UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
---------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2009
Commission File Number: 0-21683
-------------------------------
GraphOn Corporation
(Exact name of registrant as specified in its charter)
----------------------------------------------------
Delaware 13-3899021
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5400 Soquel Avenue, Suite A2
Santa Cruz, CA 95062
(Address of principal executive offices)
Registrant's telephone number: (800) 472-7466
Indicate by check mark whether the 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 [ ]
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
(ss.232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes [ ]
No [ ]
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 [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No |X|
As of May 8, 2009 there were issued and outstanding 47,342,292 shares of
the issuer's common stock, par value $0.0001.
GRAPHON CORPORATION
FORM 10-Q
Table of Contents
PART I. FINANCIAL INFORMATION PAGE
------- ----------------------------------------------------------------- ----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2009
(unaudited) and December 31, 2008 2
Unaudited Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2009 and 2008 3
Unaudited Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2009 and 2008 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4T. Controls and Procedures 19
PART II. OTHER INFORMATION
-------- -----------------
Item 1. Legal Proceedings 21
Item 1A. Risk Factors 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits 22
Signatures 22
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
GraphOn Corporation
Condensed Consolidated Balance Sheets
-------------------------------------
March 31, 2009 December 31, 2008
Assets (Unaudited) (Audited)
------ -------------- -----------------
Current Assets
Cash and cash equivalents $ 3,603,300 $ 3,742,200
Accounts receivable, net 595,600 970,000
Prepaid expenses 114,500 63,400
-------------- -----------------
Total Current Assets 4,313,400 4,775,600
-------------- -----------------
Patents, net 865,900 984,000
Other assets, net 179,500 202,900
-------------- -----------------
Total Assets $ 5,358,800 $ 5,962,500
============== =================
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
Accounts payable and accrued expense $ 888,300 $ 795,700
Warrants liability 18,400 -
Deferred revenue 1,735,200 1,744,600
-------------- -----------------
Total Current Liabilities 2,641,900 2,540,300
-------------- -----------------
Deferred revenue 874,100 858,500
Other liabilities 28,400 28,400
-------------- -----------------
Total Liabilities 3,544,400 3,427,200
-------------- -----------------
Commitments and contingencies - -
Stockholders' Equity Common stock,
$0.0001 par value, 195,000,000 shares
authorized, 47,342,292 and 47,322,292
shares issued and outstanding at
March 31, 2009 and December 31, 2008,
respectively 4,700 4,700
Additional paid-in capital 58,850,500 59,662,100
Accumulated deficit (57,040,800) (57,131,500)
-------------- -----------------
Total Stockholders' Equity 1,814,800 2,535,300
-------------- -----------------
Total Liabilities and Stockholders' Equity $ 5,358,800 $ 5,962,500
============== =================
<FN>
See accompanying notes to unaudited condensed consolidated financial statements
</FN>
2
GraphOn Corporation
Condensed Consolidated Statements of Operations
-----------------------------------------------
Three Months Ended March 31,
-------------------------------
2009 2008
(Unaudited) (Unaudited)
------------- -------------
Revenue $ 1,409,100 $ 1,312,300
Costs of revenue 132,900 158,600
------------- -------------
Gross profit 1,276,200 1,153,700
Operating expenses
Selling and marketing 489,000 408,500
General and administrative 760,000 965,400
Research and development 788,100 486,400
------------- -------------
Total operating expenses 2,037,100 1,860,300
------------- -------------
Loss from operations (760,900) (706,600)
------------- -------------
Other income (expense), net (7,700) 35,500
------------- -------------
Loss before provision for income tax (768,600) (671,100)
Provision for income tax - 800
------------- -------------
Net loss $ (768,600) $ (671,900)
============= =============
Basic and diluted loss per share $ (0.02) $ (0.01)
============= =============
Average weighted common shares outstanding 47,135,625 47,089,808
============= =============
<FN>
See accompanying notes to unaudited condensed consolidated financial statements
</FN>
3
GraphOn Corporation
Condensed Consolidated Statements of Cash Flows
-----------------------------------------------
Three Months Ended March 31,
---------------------------------
2009 2008
(Unaudited) (Unaudited)
------------ ------------
Cash Flows Provided By (Used In) Operating Activities:
------------------------------------------------------
Net Loss $ (768,600) $ (671,900)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 141,600 238,800
Stock-based compensation expense 51,600 125,100
Provision for doubtful accounts - 4,600
Loss on derivative instruments - warrants liability 13,700 -
Changes in operating assets and liabilities:
Accounts receivable 374,400 134,300
Prepaid expense (51,100) (57,000)
Accounts payable and accrued expense 92,500 (150,200)
Deferred revenue 6,200 (89,200)
------------ ------------
Net Cash Used In Operating Activities (139,700) (465,500)
------------ ------------
Cash Flows Used In Investing Activities:
----------------------------------------
Purchases of equipment - (18,200)
Other assets - (200)
------------ ------------
Net Cash Used In Investing Activities - (18,400)
------------ ------------
Cash Flows Provided By Financing Activities:
--------------------------------------------
Proceeds from sale of common stock - employee
stock purchase plan 800 3,600
------------ ------------
Net Decrease in Cash and Cash Equivalents (138,900) (480,300)
Cash and Cash Equivalents, Beginning of Period 3,742,200 5,260,800
------------ ------------
Cash and Cash Equivalents, End of Period $ 3,603,300 $ 4,780,500
============ ============
<FN>
See accompanying notes to unaudited condensed consolidated financial statements
</FN>
4
GraphOn Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation
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 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, that
are, in the opinion of management, necessary to state fairly the results for the
periods presented. This Quarterly Report on Form 10-Q should be read in
conjunction with the audited consolidated financial statements of GraphOn
Corporation (the "Company") contained in the Company's Annual Report on Form
10-K for the year ended December 31, 2008, which was filed with the SEC on March
31, 2009 ("2008 10-K 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, 2009, or any future period.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the unaudited condensed consolidated financial statements and accompanying
notes. While the Company believes that such estimates are fair when considered
in conjunction with the unaudited condensed consolidated financial statements
and accompanying notes, the actual amount of such estimates, when known, may
vary from those estimates.
Intercompany Accounts and Transactions
Significant intercompany accounts and transactions are eliminated upon
consolidation.
Revenue Recognition
The Company markets and licenses products through various means, such as;
channel distributors, independent software vendors ("ISVs"), value-added
resellers ("VARs") (collectively "resellers") and direct sales to enterprise end
users. Its product licenses are generally perpetual. The Company also separately
sells intellectual property licenses, maintenance contracts, which are comprised
of license updates and customer service access, private-label branding kits,
software developer kits ("SDKs") and product training services.
Generally, software license revenues are recognized when:
o Persuasive evidence of an arrangement exists, (i.e., when the Company
signs a non-cancelable license agreement wherein the customer
acknowledges an unconditional obligation to pay, or upon receipt of
the customer's purchase order) and
o Delivery has occurred or services have been rendered and there are no
uncertainties surrounding product acceptance (i.e., when title and risk
of loss have been transferred to the customer, which generally occurs
when the media containing the licensed programs is provided to a
common carrier or, in the case of electronic delivery, when the customer
is given access to the licensed programs) and
o The price to the customer is fixed or determinable, as typically
evidenced in a signed non-cancelable contract, or a customer's
purchase order, and
o Collectibility is probable. If collectibility is not considered
probable, revenue is recognized when the fee is collected.
Revenue recognized on software arrangements involving multiple elements is
allocated to each element of the arrangement based on vendor-specific objective
evidence ("VSOE") of the fair values of the elements; such elements include
licenses for software products, maintenance, and customer training. The Company
limits its assessment of VSOE for each element to either the price charged when
the same element is sold separately or the price established by management
having the relevant authority to do so, for an element not yet sold separately.
5
If sufficient VSOE of fair values 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 evidence of VSOE of all undelivered elements exists but evidence
does not exist for one or more delivered elements, then revenue is recognized
using the residual method. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement
fee is recognized as revenue.
Certain resellers purchase product licenses that they hold in inventory until
they are resold to the ultimate end user (an "inventory stocking order"). The
Company provides maintenance services to these resellers for such licenses at no
charge. Generally, the Company defers the recognition of revenue for inventory
stocking orders until the underlying licenses are sold to the end user. The
Company allocates revenue to the service fee (maintenance) component based on
VSOE prorated to the time period between the inventory order date and date of
sale to the end user.
There are no rights of return granted to resellers or other purchasers of the
Company's software programs.
Revenue from maintenance contracts is recognized ratably over the related
contract period, which generally ranges from one to five years.
Long-Lived Assets
Long-lived assets, which consist primarily of patents, are assessed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amounts may not be recoverable, whenever the Company has committed to a
plan to dispose of the assets or, at a minimum, as it relates to the Company's
patents, annually. Measurement of the impairment loss is based on the fair value
of the assets. Generally, fair value is determined based on appraisals, current
market value, comparable sales value, and undiscounted future cash flows, as
appropriate. Assets to be held and used affected by such impairment loss are
depreciated or amortized at their new carrying amount over the remaining
estimated life; assets to be sold or otherwise disposed of are not subject to
further depreciation or amortization. No such impairment charge was recorded
during either of the three-month periods ended March 31, 2009 or 2008.
Patents
The Company's patents are being amortized over their estimated remaining
economic lives, currently estimated to be until approximately January 31, 2011.
Costs associated with filing, documenting or writing method patents are expensed
as incurred. Contingent legal fees paid in connection with a patent lawsuit, or
settlements thereof, are charged to cost of goods sold. All other non-contingent
legal fees and costs incurred in connection with a patent lawsuit, or
settlements thereof, are charged to general and administrative expense as
incurred.
3. Stock-Based Compensation
The Company recorded stock-based compensation expense of $51,600 and $125,100 in
the three-month period ended March 31, 2009 and 2008, respectively.
The following table illustrates the stock-based compensation expense recorded
during the three-month period ended March 31, 2009 and 2008 by income statement
classification:
Three months ended March 31,
------------------------------------
Income Statement Classification 2009 2008
- ---------------------------------------- ---------------- ----------------
Cost of revenue $ 2,400 $ 5,300
Selling and marketing expense 4,400 10,600
General and administrative expense 25,300 74,900
Research and development expense 19,500 34,300
---------------- ----------------
$ 51,600 $ 125,100
================ ================
The Company estimated the fair value of each stock-based award granted during
the three-month period ended March 31, 2009 and 2008, as of the date of grant,
using a binomial model with the assumptions set forth in the following table:
6
Three Months Ended March 31,
-----------------------------------
2009 2008
---------------- ----------------
Estimated volatility 180% 159%
Annualized forfeiture rate 4% 4%
Expected option term (years) 7.5 7.5
Estimated exercise factor 10% 10%
Approximate risk-free interest rate 2.24% 3.15%
Expected dividend yield 0% 0%
The Company also recognized compensation costs for common shares purchased under
its Employee Stock Purchase Plan ("ESPP") during the three-month periods ended
March 31, 2009 and 2008, applying the same variables as noted in the table above
to the calculation of such costs, except that the expected term was 0.5 years
for each respective period and for shares purchased during the three-month
period ended March 31, 2009 the risk-free interest rate was 0.40%. The time span
from the date of grant of ESPP shares to the date of purchase is six months.
The Company does not anticipate paying dividends on its common stock for the
foreseeable future. Expected volatility is based on the historical volatility of
the Company's common stock over the 7.5 year period ended on the end of each
respective quarterly reporting period noted in the above table.
The approximate risk free interest rate was based on the implied yield available
on U.S. Treasury issues with remaining terms equivalent to the Company's
expected term on its stock-based awards. The expected term of the Company's
stock-based option awards was based on historical award holder exercise patterns
and considered the market performance of the Company's common stock and other
items. The annualized forfeiture rate was based on an analysis of historical
data and considered the impact of events such as the work force reductions the
Company carried out during previous years. The estimated exercise factor was
based on an analysis of historical data and included a comparison of historical
and current share prices.
For stock-based awards granted during the three-month periods ended March 31,
2009 and 2008, exclusive of common shares purchased pursuant to the Company's
ESPP, the weighted average fair value was $0.05 and $0.34, respectively.
The weighted average fair values of common shares purchased pursuant to the
Company's ESPP during the three-month periods ended March 31, 2009 and 2008 were
$0.27 and $0.41, respectively.
The following table presents a summary of the status and activity of the
Company's stock option awards for the three-month period ended March 31, 2009.
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Shares Price Term (Years) Value
------------- ------------ ---------------- --------------
Outstanding - December 31, 2008 7,501,255 $ 0.45
Granted 938,500 $ 0.05
Exercised - -
Forfeited or expired (108,072) $ 0.49
-------------
Outstanding - March 31, 2009 8,331,683 $ 0.40 5.68 $ 37,600
=============
Of the options outstanding as of March 31, 2009, 6,491,946 were vested,
1,759,291 were estimated to vest in future periods and 80,450 were estimated to
be forfeited prior to their vesting.
All options are exercisable immediately upon grant. Options vest, generally
ratably over a 33-month period commencing in the fourth month after the grant
date. The Company has the right to repurchase exercised options that have not
vested upon their forfeiture at the respective option's exercise price.
7
As of March 31, 2009, there was approximately $145,200 of total unrecognized
compensation cost, net of estimated forfeitures, related to stock-based
compensation. That cost is expected to be recognized over a weighted-average
period of approximately one year.
4. Revenue
Revenue for the three-month periods ended March 31, 2009 and 2008 was comprised
as follows:
2009 Over (Under) 2008
-------------------------------
Revenue 2009 2008 Dollars Percent
- ----------------------- --------------- ---------------- ----------------- ----------
Product Licenses
Windows $ 436,600 $ 429,600 $ 7,000 2%
Unix 326,200 348,200 (22,000) -6%
--------------- ---------------- -----------------
762,800 777,800 (15,000) -2%
--------------- ---------------- -----------------
Service Fees
Windows 283,700 243,700 40,000 16%
Unix 287,600 279,600 8,000 3%
--------------- ---------------- -----------------
571,300 523,300 48,000 9%
--------------- ---------------- -----------------
Other 75,000 11,200 63,800 570%
--------------- ---------------- -----------------
Total Revenue $ 1,409,100 $ 1,312,300 $ 96,800 7%
=============== ================ =================
5. Patents
Patents consisted of the following:
March 31, 2009 December 31, 2008
---------------- -------------------
Patents $ 2,839,000 $ 2,839,000
Accumulated amortization (1,973,100) (1,855,000)
---------------- -------------------
$ 865,900 $ 984,000
================ ===================
Patent amortization, which aggregated $118,100 and $222,300 during the
three-month periods ended March 31, 2009 and 2008, respectively, is a component
of general and administrative expenses.
6. Accounts Receivable, Net
Accounts receivable were net of an allowance totaling $32,000 as of both March
31, 2009 and December 31, 2008.
7. Other Liabilities
Other liabilities are comprised of the final principal payment due under a
three-year extended payment agreement (the "agreement") between the Company and
a software vendor, for software used internally by the Company as well as a
support contract and product training. A similar amount, which is due and
payable during April 2009, has been accrued as a component of accrued expenses.
The initial payment, plus interest, was made during the nine-month period ended
September 30, 2008.
Interest on the agreement, in the aggregate approximately $6,700 over the
three-year agreement, is expensed ratably upon payment.
8. Warrants Liability
Adoption of EITF 07-5
On January 1, 2009, the Company adopted EITF 07-5, "Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF
07-5"). As part of the adoption of EITF 07-5, the Company determined that
EITF07-5 applies to warrants the Company had previously issued and that such
warrants were not indexed to the Copmany's own stock; therefore, the
value of the warrants has been recorded as a liability. The Company recorded the
following cumulative effect of change in accounting principle entries pursuant
to its adoption of EITF 07-5:
8
Additional
Derivative Paid-in Accumulated
Liability Capital Deficit
------------------------------------------
Increase / (Decrease)
------------------------------------------
Record the reversal of the
prior accounting treatment
related to the warrants $ - $ (864,000) $ (864,000)
Record the January 1, 2009
derivative instrument
related to the warrants 4,700 - 4,700
------------------------------------------
$ 4,700 $ (864,000) $ (859,300)
==========================================
The Company currently does not have a material exposure to either commodity
prices or interest rates; accordingly, it does not currently use derivative
instruments to manage such risks. The Company evaluates all of its 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.
The Company used a binomial pricing model to determine the fair value of its
warrants as of March 31, 2009 using the following assumptions:
Estimated Volatility 85%
Annualized forfeiture rate 0%
Expected option term (years) 0.87
Estimated exercise factor 10%
Approximate risk-free interest rate 0.57%
Expected dividend yield 0%
On its condensed consolidated balance sheet the Company classified the fair
value of outstanding derivative instruments not designated as hedging
instruments as Warrants liability and reported $18,400 of such Warrants
liability as of March 31, 2009.
The Company reported $13,700 of other expense in its condensed consolidated
statement of operations for the three-month period ended March 31, 2009 related
to the change in fair of the Warrant liability during such period.
The Company did not record a Warrant liability on its condensed consolidated
balance sheet as of March 31, 2008, nor did it record any change in fair value
for a Warrant liability for the three-month period then ended as the effective
date for the adoption of EITF 07-5 was January 1, 2009.
9. Fair Value Measurements
SFAS No. 157, "Fair Value Measurements," establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure 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.
o Level 1: Defined as observable inputs, such as quoted prices in
active markets for identical assets.
o Level 2: Defined as observable inputs other than Level 1
prices. This includes quoted prices for similar assets or liabilities in
an active market, quoted prices for identical 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.
o Level 3: Defined as unobservable inputs for which little or no market data
exists, therefore requiring an entity to develop its own assumptions.
9
As of March 31, 2009, all of the Company's $18,400 Warrants liability reported
at fair value was categorized as Level 3 inputs.
10. Stockholders' Equity - Stock Buy Back Program
During the three-month period ended March 31, 2009, the Company did not
repurchase any of its stock under the terms of its Board approved stock buy back
program. As of March 31, 2009, approximately $912,300 of the Board approved
$1,000,000 stock buy back program remained available for future purchases. The
Company is not obligated to repurchase any specific number of shares and the
program may be suspended or terminated at the Company's discretion.
11. Commitments and Contingencies
On March 16, 2009, Juniper Networks, Inc. initiated a proceeding against the
Company and one of its resellers in the United States District Court in the
Eastern District of Virginia alleging infringement of one of their patents,
namely; U.S. Patent No. 6,243,752 (the "'752 Patent"), which protects Juniper's
unique method of transmitting data between a host computer and a terminal
computer. On May 1, 2009, the Company filed an answer in which it asked the
court to declare that the `752 Patent is not infringed and/or is invalid under
the patent laws. The Company also asserted a counterclaim against Juniper,
alleging infringement of four of its patents, namely; U.S. Patent Nos.
7,249,378, 7,269,847, 7,383,573, and 7,424,737. No trial date has been set by
the court yet.
Separately, Juniper has petitioned the United States Patent and Trademark Office
(the "PTO") to reexamine two of the Company's patents, namely; U. S. Patent Nos.
5,826,014 and 6,061,798 (the "'014" and "'798" patents, respectively). On April
6, 2008, the PTO ordered the reexamination of the `798 patent, and on July 25,
2008, the PTO ordered the reexamination of the `014 patent. Juniper also asked
the PTO to reexamine the Company's U.S. Patent No. 7,127,464 (the "'464"
patent), which patent is unrelated to any litigation. The PTO ordered the
reexamination of the `464 patent on April 17, 2008. On January 26, 2009, the PTO
issued a non-final rejection of the single claim of the `798 patent. On March
26, 2009, the Company responded with a disagreement to the PTO's non-final
rejection and added 30 new claims to the `798 patent. No response to the
Company's disagreement has yet been received from the PTO. On December 4, 2008
the PTO issued a non-final office action on the `464 patent. The Company did not
respond to the non-final office action and the `464 patent has been abandoned.
The PTO has not yet issued a first office action on the `014 patent.
12. Supplemental Disclosure of Cash Flow Information
The Company disbursed no cash for either the payment of income taxes or interest
during the three-month periods ended March 31, 2009 and 2008.
As more fully explained in Note 8, the Company adopted EITF 07-5 effective
January 1, 2009. Accordingly, the Company recorded a non-cash liability of
$4,700, which it classified as Warrants liability, as part of the cumulative
effect of a change in accounting principle upon the adoption of EITF 07-5.
Pursuant to EITF 07-5, such liability was charged to opening retained earnings
(accumulated deficit).
As more fully discussed in Note 8, the Company reocrded a $13,700 non-cash
fair value adjustment to to its Warrants liability during the three-month period
ended March 31, 2009. No such adjustment was recorded during the same period of
the prior year as the effective date for the adoption of EITF 07-5 was
January 1, 2009.
13. Loss Per Share
Potentially dilutive securities have been excluded from the computation of
diluted loss per common share, as their effect is antidilutive. For the
three-month periods ended March 31, 2009 and 2008, 18,623,163 and 21,108,486
shares of common stock equivalents were excluded from the computation of diluted
loss per share since their effect would be antidilutive.
14. Segment Information
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for reporting information about operating
segments. This standard requires segmentation based on the Company's internal
organization and reporting of revenue and operating income based on internal
accounting methods. The Company's financial reporting systems present various
data for management to operate the business prepared in methods consistent with
GAAP. The segments were defined in order to allocate resources internally.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or the decision making group, in deciding how to
allocate resources and in assessing performance. The Company's chief operating
10
decision maker is its Chief Executive Officer. The Company has determined that
it operates its business in two segments: software and intellectual property.
Segment revenue was as follows:
Three Months Ended March 31,
----------------------------------
Revenue 2009 2008
-------------------------- --------------- ---------------
Software $ 1,409,100 $ 1,312,300
Intellectual Property - -
--------------- ---------------
Consolidated Revenue $ 1,409,100 $ 1,312,300
=============== ===============
Segment loss from operations was as follows:
Three Months Ended March 31,
----------------------------------
Loss From Operations 2009 2008
--------------------------------- --------------- ---------------
Software $ (479,000) $ (247,500)
Intellectual Property (281,900) (459,100)
--------------- ---------------
Consolidated Loss From Operations $ (760,900) $ (706,600)
=============== ===============
The Company does not allocate interest and other income, interest and other
expense or income tax to its segments.
Segment fixed assets (long-lived assets) was as follows:
March 31, 2009 December 31, 2008
---------------- -----------------
Software $ 1,269,400 $ 1,254,200
Accumulated depreciation/amortization (1,094,900) (1,071,500)
---------------- -----------------
174,500 182,700
---------------- -----------------
Intellectual Property 2,839,000 4,472,200
Accumulated depreciation/amortization (1,973,100) (3,488,200)
---------------- -----------------
865,900 984,000
---------------- -----------------
Unallocated 5,000 20,200
---------------- -----------------
Total Net Assets $ 1,045,400 $ 1,186,900
================ =================
The Company does not allocate certain other assets, primarily deposits, to its
segments.
Products and services provided by the software segment include all currently
available versions of GO-Global for Windows, GO-Global for Unix, OEM private
labeling kits, software developer's kits, maintenance contracts and product
training and support. The intellectual property segment provides licenses to
the Company's intellectual property. The Company's two segments do not engage
in cross-segment transactions.
15. New Accounting Pronouncements
In April 2009, FASB issued FSP 107-1 and APB 28-1, "Interim Disclosures about
Fair Value of Financial Instruments" (collectively "FSP/APB") which increase the
frequency of fair value disclosures to a quarterly instead of annual basis. The
guidance relates to fair value disclosures for any financial instruments that
are not currently reflected on an entity's balance sheet at fair value. FSP/APB
is effective for interim and annual periods ending after June 15, 2009, but may
be adopted for interim and annual periods ending after March 15, 2009. The
Company is assessing the impact of FSP/APB but does not expect it to have a
material impact on results of operations, cash flows or financial position.
In June 2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock" ("EITF
07-5") which provides that an entity should use a two step approach to evaluate
whether an equity-linked financial instrument (or embedded feature) is indexed
to its own stock, including evaluating the instrument's contingent exercise and
settlement provisions. It also clarifies on the impact of foreign currency
11
denominated strike prices and market-based employee stock option valuation
instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. See Note
8 for additional information.
In April 2008, FASB issued FSP FAS 142-3, "Determination of the Useful Life of
Intangible Assets" ("FSP"), which amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under FASB Statement No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
142 and the period of expected cash flows used to measure the fair value of the
asset under FASB Statement No. 141 (revised 2007), "Business Combinations," and
other accounting principles generally accepted in the United States. This FSP is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption
is prohibited. The adoption of this FSP did not have a material impact on
results of operations, cash flows or financial position.
In March 2008, FASB issued SFAS No. 161, "Disclosures about Derivatives
Instruments and Hedging Activities, an Amendment of FASB Statement No. 133"
("SFAS 161"). SFAS 161 requires enhanced disclosures about a company's
derivative and hedging activities. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. Adoption of SFAS 161 did not have a material impact on results of
operations, cash flows or financial position.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R") which replaces SFAS No. 141, "Business
Combinations." SFAS 141R establishes principles and requirements for recognizing
and measuring identifiable assets and goodwill acquired, liabilities assumed and
any noncontrolling interest in a business combination at their fair value at
acquisition date. SFAS 141R alters the treatment of acquisition related costs,
business combinations achieved in stages (referred to as a step acquisition),
the treatment of gains from a bargain purchase, the recognition of contingencies
in business combinations, the treatment of in-process research and development
in a business combination as well as the treatment of recognizable deferred tax
benefits. SFAS 141R is effective for business combinations closed in fiscal
years beginning after December 15, 2008. The Company has evaluated the impact of
SFAS 141R and has concluded that results of operations, cash flows or financial
position will only be impacted in relation to future business combination
activities, if any.
In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
157") which defines fair value, establishes a framework for measuring fair value
in GAAP and expands disclosures about fair value measurements. SFAS 157 applies
under other accounting pronouncements that require or permit fair value
measurements, FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS 157 does not require any new fair value measurements, however,
for some entities; application of SFAS 157 will change current practice. SFAS
157 was effective for financial statements issued for the first fiscal year
beginning after November 15, 2007 and interim periods within those fiscal years.
Adoption of SFAS 157 did not have a material impact on results of operations,
cash flows or financial position. In February 2008, FASB issued FASB Staff
Position No. 157-2 ("SFAS 157-2") that deferred the effective date of SFAS 157
for nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis, to fiscal years, and interim periods within those fiscal years, beginning
after November 15, 2008. In addition, FASB also agreed to exclude from the scope
of FASB 157 fair value measurements made for purposes of applying SFAS No. 13,
"Accounting for Leases" and related interpretive accounting pronouncements. The
adoption of SFAS 157-2 did not have a material impact on results of operations,
cash flows or financial position.
12
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Statements
The following discussion of our financial condition and results of operations
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Actual results and the timing of certain events could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including:
o our history of operating losses, and expectation that those losses will
continue;
o we have a limited amount of cash available to fund our operations,
consequently, we may not be able to realize the anticipated benefits
of the patent portfolio we acquired from Network Engineering Software;
o that a significant portion of our operating revenue has been and
continues to be earned from a very limited number of significant
customers;
o that our stock price has been volatile and you could lose your
investment; and
o other factors, including those set forth under Item 1A, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" in our 2008 10-K Report and in other documents we have
filed with the Securities and Exchange Commission.
These factors could have a material adverse effect upon our business, results of
operations and financial condition.
Overview
We are developers of business connectivity software, including Unix, Linux and
Windows server-based software, with an immediate focus on web-enabling
applications for use and/or resale by independent software vendors ("ISVs"),
corporate enterprises, governmental and educational institutions, and others. We
have also made significant investments in intellectual property and have pursued
various means of monetizing such investments. We conduct and manage our business
based on these two segments, which we refer to as our "software" and
"Intellectual Property" segments, respectively.
Server-based computing, which is sometimes referred to as thin-client computing,
is a computing model where traditional desktop software applications are
relocated to run entirely on a server, or host computer. This centralized
deployment and management of applications reduces the complexity and total costs
associated with enterprise computing. Our software architecture provides
application developers with the ability to relocate applications traditionally
run on the desktop to a server, or host computer, where they can be run over a
variety of connections from remote locations to a variety of display devices.
With our server-based software, applications can be web-enabled, without any
modification to the original application software required, allowing the
applications to be run from browsers or portals. Our server-based technology can
web-enable a variety of Unix, Linux or Windows applications.
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 generally require us to make judgments and
estimates about matters that are uncertain at the time we make the estimates,
and different estimates, which also would have been reasonable, could have been
used, which would have resulted in different financial results. Our critical
accounting policies are identified in our 2008 10-K Report, and include: revenue
recognition, long-lived assets, patents, and stock-based compensation. The
following operating results should be read in conjunction with our critical
accounting policies.
Results of Operations for the Three-Month Periods Ended March 31,
2009 and 2008.
Revenue
Software Revenue
Our software revenue has historically been primarily derived from product
licensing fees and service fees from maintenance contracts. Other sources of
13
software revenue include private labeling fees, sales of software development
kits and training. Software development kits are tools that allow end users to
develop, interface and brand their own applications for use in conjunction with
either our Windows or Unix/Linux products.
Software revenue for the three-month periods ended March 31, 2009 and 2008 was
as follows:
2009 Over (Under) 2008
-------------------------------
Revenue 2009 2008 Dollars Percent
- ----------------------- --------------- ---------------- ----------------- ----------
Product Licenses
Windows $ 436,600 $ 429,600 $ 7,000 2%
Unix 326,200 348,200 (22,000) -6%
--------------- ---------------- -----------------
762,800 777,800 (15,000) -2%
--------------- ---------------- -----------------
Service Fees
Windows 283,700 243,700 40,000 16%
Unix 287,600 279,600 8,000 3%
--------------- ---------------- -----------------
571,300 523,300 48,000 9%
--------------- ---------------- -----------------
Other 75,000 11,200 63,800 570%
--------------- ---------------- -----------------
Total Revenue $ 1,409,100 $ 1,312,300 $ 96,800 7%
=============== ================ =================
During the three month period ended March 31, 2009 the increase in Windows-based
product licenses revenue was offset by a decrease in Unix-based product licenses
revenue, as compared with the same period of the prior year. Such revenue can
vary from period to period because a significant portion of this revenue has
historically been earned, and continues to be earned, from a limited number of
significant customers, most of whom are resellers. Consequently, if any of these
significant customers change their order level, or fail to order during the
reporting period, our product licenses revenue could be materially impacted. We
expect this situation to continue throughout the next several quarterly
reporting periods.
The increase in service fees for the three-month period ended March 31, 2009, as
compared with the same period of the prior year, was primarily a result of the
continued growth of the number of licenses our end-user customers have
installed. Since our customers typically purchase maintenance contracts, and,
subsequently, renew them upon expiration, as end-user customers continue to
deploy more and more of our products, the revenue we are able to recognize from
the sale of such maintenance contracts increases. We expect aggregate service
fees revenue for 2009 to exceed those of 2008.
Other revenue increased primarily as a result of recognizing revenue from three
private labeling transactions during the three-month period ended March 31,
2009, as opposed to recognizing revenue from only one such transaction during
the three-month period ended March 31, 2008.
Intellectual Property Revenue
For the three-month periods ended March 31, 2009 and 2008, all of our revenue
was derived from our software segment. Revenues from our intellectual property
segment are non-predictable and are dependent upon the outcome of pending
litigation and the results of licensing discussions with companies potentially
infringing upon our patents.
Cost of Revenue
Software Cost of Revenue
Software cost of revenue is comprised primarily of service costs, which
represent the costs of customer service, and product costs. 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 Sates
("GAAP"), research and development costs for new product development, after
technological feasibility is established, are recorded as "capitalized software"
on our balance sheet. Such capitalized costs are subsequently amortized as cost
of revenue over the shorter of three years or the remaining estimated life of
the products. No such costs were capitalized during either of the three-month
periods ended March 31, 2009 or 2008.
Software cost of revenue decreased by $25,700, or 16%, to $132,900, for the
three months ended March 31, 2009, from $158,600 for the same period of 2008.
Cost of revenue was 9% and 12% of revenue for the three months ended March 31,
2009 and 2008, respectively.
14
Software cost of revenue for the three-month periods ended March 31, 2009 and
2008 was as follows:
2009 Over (Under) 2008
----------------------
Description 2009 2008 Dollars Percent
------------- ---------- --------- ------------ -------
Service costs $ 127,400 $ 144,800 $ (17,400) -12%
Product costs 5,500 13,800 (8,300) -60%
---------- --------- ------------
$ 132,900 $ 158,600 $ (25,700) -16%
========== ========= ============
Service costs and product costs both decreased during the three-month period
ended March 31, 2009, as compared with the same period of the prior year. The
decrease in service costs was primarily as a result of a change in the mix of
employees providing customer service as well as the time spent by each providing
such services. The decrease in product costs was as a result of the timing of
the renewal of a service contract for certain software that we license and
incorporate into our product offerings.
Included in service costs for the three-month periods ended March 31, 2009 and
2008 was non-cash stock-based compensation costs aggregating approximately
$2,400 and $5,300, respectively.
We expect 2009 software cost of revenue to approximate 2008 levels.
Intellectual Property Cost of Revenue
For the three-month periods ended March 31, 2009 and 2008, all of our cost of
revenue was incurred from the sales of our software products. Cost of revenue
from Intellectual Property sales are non-predictable and are dependent upon the
outcome of pending litigation and the results of licensing discussions with
companies potentially infringing upon our patents.
Selling and Marketing Expenses
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 period ended March 31, 2009
increased by $80,500, or 20%, to $489,000, from $408,500 for the same period of
2008. Selling and marketing expenses were 35% and 31% of revenue for the
three-month periods ended March 31, 2009 and 2008, respectively.
Employee costs, the costs of outside services and travel all increased during
the three-month period ended March 31, 2009 as compared to the three-month
period ended March 31, 2008. Employee costs were $21,800 higher primarily due to
higher commissions, resulting from a higher level of sales bookings, and
increased health care costs. Outside services were $32,500 higher as a result of
certain costs associated with implementing an integrated sales management
software package and an increase in general marketing activities. Travel costs
were $23,200 higher primarily as a result of costs associated with our Asian
sales representative, and others, visiting customers and prospects in Asia.
Included in employee costs were non-cash stock-based compensation costs
aggregating approximately $4,400 and $10,600, respectively, for the three-month
periods ended March 31, 2009 and 2008.
We currently expect our full-year 2009 sales and marketing expense to be
somewhat higher than 2008 levels.
General and Administrative Expenses
General and administrative expenses primarily consist of employee costs
(inclusive of non-cash stock-based compensation expense), amortization and
depreciation, legal, professional and other outside services (including those
related to realizing benefits from our patent-related assets), travel and
entertainment, insurance, certain costs associated with being a publicly held
corporation, and bad debts expense.
General and administrative expenses decreased by $205,000, or 21%, to $760,000,
for the three-month period ended March 31, 2009, from $965,400 for the same
period of 2008. General and administrative expenses were approximately 54% and
74% of revenues for the three-month periods ended March 31, 2009 and 2008,
respectively.
The main factors that contributed to the decrease in general and administrative
expense for the three-month period ended March 31, 2009, as compared with the
same period of 2008, were an aggregate $105,100 decrease in depreciation and
amortization, primarily as a result of the reduction in the net book value of
15
our patent portfolio after the recording of an impairment charge against the
portfolio during the fourth quarter of the year ended December 31, 2008, and an
aggregate $85,700 decrease in employee costs, primarily as a result of
termination of one employee in our patent group during the three-month period
ended March 31, 2009 and a decrease in non-cash stock-based compensation
expense, which resulted from the decrease in, and continued low fair market
value of our common stock.
Costs associated with other individual components of general and administrative
expense, notably travel and entertainment, insurance, rent, costs associated
with being a public entity and bad debts expense did not change significantly
during the three-month period ended March 31, 2009, as compared with the same
period of the prior year.
Included in general and administrative employee costs was non-cash stock-based
compensation expense aggregating $25,300 and $74,900, respectively, for the
three-month periods ended March 31, 2009 and 2008.
We currently expect 2009 general and administrative expenses to approximate 2008
levels.
Research and Development Expenses
Research and development expenses consist primarily of employee costs (inclusive
of stock-based compensation expense), payments to contract programmers and rent.
Research and development expenses increased by $301,700, or 62%, to $788,100,
for the three-month period ended March 31, 2009, from $486,400 for the same
period of 2008. Research and development expenses were approximately 56% and 37%
of revenues for the three-month periods ended March 31, 2009 and 2008,
respectively.
Under GAAP, all costs of product development incurred once technological
feasibility has been established, but prior to general release of the product,
are typically capitalized and amortized to expense over the estimated life of
the underlying product, rather than being charged to expense in the period
incurred. No such product development costs were capitalized during either of
the three-month periods ended March 31, 2009 or 2008.
Factors contributing to the increase in research and developments costs during
the three-month period ended March 31, 2009, as compared with the same period of
the prior year included; an $149,200 increase in employee costs, which resulted
from having four more employees, and an $149,800 increase in outside services as
we increased our use of contract engineers to assist in research and development
activities surrounding GO-Global for Windows. Partially offsetting these
increases was an $8,500 decrease in rent, related to the closure of our office
in Israel during 2008.
Included in research and development employee costs was non-cash stock-based
compensation expense aggregating $19,500 and $34,300, respectively, for the
three-month periods ended March 31, 2009 and 2008.
We currently expect 2009 research and development expenses to be somewhat higher
as compared with 2008 levels as a result of the increases to our engineering
staff, and a continued increase in the use of outside consultants and our
overall investments in this area.
Segment Operating Loss
Segment operating loss for the three-month periods ended March 31, 2009 and 2008
was as follows:
Three Months Ended March 31,
----------------------------------
Loss From Operations 2009 2008
--------------------------------- --------------- ---------------
Software $ (479,000) $ (247,500)
Intellectual Property (281,900) (459,100)
--------------- ---------------
Consolidated Loss From Operations $ (760,900) $ (706,600)
=============== ===============
The $231,500 increase in the operating loss we experienced from our software
segment for the three-month period ended March 31, 2009, as compared with the
same period of the prior year, was primarily due to the increases in our selling
and marketing and research and development expenses, which were partially offset
by our increased revenue and decreased costs of revenue, as previously
discussed.
The $177,200 decrease in the operating loss we experienced from our intellectual
property segment for the three-month period ended March 31, 2009, as compared
with the same period of the prior year, was primarily due to a $104,200 decrease
in patent amortization, which resulted from the reduction in the net book value
of our patent portfolio after the recording of an impairment charge against the
portfolio during the fourth quarter of the year ended December 31, 2008, a
16
$48,600 decrease in employee costs, which resulted from the termination of one
patent segment employee during the three-month period ended March 31, 2009, and
an aggregate $27,600 decrease in legal fees related to our on-going patent
litigation efforts.
Other Income (Expense)
During the three-month period ended March 31, 2009, other income (expense) was
mainly comprised of a $13,700 expense charge related to the fair value
adjustment recorded against our Warrants liability (see Notes 8 and 9), which
was partially offset by interest income on excess cash. During the
three-month period ended March 31, 2008, other income (expense) consisted
primarily of interest income on excess cash.
We anticipate that other income (expense) for 2009 will be lower than 2008
levels due to the adoption of EITF 07-5 (see Note 8).
Net Loss
As a result of the foregoing items, net loss for the three-month period ended
March 31, 2009 was $768,600, an increase of $96,700, or 14%, from a net loss of
$671,900 for the same period of 2008.
Liquidity and Capital Resources
We are planning to increase investments in our software segment during 2009 and
to fund these increases through our cash on hand, as of March 31, 2009, and our
anticipated 2009 revenue streams. We are continually looking at ways to improve
our revenue streams, including through the development of new products and
further acquisitions. We continue to review potential acquisition and other
investment opportunities as they present themselves to us. We believe that
maintaining our current revenue streams, coupled with judicial use of our cash
on hand, will be sufficient to support our operational plans for the next twelve
months.
During the three-month periods ended March 31, 2009 and 2008, our reported net
losses of $768,600 and $671,900, respectively, included significant non-cash
items, such as; depreciation and amortization of $141,600 and $238,800,
respectively, which were primarily related to amortization of our patents; and
stock-based compensation expense of $51,600 and $125,100, respectively.
During the three-month periods ended March 31, 2009 and 2008 we closely
monitored our investing activities, spending approximately a net $0 and $18,400,
respectively, in those activities. Our investing activities were primarily
comprised of fixed asset purchases, mainly office furniture and equipment. Our
financing activities for the three-month periods ended March 31, 2009 and 2008
were comprised of receiving proceeds from the sale of stock to our employees
under the terms of our employee stock purchase plan.
Cash and Cash Equivalents
As of March 31, 2009, cash and cash equivalents were $3,603,300, as compared
with $3,742,200 as of December 31, 2008, a decrease of $138,900, or 4%. The
majority of this decrease was due to the consumption of $139,700 of cash and
cash equivalents by our operations.
Accounts Receivable, net
At March 31, 2009 and December 31, 2008, we had approximately $595,600 and
$970,000, respectively, in accounts receivable, net of allowances totaling
$32,000 at each respective date. 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 Buy Back Program
As of March 31, 2009, we had repurchased 294,000 shares of common stock for
$87,700 under terms of the Board approved stock buy back program. 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. All such
shares were repurchased during the three-month period ended September 30, 2008.
As of March 31, 2009, $912,300 remains authorized but unused.
17
Working Capital
As of March 31, 2009, we had current assets of $4,313,400 and current
liabilities of $2,641,900, which netted to working capital of $1,671,500.
Included in current liabilities was the current portion of deferred revenue of
$1,735,200.
Segment Fixed Assets
As of March 31, 2009, segment fixed assets (long-lived assets) were as follows:
March 31, 2009 December 31, 2008
---------------- -----------------
Software $ 1,269,400 $ 1,254,200
Accumulated depreciation/amortization (1,094,900) (1,071,500)
---------------- -----------------
174,500 182,700
---------------- -----------------
Intellectual Property 2,839,000 4,472,200
Accumulated depreciation/amortization (1,973,100) (3,488,200)
---------------- -----------------
865,900 984,000
---------------- -----------------
Unallocated 5,000 20,200
---------------- -----------------
Total Net Assets $ 1,045,400 $ 1,186,900
================ =================
Contingencies
On March 16, 2009, Juniper Networks, Inc. initiated a proceeding against us and
one of our resellers in the United States District Court in the Eastern District
of Virginia alleging infringement of one of their patents, namely; U.S. Patent
No. 6,243,752 (the "'752 Patent"), which protects Juniper's unique method of
transmitting data between a host computer and a terminal computer. On May 1,
2009, we filed an answer in which we asked the court to declare that the `752
Patent is not infringed and/or is invalid under the patent laws. We also
asserted a counterclaim against Juniper, alleging infringement of four of our
patents, namely; U.S. Patent Nos. 7,249,378, 7,269,847, 7,383,573, and
7,424,737. No trial date has been set by the court yet.
Separately, Juniper has petitioned the United States Patent and Trademark Office
(the "PTO") to reexamine two of our patents, namely; U. S. Patent Nos. 5,826,014
and 6,061,798 (the "'014" and "'798" patents, respectively). On April 6, 2008,
the PTO ordered the reexamination of the `798 patent, and on July 25, 2008, the
PTO ordered the reexamination of the `014 patent. Juniper also asked the PTO to
reexamine our U.S. Patent No. 7,127,464 (the "'464" patent), which patent is
unrelated to any litigation. The PTO ordered the reexamination of the `464
patent on April 17, 2008. On January 26, 2009, the PTO issued a non-final
rejection of the single claim of the `798 patent. On March 26, 2009, we
responded with a disagreement to the PTO's non-final rejection and added 30 new
claims to the `798 patent. No response to our disagreement has yet been received
from the PTO. On December 4, 2008 the PTO issued a non-final office action on
the `464 patent. We did not respond to the non-final office action and the `464
patent has been abandoned. The PTO has not yet issued a first office action on
the `014 patent.
New Accounting Pronouncements
In April 2009, FASB issued FSP 107-1 and APB 28-1, "Interim Disclosures about
Fair Value of Financial Instruments" (collectively "FSP/APB") which increase the
frequency of fair value disclosures to a quarterly instead of annual basis. The
guidance relates to fair value disclosures for any financial instruments that
are not currently reflected on an entity's balance sheet at fair value. FSP/APB
is effective for interim and annual periods ending after June 15, 2009, but may
be adopted for interim and annual periods ending after March 15, 2009. The
adoption of FSP/APB did not have a material impact on results of operations,
cash flows or financial position.
In June 2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock" ("EITF
07-5") which provides that an entity should use a two step approach to evaluate
whether an equity-linked financial instrument (or embedded feature) is indexed
to its own stock, including evaluating the instrument's contingent exercise and
settlement provisions. It also clarifies on the impact of foreign currency
denominated strike prices and market-based employee stock option valuation
18
instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. See Note
8 for additional information..
In April 2008, FASB issued FSP FAS 142-3, "Determination of the Useful Life of
Intangible Assets" ("FSP"), which amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under FASB Statement No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
142 and the period of expected cash flows used to measure the fair value of the
asset under FASB Statement No. 141 (revised 2007), "Business Combinations," and
other accounting principles generally accepted in the United States. This FSP is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption
is prohibited. The adoption of this FSP did not have a material impact on
results of operations, cash flows or financial position.
In March 2008, FASB issued SFAS No. 161, "Disclosures about Derivatives
Instruments and Hedging Activities, an Amendment of FASB Statement No. 133"
("SFAS 161"). SFAS 161 requires enhanced disclosures about a company's
derivative and hedging activities. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. Adoption of SFAS 161 did not have a material impact on results of
operations, cash flows or financial position.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R") which replaces SFAS No. 141, "Business
Combinations." SFAS 141R establishes principles and requirements for recognizing
and measuring identifiable assets and goodwill acquired, liabilities assumed and
any noncontrolling interest in a business combination at their fair value at
acquisition date. SFAS 141R alters the treatment of acquisition related costs,
business combinations achieved in stages (referred to as a step acquisition),
the treatment of gains from a bargain purchase, the recognition of contingencies
in business combinations, the treatment of in-process research and development
in a business combination as well as the treatment of recognizable deferred tax
benefits. SFAS 141R is effective for business combinations closed in fiscal
years beginning after December 15, 2008. We have evaluated the impact of SFAS
141R and have concluded that results of operations, cash flows or financial
position will only be impacted in relation to future business combination
activities, if any.
In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
157") which defines fair value, establishes a framework for measuring fair value
in GAAP and expands disclosures about fair value measurements. SFAS 157 applies
under other accounting pronouncements that require or permit fair value
measurements, FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS 157 does not require any new fair value measurements, however,
for some entities; application of SFAS 157 will change current practice. SFAS
157 was effective for financial statements issued for the first fiscal year
beginning after November 15, 2007 and interim periods within those fiscal years.
Adoption of SFAS 157 did not have a material impact on results of operations,
cash flows or financial position. In February 2008, FASB issued FASB Staff
Position No. 157-2 ("SFAS 157-2") that deferred the effective date of SFAS 157
for nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis, to fiscal years, and interim periods within those fiscal years, beginning
after November 15, 2008. In addition, FASB also agreed to exclude from the scope
of FASB 157 fair value measurements made for purposes of applying SFAS No. 13,
"Accounting for Leases" and related interpretive accounting pronouncements. The
adoption of SFAS 157-2 did not have a material impact on results of operations,
cash flows or financial position.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
ITEM 4T. Controls and Procedures
Under the supervision and with the participation of our management, including
our Chief Executive Officer and 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 Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of March 31, 2009.
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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
March 31, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On August 13, 2008, we initiated a proceeding against Google Inc. ("Google") in
the United States District Court in the Eastern District of Texas alleging
infringement of four of our patents, namely; U.S. Patent Nos. 6,324,538,
6,850,940, 7,028,034 and 7,269,591, which protect our unique method of
maintaining an automated and network-accessible database. The suit alleges that
Google infringes our patents on their Web sites. The suit seeks permanent
injunctive relief along with unspecified damages. On October 8, 2008, Google
filed its Answers and Counterclaims seeking a declaratory judgment that they do
not infringe the patents referenced in the suit and that each of the patents in
the suit are invalid and unenforceable. On October 31, 2008, we filed our
answers to each of the counterclaims.
On March 10, 2008, we initiated a proceeding against Classified Ventures, LLC;
IAC/InterActiveCorp; Match.com (an operating business of IAC/InterActiveCorp);
Yahoo! Inc.; eHarmony.com; and CareerBuilder, LLC in the United States District
Court in the Eastern District of Texas alleging infringement of four of our
patents, namely; U.S. Patent Nos. 6,324,538, 6,850,940, 7,028,034 and 7,269,591,
which protect our unique method of maintaining an automated and
network-accessible database. The suit alleges that the named companies infringe
our patents on each of their Web sites. The suit seeks permanent injunctive
relief along with unspecified damages. During late April and early May 2008, the
opposing parties in the proceeding filed their Answers and Counterclaims seeking
a declaratory judgment that they do not infringe the patents in the suit and
that each of the patents in the suit are invalid and unenforceable. On June 5,
2008, we filed our answers to each of the opposing parties' counterclaims. On
August 13, 2008, the opposing parties filed their respective motions for early
hearing on inequitable conduct. Responses and replies were filed during August
and September 2008 addressing this motion. On August 21, 2008, IAC/interactive
Corp. was dismissed from the lawsuit without prejudice. On December 2, 2008 the
court issued a Docket Control Order setting the dates of April 27, 2011 for the
Markman Hearing and November 7, 2011 for jury selection.
During April 2009 we entered into settlement and licensing agreements with
CareerBuilder, LLC and Classified Ventures, LLC, which resolved all legal
disputes between us and them. The aggregate financial effect of these agreements
will be reported in our operating results for the three and six-month periods
ending June 30, 2009.
On August 28, 2007, we filed a proceeding against Juniper Networks, Inc.
("Juniper") in the United States District Court in the Eastern District of Texas
(the "court") alleging that certain of Juniper's products infringe three of our
patents, namely; U.S. Patent Nos. 5,826,014, 6,061,798 and 7,028,336, (the
"'014," "'798" and "'336" patents, respectively) which protect our fundamental
network security and firewall technologies. We seek preliminary and permanent
injunctive relief along with unspecified damages and fees. Juniper filed its
Answer and Counterclaims on October 26, 2007 seeking a declaratory judgment that
it does not infringe the `014, `798 and `336 patents and that all three of these
patents are invalid and unenforceable. Subsequent to October 26, 2007 and
through May 8, 2009, we and Juniper have filed further replies and responses
addressing the issues raised in our original complaint and Juniper's Answer and
Counterclaims. On May 30, 2008 the court issued a Docket Control Order setting
the dates of April 7, 2010 for the Markman Hearing and July 6, 2010 for jury
selection. Also on May 30, 2008, we served our Asserted Claims and Infringement
Contentions. On July 25, 2008, we filed an amended complaint removing the `336
patent from our infringement claim. Juniper responded with its answer and
counterclaim to the amended complaint on August 11, 2008. On September 5, 2008,
we filed a second amended complaint to correct Juniper's corporate name, which
was followed by Juniper's answer and our reply during October 2008. On January
27, 2009, Juniper filed a motion to change the venue to the Northern District of
California.
On March 16, 2009, Juniper initiated a proceeding against us and one of our
resellers in the United States District Court in the Eastern District of
Virginia alleging infringement of one of their patents, namely; U.S. Patent No.
6,243,752, which protects Juniper's unique method of transmitting data between a
host computer and a terminal computer. On May 1, 2009, we filed an answer in
which we asked the court to declare that the `252 Patent is not infringed and/or
is invalid under the patent laws. We also asserted a counterclaim against
Juniper, alleging infringement of four of our patents, namely; U.S. Patent Nos.
7,249,378, 7,269,847, 7,383,573, and 7,424,737. No trial date has been set by
the court yet.
Separately, Juniper has petitioned the United States Patent and Trademark Office
(the "PTO") to reexamine two of our patents, namely; the `014 and `798 patents.
On April 6, 2008, the PTO ordered the reexamination of the `798 patent, and on
July 25, 2008, the PTO ordered the reexamination of the `014 patent. Juniper has
also asked the PTO to reexamine our '464 patent, which patent is unrelated to
any litigation. The PTO ordered the reexamination of the `464 patent on April
17, 2008. On January 26, 2009, the PTO issued a non-final rejection of the
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single claim of the `798 patent. On March 26, 2009, we responded with a
disagreement to the PTO's rejection and added 30 new claims to the `798 patent.
No response to our disagreement has yet been received from the PTO. On December
4, 2008 the PTO issued a non-final office action on the `464 patent. We did not
respond to the office action and the `464 patent has been abandoned. The PTO has
not yet issued a first office action on the `014 patent.
ITEM 1A. Risk Factors
Not Applicable
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three-month period ended March 31, 2009, we granted the
following stock options:
o stock options to purchase an aggregate 513,500 shares of common
stock, at an exercise price of $0.05, were granted to
various non-executive employees.
o stock options to purchase an aggregate 425,000 shares of common stock,
at an exercise price of $0.05, were granted to our directors and
executive employees.
The grants of such stock options to the above-listed persons were not registered
under the Securities Act of 1933, because the stock options were offered and
sold in transactions not involving a public offering, exempt from registration
under the Securities Act pursuant to Section 4(2).
On January 8, 2008, our Board of Directors authorized a stock buy back 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 such share repurchases of our common stock were made during the three-month
period ended March 31, 2009 under our Board authorized buy back program.
ITEM 3. Defaults Upon Senior Securities
Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits
Exhibit 31 - Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32 - Section 1350 Certifications
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: May 15, 2009 Date: May 15, 2009
By: /s/ Robert Dilworth By: /s/ William Swain
------------------- -----------------
Robert Dilworth William Swain
Chief Executive Officer and Chief Financial Officer
Chairman of the Board (Principal Financial Officer and
(Principal Executive Officer) (Principal Accounting Officer)
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