further, due to our expected investments in hopTo, and our intellectual property strategy, we expect our cash flow from operations to decrease. Based on our cash on hand as of June 30, 2013, (including the approximately $2.55 million received from the exercise of warrants in the June 2013 warrant exercise transactions), and the anticipation of modest increased revenue from our GO-Global products, we believe that we will have sufficient resources to support our operational plans for the next twelve months.
However, in order to fully execute on our business strategy for hopTo we will require additional capital resources. Such resources may come from revenue from our existing GO-Global product line, new revenue from the planned hopTo product line, and capital raised from debt or equity issuances.
There can be no assurance of increased revenue from existing product lines or new revenue from new product lines. In addition, issuances of new capital stock would dilute existing stockholder and may give the purchasers of new capital stock additional rights, preferences and privileges relative to existing stockholders. There can be no assurance that additional capital necessary for full execution of our hopTo business strategy will be available on a timely basis, on reasonable terms or at all.
During the six-month periods ended June 30, 2013 and 2012, our reported net losses of $597,800 and $2,283,300, respectively, included three significant non-cash items: depreciation and amortization of $135,500 and $124,500, respectively, which were primarily related to amortization of capitalized software development costs and depreciation of fixed assets, stock-based compensation expense of $390,500 and $565,500, respectively, $1,319,200 and $607,900, respectively, credited to other income related to the change in fair value recorded for the Warrants Liability.
During the six-month periods ended June 30, 2013 and 2012, we incurred operating cash outflows of $0 and $37,000, respectively in our former intellectual property segment, whose operations we discontinued in 2012. (See Note 17 to Notes to Unaudited Condensed Consolidated Financial Statements).
We expect to continue making investments in our products during the remainder of 2013, with a focus on new product development, primarily within the planned hopTo product line. During the six-month periods ended June 30, 2013 and 2012, we invested approximately $48,000 and $238,700 of cash, respectively, into fixed assets. Such expenditures made during the six-month period ended June 30, 2012 were primarily incurred in connection with the opening of our office in Campbell, California and equipping our new products development team located therein.
During the six-month period ended June 30, 2013, 9,917,500 warrants and 751,378 employee options were exercised, which provided cash flows from financing activities of $2,551,300 and $112,400, respectively. During the six-month period ended June 30, 2012, 56,100 employee options were exercised, which provided cash flows from financing activities of $8,100. No warrants were exercised during the six-month period ended June 30, 2012.
Cash
As of June 30, 2013, our cash balance was $4,761,000, as compared with $3,960,600 as of December 31, 2012, an increase of $800,400, or 20.2%. The increase primarily resulted from the cash received from the exercise of warrants in the June 2013 transaction, which was partially offset by the cash used by our operating and investing activities.
At June 30, 2013 and December 31, 2012, we reported accounts receivable, net, of $752,900 and $865,900, respectively. Such amounts were reported net of the allowance for doubtful accounts, which allowances totaled $24,600 and $33,900 at June 30, 2013 and December 31, 2012, respectively. The decrease in accounts receivable, net, was mainly due to lower sales during the first half of the year and the timing of sales during the second quarter. We collect the significant majority of our quarter-end accounts receivable during the subsequent quarter; accordingly, increases or decreases in accounts receivable from one period to the next tends to be indicative of the trend in our sales from one period to the next. From time to time, we could have individually significant accounts receivable balances due us 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.
Stock Repurchase Program
As of June 30, 2013, we had purchased 1,424,000 shares of our common stock for $217,400 under terms of our Board-approved stock repurchase program, which was established on January 8, 2008. Under this program, the Board approved up to $1,000,000 to be used in repurchasing our stock; however, we are not obligated to repurchase any specific number of shares and the program may be suspended or terminated at our discretion. During each of the three and six-month periods ended June 30, 2013 and 2012, no repurchases were made. As of June 30, 2013, $782,600 remains available for stock purchases under this program.
Working Capital
As of June 30, 2013, we had current assets of $5,617,900 and current liabilities of $3,861,400, which netted to working capital of $1,756,500. Included in current liabilities was the current portion of deferred revenue of $2,759,800.
Not applicable.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer, we 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 the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2013.
There has not been any change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Not Applicable
There have been no material changes in our risk factors from those set forth under Item 1A, “Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2012, which was filed with the Securities and Exchange Commission on April 12, 2013.
On January 8, 2008, our Board of Directors authorized a stock repurchase program to repurchase up to $1,000,000 of our outstanding common stock. Under terms of the program, we are not obligated to repurchase any specific number of shares and the program may be suspended or terminated at management’s discretion. No shares were repurchased under the stock repurchase program during the three-month period ended June 30, 2013.
On June 17, 2013, we entered into, and subsequently consummated, an Exercise Agreement (the “Exercise Agreement”) with five of the largest investors in our September 1, 2011 private placement of common stock and warrants (the “2011 Transaction”), providing for the exercise for cash by such investors of warrants to purchase an aggregate 9 million shares of our common stock, out of the approximately 17 million shares of common stock subject to warrants issued to the investors in the 2011 Transaction that remained outstanding as of such date. We received cash proceeds of $2.34 million as a result of the warrants exercised. In consideration for the early exercise of these warrants, we issued to the five investors an aggregate of 4.5 million warrants to purchase common stock at an exercise price of $1.00 per warrant, with a term of five years from issuance (the “New Warrants”). Each of the warrant holders represented to us that there were “accredited investors.” The issuance of such common stock upon exercise and the issuance of the New Warrants was not registered under the Securities Act of 1933 because such securities were offered and sold in transactions not involving a public offering, exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) and in compliance with Rule 506 thereunder.
On August 9, 2013, we consummated an offer to exercise warrants (the “Offer to Exercise”) made to holders of warrants in the 2011 Transaction who were not parties to the Exercise Agreement. We were obligated to conduct the Offer to Exercise under the terms of the Exercise Agreement entered into in connection with the June 17, 2013 transaction. In connection with the Offer to Exercise, warrants to purchase an aggregate of 305,000 shares of our common stock were exercised for which we received cash proceeds of $64,000. In consideration for the early exercise of these warrants, we issued an aggregate of 152,500 New Warrants at an exercise price of $1.00 per warrant, with a term of five years from issuance. Each of the warrant holders represented to us that there were “accredited investors.” The issuance of such common stock upon exercise and the issuance of the New Warrants was not registered under the Securities Act of 1933 because such securities were offered and sold in transactions not involving a public offering, exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) and in compliance with Rule 506 thereunder.
Not applicable
Not applicable
Not applicable
Exhibit Number | Exhibit Description |
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
Certification of Interim Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished, not filed) | |
Certification of Interim Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished, not filed) | |
101* | The following financial information from GraphOn Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets as of June 30, 2013 (unaudited) and December 31, 2012, (ii) Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2013 and 2012, (iii) Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2013 and 2012, (iv) Notes to Unaudited Condensed Consolidated Financial Statements. |
* Furnished, not filed
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: | August 13, 2013 | Date: | August 13, 2013 | |
By: | /s/ Eldad Eilam | By: | /s/ Robert L. Dixon | |
Eldad Eilam | Robert L. Dixon | |||
Chief Executive Officer | Interim Chief Financial Officer | |||
(Principal Executive Officer) | (Principal Financial Officer and | |||
Principal Accounting Officer) |
33