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 June 30, 2009
Commission File Number: 0-21683
-------------------------------
GraphOn Corporation
(Exact name of registrant as specified in its charter)
----------------------------------------------------
Delaware 13-3899021
(State or 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 August 12, 2009 there were issued and outstanding 47,389,292 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 June 30, 2009
(unaudited) and December 31, 2008 2
Unaudited Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2009 and 2008 3
Unaudited Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 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 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4T. Controls and Procedures 23
PART II. OTHER INFORMATION
-------- -----------------
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits 25
Signatures 25
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
GraphOn Corporation
Condensed Consolidated Balance Sheets
-------------------------------------
(Unaudited)
Assets June 30, 2009 December 31, 2008
------ -------------- -----------------
Current Assets
Cash and cash equivalents $ 3,924,100 $ 3,742,200
Accounts receivable, net 912,400 970,000
Prepaid expenses 123,000 63,400
-------------- -----------------
Total Current Assets 4,959,500 4,775,600
-------------- -----------------
Patents, net 747,900 984,000
Other assets, net 156,400 202,900
-------------- -----------------
Total Assets $ 5,863,800 $ 5,962,500
============== =================
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
Accounts payable and accrued expense $ 821,700 $ 795,700
Liability attributable to warrants 4,200 -
Deferred revenue 1,833,800 1,744,600
-------------- -----------------
Total Current Liabilities 2,659,700 2,540,300
-------------- -----------------
Deferred revenue 862,000 858,500
Other liabilities - 28,400
-------------- -----------------
Total Liabilities 3,521,700 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
June 30, 2009 and December 31, 2008,
respectively 4,700 4,700
Additional paid-in capital 58,905,100 59,662,100
Accumulated deficit (56,567,700) (57,131,500)
-------------- -----------------
Total Stockholders' Equity 2,342,100 2,535,300
-------------- -----------------
Total Liabilities and Stockholders' Equity $ 5,863,800 $ 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 June 30, Six Months Ended June 30,
------------------------------------ ------------------------------------
2009 2008 2009 2008
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------------- ----------------- ---------------- ----------------
Revenue $ 3,271,000 $ 1,373,100 $ 4,680,100 $ 2,685,400
Costs of revenue 857,000 146,700 989,900 305,300
---------------- ----------------- ---------------- ----------------
Gross profit 2,414,000 1,226,400 3,690,200 2,380,100
---------------- ----------------- ---------------- ----------------
Operating expenses:
Selling and marketing 458,200 427,200 947,200 835,700
General and administrative 772,800 945,100 1,532,800 1,910,500
Research and development 723,900 599,400 1,512,000 1,085,800
---------------- ----------------- ---------------- ----------------
Total operating expenses 1,954,900 1,971,700 3,992,000 3,832,000
---------------- ----------------- ---------------- ----------------
Income (loss) from operations 459,100 (745,300) (301,800) (1,451,900)
---------------- ----------------- ---------------- ----------------
Other income, net 15,500 17,100 7,800 52,600
---------------- ----------------- ---------------- ----------------
Income (loss) before provision
for income tax 474,600 (728,200) (294,000) (1,399,300)
Provision for income tax 1,500 800 1,500 1,600
---------------- ----------------- ---------------- ----------------
Net income (loss) $ 473,100 $ (729,000) $ (295,500) $ (1,400,900)
================ ================= ================ ================
Earnings (loss) per share - basic
and diluted $ (0.01) $ (0.02) $ (0.01) $ (0.03)
================ ================= ================ ================
Average weighted common shares
outstanding - basic 47,142,292 47,096,401 47,138,977 47,093,104
================ ================= ================ ================
Average weighted common shares
outstanding - diluted 47,673,422 47,096,401 47,138,977 47,093,104
================ ================= ================ ================
<FN>
See accompanying notes to unaudited condensed consolidated financial statements
</FN>
3
GraphOn Corporation
Condensed Consolidated Statements of Cash Flows
-----------------------------------------------
Six Months Ended June 30,
---------------------------------
2009 2008
(Unaudited) (Unaudited)
------------ ------------
Cash Flows Provided By (Used In) Operating Activities:
------------------------------------------------------
Net Loss $ (295,500) $ (1,400,900)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 280,500 482,300
Stock-based compensation expense 106,200 214,700
Provision for doubtful accounts - 4,600
Gain on derivative instruments - warrants (500) -
Changes in operating assets and liabilities
Accounts receivable 57,600 132,800
Prepaid expense (51,900) (35,300)
Accounts payable and accrued expense (2,400) (102,000)
Deferred revenue 92,700 (13,100)
------------ ------------
Net Cash Provided By (Used In) Operating Activities 186,700 (716,900)
------------ ------------
Cash Flows Used In Investing Activities:
----------------------------------------
Purchases of equipment (5,600) (58,200)
Other assets - (200)
------------ ------------
Net Cash Used In Investing Activities (5,600) (58,400)
------------ ------------
Cash Flows Provided By Financing Activities:
--------------------------------------------
Proceeds from sale of common stock - employee
stock purchase plan 800 3,600
------------ ------------
Net Cash Provided By Financing Activities 800 3,600
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 181,900 (771,700)
Cash and Cash Equivalents, Beginning of Period 3,742,200 5,260,800
------------ ------------
Cash and Cash Equivalents, End of Period $ 3,924,100 $ 4,489,100
============ ============
<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.
Intellectual property license agreements provide for the payment of a fully paid
licensing fee to the Company in consideration for the grant of a one-time,
non-exclusive, license to manufacture and/or sell products covered by patented
technologies owned by the Company. Generally, the execution of these license
agreements also provides for the release of the licensee from certain past and
future claims, and the dismissal of any pending litigation between the Company
and the licensee. Pursuant to the terms of these license agreements, the Company
has no further obligation with respect to the grant of the license, including no
express or implied obligation to maintain or upgrade the patented technologies,
or provide future support or services to the licensee. Generally, the license
agreements provide for the grant of the license and releases upon execution of
the agreement. As such, the earnings process is complete upon the execution of
the license agreement, and revenue is recognized upon execution of the
agreement, and the determination that collectibility is probable.
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 or six-month periods ended June 30, 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 following table summarizes the stock-based compensation expense recorded by
the Company during the three and six-month periods ended June 30, 2009 and 2008
by income statement classification:
Three months ended Six months ended
June 30, June 30,
Income Statement ---------------------- ---------------------
Classification 2009 2008 2009 2008
- ------------------------ ---------- ---------- ---------- ----------
Cost of revenue $ 2,000 $ 5,500 $ 4,400 $ 10,800
Selling and marketing expense 4,400 8,400 8,800 19,000
General and administrative expense 22,000 46,300 47,300 121,200
6
Research and development expense 26,200 29,400 45,700 63,700
---------- ---------- ---------- ----------
$ 54,600 $ 89,600 $ 106,200 $ 214,700
========== ========== ========== ==========
The Company estimated the fair value of each stock-based award granted during
the three and six-month periods ended June 30, 2009 and 2008, as of the
respective dates of grant, using a binomial model with the assumptions set forth
in the following table:
Expected Risk-
Annualized Option Estimated Free
Estimated Forfeiture Term Exercise Interest
Volatility Rate (Years) Factor Rate Dividends
----------- ---------- -------- ---------- -------- ---------
For the three months ended June 30,
- -----------------------------------
2009 (1) - - - - - -
2008 158% 4% 7.5 10% 3.46% -
For the six months ended June 30,
- ---------------------------------
2009 180% 4% 7.5 10% 2.24%
2008 158.00-159.00% 4% 7.5 10% 3.15-3.46% -
<FN>
(1) No stock-based awards were granted during the three-month period ended
June 30, 2009.
</FN>
The Company also recognized compensation costs for common shares purchased under
its Employee Stock Purchase Plan ("ESPP") during the three and six-month periods
ended June 30, 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 and
six-month periods ended June 30, 2009 and 2008, the risk-free interest rate was
0.40% and 4.60%, respectively. 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 period ended June 30,
2008, exclusive of common shares purchased pursuant to the Company's ESPP, the
weighted average fair value was $0.28 per share. No such stock-based awards were
granted during the three-month period ended June 30, 2009. For stock-based
awards granted during the six-month periods ended June 30, 2009 and 2008,
exclusive of common shares purchased pursuant to the Company's ESPP, the
weighted average fair values were $0.05 and $0.34 per share, respectively.
The weighted average fair values of common shares purchased pursuant to the
Company's ESPP during the six-month periods ended June 30, 2009 and 2008 were
$0.05 and $0.41, respectively. No shares were purchased pursuant to the
Company's ESPP during the three-month periods ended June 30, 2009 or 2008.
The following table presents a summary of the status and activity of the
Company's stock option awards for the three-month periods ended March 31, 2009
and June 30, 2009.
7
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
-------------
Granted - -
Exercised - -
Forfeited or expired (1,030,170) $ 0.47
-------------
Outstanding - March 31, 2009 7,301,513 $ 0.39 6.19 $ 27,900
=============
Of the options outstanding as of June 30, 2009, 5,697,402 were vested, 1,541,112
were estimated to vest in future periods and 62,999 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.
As of June 30, 2009, there was approximately $99,700 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 June 30, 2009 and 2008 was comprised
as follows:
2009 Over (Under) 2008
-------------------------------
Revenue 2009 2008 Dollars Percent
- ----------------------- --------------- ---------------- ----------------- ----------
Product Licenses
Windows $ 510,200 $ 476,100 $ 34,100 7.2%
Unix 334,300 353,000 (18,700) -5.3%
--------------- ---------------- -----------------
844,500 829,100 15,400 1.9%
--------------- ---------------- -----------------
Itellectual property
licenses 1,850,000 - 1,850,000 na
Service Fees
Windows 287,300 248,400 38,900 15.7%
Unix 289,200 274,800 14,400 5.2%
--------------- ---------------- -----------------
576,500 523,200 53,300 10.2%
--------------- ---------------- -----------------
Other - 20,800 (20,800) -100.0%
--------------- ---------------- -----------------
Total Revenue $ 3,271,000 $ 1,373,100 $ 1,897,900 138.2%
=============== ================ =================
Revenue for the six-month periods ended June 30, 2009 and 2008 was comprised as
follows:
2009 Over (Under) 2008
-------------------------------
Revenue 2009 2008 Dollars Percent
- ----------------------- --------------- ---------------- ----------------- ----------
Product Licenses
Windows $ 946,800 $ 905,700 $ 41,100 4.5%
Unix 660,500 701,200 (40,700) -5.8%
--------------- ---------------- -----------------
1,607,300 1,606,900 400 0.0%
--------------- ---------------- -----------------
Intellectual property
licenses 1,850,000 - 1,850,000 na
8
Service Fees
Windows 571,000 492,100 78,900 16.0%
Unix 576,800 554,400 22,400 4.0%
--------------- ---------------- -----------------
1,147,800 1,046,500 101,300 9.7%
--------------- ---------------- -----------------
Other 75,000 32,000 43,000 134.4%
--------------- ---------------- -----------------
Total Revenue $ 4,680,100 $ 2,685,400 $ 1,994,700 74.3%
=============== ================ =================
On April 24, 2009, April 28, 2009 and May 26, 2009, the Company entered into
settlement and licensing agreements with CareerBuilder, LLC, Classified
Ventures, LLC and Google, Inc., respectively, which ended all legal disputes
between the Company and these entities and granted to each of these entities
irrevocable, perpetual, world-wide, non-exclusive licenses to all of the
Company's patents and patent applications.
5. Patents
Patents consisted of the following:
J une 30, 2009 December 31, 2008
---------------- -------------------
Patents $ 2,839,000 $ 2,839,000
Accumulated amortization (2,091,100) (1,855,000)
---------------- -------------------
$ 747,900 $ 984,000
================ ===================
Patent amortization, which aggregated $118,100 and $222,300 during the
three-month periods ended June 30, 2009 and 2008, respectively, and $236,100 and
$444,500 during the six-month periods ended June 30, 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 June
30, 2009 and December 31, 2008.
7. Liability Attributable to Warrants
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 Company'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:
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
9
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 June 30, 2009 using the following assumptions:
Estimated volatility 85%
Annualized forfeiture rate 0%
Expected option term (years) 0.62
Estimated exercise factor 10%
Approximate risk-free interest rate 0.36%
Expected dividend yield 0%
The Company classified the fair value of outstanding derivative instruments not
designated as hedging instruments as a liability attributable to warrants on its
condensed consolidated balance sheet and reported $4,200 of such liability as of
June 30, 2009.
The Company reported $14,200 and $500 of other income in its condensed
consolidated statement of operations for the three and six-month periods ended
June 30, 2009, respectively, related to the change in fair value of the
liability attributable to warrants during such periods.
The Company did not record a liability attributable to warrants on its condensed
consolidated balance sheet as of June 30, 2008, nor did it record any change in
fair value for such liability for either of the three or six-month periods then
ended as the effective date for the adoption of EITF 07-5 was January 1, 2009.
8. 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.
As of June 30, 2009, all of the Company's $4,200 liability attributable to
warrants reported at fair value was categorized as Level 3 inputs.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash and
cash equivalents, accounts receivable, and accounts payable and accrued expense,
approximate fair value because of their generally short maturities.
9. Stockholders' Equity - Stock Buy Back Program
The Company did not repurchase any of its stock under the terms of its Board
approved stock buy back program during either the three or six-month periods
ended June 30, 2009 or 2008. As of June 30, 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.
10
10. 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.
On June 18, 2009 the United States District Court in the Eastern District of
Virginia granted a motion filed by Juniper to transfer the Company's
counterclaim of patent infringement to the United States District Court in the
Eastern District of Texas. No trial date has been set by the court yet. On
August 12, 2009 the Company filed a motion to consolidate the patents
transferred from the Virginia case into the pending case in the Eastern District
of Texas. The motion to consolidate has not yet been ruled on by the court.
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 detailed disagreement with the PTO's
non-final rejection and added 30 new claims to the `798 patent. The PTO has not
yet responded to the Company's response.
On December 4, 2008 the PTO issued a non-final office action on the `464 patent.
Such non-final office action laid out the PTO's rejection of the `464 patent in
view of relevant prior art. The Company did not respond to the non-final office
action and the `464 patent has been abandoned.
On May 26, 2009, the PTO issued a non-final rejection of the single claim of the
`014 patent. On July 27, 2009, the Company responded with a detailed
disagreement with the PTO's non-final rejection and added 15 new claims to the
`014 patent. The PTO has not yet responded to the Company's response.
On March 10, 2008, the Company 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 the Company's patents, namely; U.S. Patent Nos.
6,324,538, 6,850,940, 7,028,034 and 7,269,591, which protect the Company's
unique method of maintaining an automated and network-accessible database. The
suit alleges that the named companies infringe the Company's 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, the Company
filed its 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. On March 30, 2009 the
court denied the motions for an early hearing on inequitable conduct. On May 11,
2009, in conjunction with the settlements (see Note 4), the court granted a
joint motion to dismiss Classified Ventures, LLC and CareerBuilder, LLC from the
case.
11. Supplemental Disclosure of Cash Flow Information
The Company disbursed $2,200 for the payment of interest expense during each of
the six-month periods ended June 30, 2009 and 2008. All of such monies were
disbursed during the three-month periods ended June 30, 2009 and 2008,
respectively.
The Company disbursed $1,600 and $42,800 for the payment of income taxes during
the six-month periods ended June 30, 2009 and 2008, respectively. All of such
monies were disbursed during the three-month periods ended June 30, 2009 and
2008, respectively.
11
As more fully explained in Note 7, 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 a liability attributable to warrants, 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).
Additionally, the Company recorded as other income a $14,200 non-cash fair value
adjustment to its liability attributable to warrants during the three-month
period ended June 30, 2009. During the six-month period ended June 30, 2009, the
Company recorded as other income an aggregate $500 non-cash fair value
adjustment to its liability attributable to warrants. No such adjustment was
recorded during either the three-month or six-month periods of the prior year as
the effective date for the adoption of EITF 07-5 was January 1, 2009.
12. Earnings (Loss) Per Share
For the three months ended June 30, 2009, potentially dilutive securities
include warrants and options for the Company's common stock. Diluted weighted
average commons shares outstanding for the three months ended June 30, 2009
consist of the following:
For the Three Months Ended June 30, 2009
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- -----------
Net income - basic $ 473,100 47,142,292 $ 0.01
Effect of dilutive securities
Stock options - 531,130
----------- -------------
Net income - diluted $ 473,100 47,673,422 $ 0.01
=========== =============
For each of the three and six-month periods ended June 30, 2008, 21,123,486
shares of common stock equivalents were excluded from the computation of diluted
loss per share since their effect would be antidilutive. For the six-month
period ended June 30, 2009, 16,776,217 shares of common stock equivalents were
excluded from the computation of diluted loss per share since their effect would
be antidilutive.
13. 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
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 June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
Revenue 2009 2008 2009 2008
-------------------------- --------------- --------------- --------------- ---------------
Software $ 1,421,000 $ 1,373,100 $ 2,830,100 $ 2,685,400
Intellectual Property 1,850,000 - 1,850,000 -
--------------- --------------- --------------- ---------------
Consolidated Revenue $ 3,271,000 $ 1,373,100 $ 4,727,700 $ 2,685,400
=============== =============== =============== ===============
Segment gain (loss) from operations was as follows:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- ----------------------------------
Gain (Loss) From Operations 2009 2008 2009 2008
----------------------------- --------------- --------------- --------------- ---------------
Software $ (382,900) $ (337,600) $ (862,000) $ (585,100)
Intellectual Property 842,000 (407,700) 560,200 (866,800)
--------------- --------------- --------------- ---------------
Consolidated Loss From
Operations $ 459,100 $ (745,300) $ (301,800) $ (1,451,900)
=============== =============== =============== ===============
12
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:
June 30, 2009 December 31, 2008
---------------- -----------------
Software $ 1,267,400 $ 1,254,200
Accumulated depreciation/amortization (1,115,900) (1,071,500)
---------------- -----------------
151,500 182,700
---------------- -----------------
Intellectual Property 2,839,000 2,839,000
Accumulated depreciation/amortization (2,091,100) (1,855,000)
---------------- -----------------
747,900 984,000
---------------- -----------------
Unallocated 4,900 20,200
---------------- -----------------
Total Net Assets $ 904,300 $ 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.
14. Subsequent Events
The Company has evaluated all subsequent events through August 14, 2009, the
date the financial statements were issued.
15. New Accounting Pronouncements
In May 2009, the Financial Accounting Standards Board ("FASB") issued SFAS No.
165, "Subsequent Events" ("SFAS 165") which establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. In
particular, SFAS 165 sets forth (a) the period after the balance sheet date
during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, (b) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements, and (c) the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. SFAS 165 is
effective for interim or annual financial reporting periods ending after June
15, 2009. The adoption of FAS 165 did not have a material impact on results of
operations, cash flows or financial position.
In April 2009, FASB issued FASB Staff position 107-1 ("FSP 107-1") and
Accounting Principles Board 28-1 ("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. The
adoption of this FSP/APB did not have a material impact on results of
operations, cash flows or financial position.
In June 2008, FASB ratified the Emerging Issues Task Force's 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 instruments on the evaluation. EITF 07-5 is
13
effective for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. See Note 7 for additional information.
In April 2008, FASB issued FSP 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. 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, 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.
14
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 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 and Six-Month Periods Ended June 30, 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
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 June 30, 2009 and 2008 was as
follows:
15
2009 Over (Under) 2008
-------------------------------
Revenue 2009 2008 Dollars Percent
- ----------------------- --------------- ---------------- ----------------- ----------
Product Licenses
Windows $ 510,200 $ 476,100 $ 34,100 7.2%
Unix 334,300 353,000 (18,700) -5.3%
--------------- ---------------- -----------------
844,500 829,100 15,400 1.9%
--------------- ---------------- -----------------
Service Fees
Windows 287,300 248,400 38,900 15.7%
Unix 289,200 274,800 14,400 5.2%
--------------- ---------------- -----------------
576,500 523,200 53,300 10.2%
--------------- ---------------- -----------------
Other - 20,800 (20,800) -100.0%
--------------- ---------------- -----------------
Total $ 1,421,000 $ 1,373,100 $ 47,900 3.5%
=============== ================ =================
Software revenue for the six-month periods ended June 30, 2009 and 2008 was as
follows:
2009 Over (Under) 2008
-------------------------------
Revenue 2009 2008 Dollars Percent
- ----------------------- --------------- ---------------- ----------------- ----------
Product Licenses
Windows $ 946,800 $ 905,700 $ 41,100 4.5%
Unix 660,500 701,200 (40,700) -5.8%
--------------- ---------------- -----------------
1,607,300 1,606,900 400 0.0%
--------------- ---------------- -----------------
Service Fees
Windows 571,000 492,100 78,900 16.0%
Unix 576,800 554,400 22,400 4.0%
--------------- ---------------- -----------------
1,147,800 1,046,500 101,300 9.7%
--------------- ---------------- -----------------
Other 75,000 32,000 43,000 134.4%
--------------- ---------------- -----------------
Total Revenue $ 2,830,100 $ 2,685,400 $ 144,700 5.4%
=============== ================ =================
During the three and six-month periods ended June 30, 2009 the increases in
Windows-based product licenses revenue were partially offset by decreases in
Unix-based product licenses revenue, as compared with the same periods 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 increases in service fees for the three and six-month periods ended June 30,
2009, as compared with the same periods of the prior year, were 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 for the six-month period ended June 30, 2009 increased, as
compared with the same period of the prior year, as a result of the sale of
private labeling kits. We have entered into four such sales during 2009, as
compared with only two such sales during 2008. Other revenue for the three-month
period ended June 30, 2009 decreased, as compared with the same period for the
prior year, as a result of the deferral of all revenue related to the sale of a
private labeling kit during such period as not all criteria necessary for
revenue recognition were present. We expect to be able to recognize all revenue
related to this transaction by December 31, 2009.
Intellectual Property Revenue
We derived $1,850,000 from our intellectual property segment during each of the
three and six-month periods ended June 30, 2009 as we entered into three
separate licensing agreements during such periods. We entered into no such
licensing agreements during either of the comparable periods of the prior year.
16
Revenues from our intellectual property segment are non-predictable and are
dependent upon the outcome of our currently pending litigation efforts.
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 or
six-month periods ended June 30, 2009 or 2008.
Software cost of revenue was 4% and 11% of total revenue for the three months
ended June 30, 2009 and 2008, respectively, and 6% and 11% of total revenue for
the six months ended June 30, 2009 and 2008, respectively.
Software cost of revenue for the three-month periods ended June 30, 2009 and
2008 was as follows:
2009 Over (Under) 2008
----------------------
Description 2009 2008 Dollars Percent
------------- ---------- --------- ------------ -------
Service costs $ 126,500 $ 124,800 $ 1,700 1%
Product costs 5,500 21,900 (16,400) -75%
---------- --------- ------------
$ 132,000 $ 146,700 $ (14,700) -10%
========== ========= ============
Software cost of revenue for the six-month periods ended June 30, 2009 and 2008
was as follows:
2009 Over (Under) 2008
----------------------
Description 2009 2008 Dollars Percent
------------- ---------- --------- ------------ -------
Service costs $ 253,900 $ 269,600 $ (15,700) -6%
Product costs 11,000 35,700 (24,700) -69%
---------- --------- ------------
$ 264,900 $ 305,300 $ (40,400) -13%
========== ========= ============
Service costs and product costs both decreased during the six-month period ended
June 30, 2009, as compared with the same period of the prior year. The decrease
in service costs for the six-month period ended June 30, 2009, as compared with
the same period of the prior year, 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 for both the three and
six-month period ended June 30, 2009, as compared with the same periods of the
prior year, 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.
Service costs include non-cash stock-based compensation. Such costs aggregated
approximately $2,000 and $5,500 for the three-month periods ended June 30, 2009
and 2008, respectively, and $4,400 and $10,800 for the six-month periods ended
June 30, 2009 and 2008, respectively.
We expect 2009 software cost of revenue to approximate 2008 levels.
Intellectual Property Cost of Revenue
For the three and six-month periods ended June 30, 2009, we incurred $725,000 of
contingent legal fees in conjunction with the intellectual property licenses
entered into during such periods. No such fees were incurred during either of
the comparable periods of the prior year as we did not enter into any
intellectual property licenses during those periods.
Cost of revenue from intellectual property sales are non-predictable and are
dependent upon the outcome of our currently pending litigation efforts.
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.
17
Selling and marketing expenses for the three-month period ended June 30, 2009
increased by $31,000, or 7%, to $458,200, from $427,200 for the same period of
2008. Selling and marketing expenses were 14% and 31% of revenue for the
three-month periods ended June 30, 2009 and 2008, respectively. For the
six-month period ended June 30, 2009 selling and marketing expenses increased by
$111,500, or 13%, to $947,200, from $835,700 for the same period of 2008.
Selling and marketing expenses were 20% and 31% of revenue for the six-month
periods ended June 30, 2009 and 2008, respectively.
Employee costs and the costs of outside services increased during both the three
and six-month periods ended June 30, 2009, as compared to the same periods of
the prior year. Employee costs were higher ($17,000 and $38,800 for the three
and six-month periods, respectively) primarily due to higher commissions and
bonuses, resulting from a higher level of sales bookings, and increased health
care costs. Outside services were higher ($19,400 and $56,300 for the three and
six-month periods, respectively) mainly as a result of certain costs associated
with implementing an integrated sales management software package. Travel
expenses were $9,000 lower during the three-month period ended June 30, 2009, as
compared with the same period of the prior year, however; for the six-month
period ended June 30, 2009, travel expenses were $14,100 higher than the prior
year. This resulted primarily as a result of the costs associated with our Asian
sales representative, and others, visiting customers and prospects in Asia
during the three months ended March 31, 2009. No such trips were made during the
three-months ended June 30, 2009 or during the three or six-month periods ended
June 30, 2008.
Included in employee costs were non-cash stock-based compensation costs
aggregating approximately $4,400 and $8,400, respectively, for the three-month
periods ended June 30, 2009 and 2008, and $8,800 and $19,000 for the six-month
periods ended June 30, 2009 and 2008, respectively.
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 $172,300 or 18%, to $772,800,
for the three-month period ended June 30, 2009, from $945,100 for the same
period of 2008. General and administrative expenses were approximately 23% and
69% of revenue for the three-month periods ended June 30, 2009 and 2008,
respectively. For the six-month period ended June 30, 2009, general and
administrative expenses decreased by $377,700, or 20%, to $1,532,800 from
$1,910,500 for the same period of 2008. General and administrative expenses were
approximately 32% and 71% of revenue for the six-month periods ended June 30,
2009 and 2008, respectively.
The main factors that contributed to the decrease in general and administrative
expense for the three and six-month periods ended June 30, 2009, as compared
with the same periods of 2008, were aggregate decreases in depreciation and
amortization ($105,700 and $210,800 for the three and six-month periods,
respectively), primarily as a result of 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, and
aggregate decreases in employee costs ($59,800 and $145,600 for the three and
six-month periods, respectively), 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
certain stock options becoming fully vested and the low fair value associated
with new grants .
Partially offsetting these decreases during the three-month period ended June
30, 2009 was an $18,200 increase in certain non-contingent legal fees associated
with our Juniper lawsuits, as compared with the same period of the prior year.
Partially offsetting these decreases during the six-month period ended June 30,
2009, as compared with the same period of the prior year, was a $27,500 increase
in costs associated with our Sarbanes-Oxley implementation and a $23,700
increase in travel, primarily resulting from increased time being spent by our
Chief Executive Officer in our New Hampshire engineering facility.
Costs associated with other individual components of general and administrative
expense, notably; insurance, rent, costs associated with being a public entity
and bad debts expense did not change significantly during either the three or
six-month periods ended June 30, 2009, as compared with the same periods of the
prior year.
18
Included in general and administrative employee costs was non-cash stock-based
compensation expense aggregating $22,000 and $46,300, respectively, for the
three-month periods ended June 30, 2009 and 2008, respectively, and $47,300 and
$121,200 for the six-month periods ended June 30, 2009 and 2008, respectively.
As noted above, general and administrative expenses have significantly decreased
during both the three and six-month periods ended June 30, 2009 as compared with
the same periods of the prior year. We do not expect this trend to continue
throughout the remainder of 2009. We expect that certain non-contingent legal
fees associated with our Juniper lawsuits will continue to increase throughout
the remainder of 2009 and such increases will exceed the aggregate decreases
noted above. We expect that aggregate general and administrative expenses for
2009 will slightly exceed 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, rent,
and depreciation
Research and development expenses increased by $124,500, or 21%, to $723,900,
for the three-month period ended June 30, 2009, from $599,400 for the same
period of 2008. Research and development expenses were approximately 22% and 44%
of revenue for the three-month periods ended June 30, 2009 and 2008,
respectively. For the six-month period ended June 30, 2009, research and
development expenses increased by $426,200, or 39%, to $1,512,000 from
$1,085,800 for the same period of the prior year. Research and development
expenses were approximately 32% and 40% of revenue for the six-month periods
ended June 30, 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 or six-month periods ended June 30, 2009 or 2008.
Factors contributing to the increase in research and developments costs during
both the three and six-month periods ended June 30, 2009, as compared with the
same periods of the prior year, included: increased employee costs ($68,500 and
$217,600, for the three and six-month periods, respectively), which resulted
from having four more employees; and increased outside services ($93,000 and
$242,800, for the three and six-month periods, respectively) as we increased our
use of contract engineers to assist in research and development activities
surrounding GO-Global for Windows. Partially offsetting these increases were
decreases in rent ($9,500 and $17,900, for the three and six-month periods,
respectively), 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 $26,200 and $29,400, respectively, for the
three-month periods ended June 30, 2009 and 2008, respectively, and $45,700 and
$63,700 for the six-month periods ended June 30, 2009 and 2008, respectively.
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 Gain (Loss)
Segment operating gain (loss) for the three and six-month periods ended June 30,
2009 and 2008 was as follows:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- ----------------------------------
Gain (Loss) From Operations 2009 2008 2009 2008
----------------------------- --------------- --------------- --------------- ---------------
Software $ (382,900) $ (337,600) $ (862,000) $ (585,100)
Intellectual Property 842,000 (407,700) 560,200 (866,800)
--------------- --------------- --------------- ---------------
Consolidated Loss From
Operations $ 459,100 $ (745,300) $ (301,800) $ (1,451,900)
=============== =============== =============== ===============
The increases in the operating loss we experienced from our software segment for
both the three and six-month periods ended June 30, 2009, as compared with the
same periods of the prior year, were 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.
19
The gains we experienced from our intellectual property segment for both the
three and six-month periods ended June 30, 2009, as compared with the same
periods of the prior year were due to the intellectual property licensing
settlements we entered into during such periods of 2009. No such settlements
were entered into during the prior year.
Other Income, net
During the three and six-month periods ended June 30, 2009, other income, net,
included $14,200 and $500, respectively, of income related to the fair value
adjustment recorded against our liability attributable to warrants (see Note 7).
Also included in other income, net was interest income earned on excess cash
balances. During the three and six-month periods ended June 30, 2008, other
income, net, was primarily comprised of interest income earned on excess cash
balances.
Net Income (Loss)
As a result of the foregoing items, net income for the three-month period ended
June 30, 2009 was $459,100, as compared with a net loss of $729,000 for the same
period of 2008. For the six-month period ended June 30, 2009, net loss was
$295,500, a decrease of $1,105,400, or 79%, from a net loss of $1,400,900 for
the same period of 2008.
Liquidity and Capital Resources
We have increased investments in our software segment during the six-month
period ended June 30, 2009, as compared with the same period of the prior year,
and anticipate this trend to continue for the remainder of 2009. We have funded
and expect to continue to fund these increases through our cash on hand, as of
June 30, 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 six-month periods ended June 30, 2009 and 2008, our reported net
losses of $295,500 and $1,400,900, respectively, included significant non-cash
items, such as; depreciation and amortization of $280,500 and $482,300,
respectively, which were primarily related to amortization of our patents; and
stock-based compensation expense of $106,200 and $214,700, respectively.
During the six-month periods ended June 30, 2009 and 2008 we closely monitored
our investing activities, spending approximately $5,600 and $58,200,
respectively, primarily in fixed asset purchases that were mainly office
furniture and equipment. Our financing activities for the six-month periods
ended June 30, 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.
During the six-month period ended June 30, 2009 we also made the second of three
payments on a software license.
Cash and Cash Equivalents
As of June 30, 2009, cash and cash equivalents were $3,924,100, as compared with
$3,742,200 as of December 31, 2008, an increase of $181,900, or 5%. The majority
of this increase was due to the proceeds of the intellectual property settlement
licenses entered into during the period, which were partially offset by the
consumption of cash by other elements of our operations.
Accounts Receivable, net
At June 30, 2009 and December 31, 2008, we had approximately $912,400 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 June 30, 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 June 30, 2009, $912,300 remains authorized but unused.
20
Working Capital
As of June 30, 2009, we had current assets of $4,959,500 and current liabilities
of $2,659,700, which netted to working capital of $2,299,800. Included in
current liabilities was the current portion of deferred revenue of $1,833,800.
Segment Fixed Assets
As of June 30, 2009 and December 31, 2008, segment fixed assets (long-lived
assets) were as follows:
June 30, 2009 December 31, 2008
---------------- -----------------
Software $ 1,267,400 $ 1,254,200
Accumulated depreciation/amortization (1,115,900) (1,071,500)
---------------- -----------------
151,500 182,700
---------------- -----------------
Intellectual Property 2,839,000 2,839,000
Accumulated depreciation/amortization (2,091,100) (1,855,000)
---------------- -----------------
747,900 984,000
---------------- -----------------
Unallocated 4,900 20,200
---------------- -----------------
Total Net Assets $ 904,300 $ 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.
On June 18, 2009 the United States District Court in the Eastern District of
Virginia granted a motion filed by Juniper to transfer our counterclaim of
patent infringement to the United States District Court in the Eastern District
of Texas. 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 detailed disagreement with the PTO's non-final rejection and
added 30 new claims to the `798 patent. The PTO has not yet responded to our
response.
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.
On May 26, 2009, the PTO issued a non-final rejection of the single claim of the
`014 patent. On July 27, 2009, we responded with a detailed disagreement with
the PTO's non-final rejection and added 15 new claims to the `014 patent. The
PTO has not yet responded to our response.
New Accounting Pronouncements
In May 2009, FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165") which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. In particular, SFAS 165 sets forth (a) the period
after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition
or disclosure in the financial statements, (b) the circumstances under which an
21
entity should recognize events or transactions occurring after the balance sheet
date in its financial statements, and (c) the disclosures that an entity should
make about events or transactions that occurred after the balance sheet date.
SFAS 165 is effective for interim or annual financial reporting periods ending
after June 15, 2009. The adoption of FAS 165 did not have a material impact on
results of operations, cash flows or financial position.
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. We are
assessing the impact of FSP/APB but do not expect it to have a material impact
on results of operations, cash flows or financial position.
In June 2008, 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
instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years.
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, 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
22
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 June 30, 2009.
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, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On April 24, 2009, April 28, 2009 and May 26, 2009, we entered into settlement
and licensing agreements with CareerBuilder, LLC, Classified Ventures, LLC and
Google, Inc., respectively, which ended all legal disputes between us and these
entities and granted to each of these entities irrevocable, perpetual,
world-wide, non-exclusive licenses to all of our patents and patent
applications.
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. On June 18, 2009, The United
States District Court in the Eastern District of Virginia granted a motion filed
by Juniper to transfer our counterclaim of patent infringement to the United
States District Court in the Eastern District of Texas. 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
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. The PTO has not yet responded to our response.
On December 4, 2008 the PTO issued a non-final office action on the `464 patent.
We did not respond to the non-fianl office action and the `464 patent has been
abandoned.
On May 26, 2009, the PTO issued a non-final rejection of the single claim of the
`014 patent. On July 27, 2009, we responded with a detailed disagreement with
the PTO's non-final rejection and added 15 new claims to the `014 patent. The
PTO has not yet responded to our response.
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
24
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. On March 30, 2009 the
court denied the motions for an early hearing on inequitable conduct. On May 11,
2009, in conjunction with the settlements, the court granted a joint motion to
dismiss Classified Ventures, LLC and CareerBuilder, LLC from the case.
ITEM 1A. Risk Factors
Not Applicable
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
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 June 30, 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: August 14, 2009 Date: August 14, 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)