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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2003
Commission File Number: 0-21683
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GraphOn Corporation
(Exact name of Registrant as specified in its charter)
----------------------
Delaware 13-3899021
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
400 Cochrane Circle
Morgan Hill, CA 95037
(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 is an accelerated
filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of May 1, 2003 there were issued and outstanding 16,602,719 shares of
the Registrant's Common Stock, par value $0.0001.
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GRAPHON CORPORATION
FORM 10-Q
Table of Contents
Page
PART I.
Item 1.Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Operations
and Comprehensive Loss 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3.Quantitative and Qualitative Disclosures About
Market Risk 16
Item 4.Controls and Procedures 16
PART II.
Item 6.Exhibits and Reports on Form 8-K 17
Signatures 18
Certifications 18
PART I--FINANCIAL INFORMATION
ITEM I Financial Statements
GRAPHON CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
ASSETS ------------ ------------
------------ (Unaudited)
Current Assets:
Cash and cash equivalents $ 1,620,600 $ 1,958,200
Accounts receivable, net of allowance for
doubtful accounts of $50,300 and $50,300 451,700 337,900
Prepaid expenses and other current assets 69,200 192,000
------------ -----------
Total Current Assets 2,141,500 2,488,100
------------ -----------
Purchased technology, net 956,100 1,163,100
Capitalized software, net 475,800 406,500
Other assets 424,400 491,900
------------ -----------
TOTAL ASSETS $ 3,997,800 $ 4,549,600
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable $ 139,300 $ 228,700
Accrued expenses 662,400 795,100
Deferred revenue 846,100 796,100
------------ -----------
Total Current Liabilities 1,647,800 1,819,900
------------ -----------
Commitments and contingencies - -
Stockholders' Equity
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, $0.0001 par value, 45,000,000
shares authorized, 16,16,602,719 and 16,580,719
shares issued and outstanding 1,700 1,700
Additional paid in capital 45,984,500 45,982,500
Notes receivable (51,300) (50,300)
Accumulated other comprehensive loss (3,000) (2,400)
Accumulated deficit (43,581,900) (43,201,800)
------------ -----------
Total Stockholders' Equity 2,350,000 2,729,700
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,997,800 $ 4,549,600
============ ===========
See accompanying notes to consolidated financial statements.
2
GRAPHON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended
March 31,
--------------------------
2003 2002
----------- -----------
(Unaudited) (Unaudited)
Revenue $ 1,044,000 $ 585,700
Cost of revenue 324,600 454,600
----------- -----------
Gross Profit 719,400 131,100
----------- -----------
Operating Expenses:
Selling and marketing 420,900 808,800
General and administrative 356,400 643,700
Research and development 328,000 812,800
Restructuring charge - 1,490,400
----------- -----------
Total Operating Expenses 1,105,300 3,755,700
----------- -----------
Loss From Operations (385,900) (3,624,600)
Other Income (Expense):
Interest and other income 5,800 62,700
Interest and other expense - (28,600)
----------- -----------
Total Other Income 5,800 34,100
----------- -----------
Loss Before Provision for Income Taxes (380,100) (3,590,500)
Provision for Income Taxes - -
----------- -----------
Net Loss $ (380,100) $(3,590,500)
Other Comprehensive Loss, net of tax
Unrealized holding loss on investment - (7,400)
Foreign currency translation adjustment (600) (500)
----------- -----------
Comprehensive loss $ (380,700) $(3,598,400)
=========== ===========
Basic and Diluted Loss per Common Share $ (0.02) $ (0.21)
=========== ===========
Weighted Average Common Shares Outstanding 16,594,408 17,353,663
=========== ===========
See accompanying notes to consolidated financial statements.
3
GRAPHON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
---------------------------
2003 2002
------------ ------------
(Unaudited) (Unaudited)
Cash Flows From Operating Activities:
Net loss $ (380,100) $ (3,590,500)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 319,500 526,700
Restructuring charge - 559,800
Amortization of deferred compensation - 94,200
Provision for doubtful accounts - (100,000)
Changes in operating assets and liabilities:
Accounts receivable (113,800) 216,400
Prepaid expenses and other assets 122,800 86,500
Accounts payable (89,400) (35,000)
Accrued expenses (132,700) 378,300
Deferred revenue 50,000 (11,300)
------------ ------------
Net Cash Used In Operating Activities (223,700) (1,874,900)
------------ ------------
Cash Flows From Investing Activities:
Purchase of available-for-sale securities - (510,400)
Proceeds from sale of available-for-sale securities - 978,700
Capitalization of software development costs (112,700) (63,300)
Capital expenditures (1,600) -
Note receivable (1,000) -
------------ ------------
Net Cash (Used In) Provided By Investing Activities (115,300) 405,000
------------ ------------
Cash Flows From Financing Activities:
Repayment of note payable - (26,600)
Proceeds from note payable - 5,400
Net proceeds from issuance of common stock 2,000 -
------------ ------------
Net Cash (Used In) Provided By Financing Activities 2,000 (21,200)
------------ ------------
Effect of exchange rate fluctuations on cash and
cash equivalents (600) (500)
------------ ------------
Net Decrease in Cash and Cash Equivalents (337,600) (1,491,600)
Cash and Cash Equivalents, beginning of period 1,958,200 3,952,600
------------ ------------
Cash and Cash Equivalents, end of period $ 1,620,600 $ 2,461,000
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest expense $ - $ 200
Noncash Investing and Financing Activities:
Notes receivable issued for purchase of common stock $ - $ 50,000
See accompanying notes to consolidated financial statements.
4
GRAPHON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited consolidated financial statements of GraphOn Corporation (the
Company) included herein have been prepared in accordance with the instructions
for Form 10-Q and, therefore, do not include all information and footnotes
necessary for a complete presentation of the Company's results of operations,
financial position and cash flows.
The unaudited condensed financial statements included herein reflect all
adjustments (which include only normal, recurring adjustments in the quarterly
period ended March 31, 2003.) that are, in the opinion of management, necessary
to state fairly the results for the periods presented. This Quarterly Report on
Form 10-Q should be read in conjunction with the Company's audited financial
statements contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002, which was filed with the Securities and Exchange
Commission (the Commission) on March 31, 2003. 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, 2003, or any future
period.
The Company's financial statements have been presented on a going concern
basis, which contemplates the realization of assets and the settlement of
liabilities in the normal course of business. The Company has suffered from
recurring losses and has absorbed significant cash in its operating activities.
Further, the Company's cash balances, including both cash and cash equivalents
and available-for-sale securities, have declined significantly as of March 31,
2003 compared to March 31, 2002. These matters raise substantial doubt about the
ability of the Company to continue in existence as a going concern. The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of assets or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
Revenues as reported for the current period are significantly higher than the
same period in the prior year and management believes that revenue for the
second half of 2003 will be greater than revenue for the first half of 2003.
Although there can be no assurances that these revenues will materialize,
management has been encouraged by the performance of GO-Global for Windows since
its December 2002 commercial rollout as well as the growth in revenue being
generated by the Unix product line. In a little over three months since its
commercial release, GO-Global for Windows has replaced the legacy Windows
products for new Windows orders, and it is now the only Windows-based product
being shipped.
Management believes that the Company will be able to support its operational
needs with currently available resources for at least the next few quarterly
periods. The Company has been successful in significantly reducing operating
costs through a series of strategic restructurings and work force reductions
that began in September of 2001, and will potentially further reduce operating
costs as needed in order to match operating costs with available resources as
2003 progresses.
5
The Company is exploring all options available to aggressively reduce costs,
to increase revenues and to find alternative sources of financing its
operations. Such options will likely include the exiting of facilities and could
possibly include further work force reductions or the disposition of certain
operations if management were unable to match its operations to currently
available resources. If the Company were unsuccessful in obtaining any of these
strategic goals, it would face a severe constraint on its ability to sustain
operations in a manner that would create future growth and viability, and the
Company may need to cease operations entirely.
2. Earnings Per Share
Basic earnings per share are calculated using the weighted average number of
shares outstanding during the period. Diluted earnings per share are calculated
using the weighted average number of shares outstanding during the period plus
the dilutive effect of outstanding stock options and warrants using the
"treasury stock" method and are not included since they are antidilutive.
3. Stockholders' Equity
During the three-month period ended March 31, 2003, the Company issued 22,000
shares of common stock to employees pursuant to the purchase by those employees
of common stock under the Employee Stock Purchase Plan, resulting in cash
proceeds of $2,000. This amount is included in the Consolidated Statements of
Cash Flows as a component of net proceeds from issuance of common stock.
4. Litigation
The Company is currently not involved in any litigation that it believes
would have a materially adverse affect upon its financial results.
5. Stock-Based Incentive Programs
The following table summarizes relevant information as the Company's reported
results of operations under the intrinsic value method of accounting for stock
awards, with supplemental information, as if the fair value recognition
provisions of Statement of Financial Accounting Standards Number 123, "Stock
Based Compensation," as amended by Statement of Financial Accounting Standards
Number 148, "Accounting for Stock Based Compensation - Transition and
Disclosure," (collectively SFAS 123) had been applied to each of the three-month
periods ended March 31, 2003 and 2002, respectively.
Three months ended
March 31,
---------------------------
2003 2002
Net loss: ------------ ------------
As reported: $ (380,100) $ (3,590,500)
Add: stock-based compensation expense
included in net loss, net of related
tax effects - 94,200
Deduct: total stock-based compensation
expense determined under fair-value
method for all awards, net of related
tax effects (133,400) (440,600)
------------ ------------
6
Pro forma net loss $ (513,500) $ (3,936,900)
============ ============
Basic and diluted loss per share:
As reported $ (0.02) $ (0.21)
Pro forma $ (0.03) $ (0.23)
7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
The following discussion of the financial condition and results of operations
of the Company 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, but not limited to, those set forth under "Risk
Factors" in the Company's Annual Report on Form 10-K for the year ended December
31, 2002 and in other documents filed by the Company with the Securities and
Exchange Commission.
Overview
We are developers of business connectivity software, including server-based
software, with an immediate focus on web-enabling applications for use by
various parties, including independent software vendors (ISVs), application
service providers (ASPs), corporate enterprises, governmental and educational
institutions, and others. Server-based computing, sometimes referred to as
thin-client computing, is a computing model where traditional desktop software
applications are relocated to run entirely on a server, or host computer. This
centralized deployment and management of applications is intended to reduce 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 the
desktop. Our server-based technology works on today's most powerful personal
computer, or low-end network computer, without application rewrites or changes
to the corporate computing infrastructure.
With our 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. In addition, the ability to access such
applications over the Internet creates new operational models and sales
channels. We provide the technology to access applications over the Internet.
We entered both the UNIX and Linux server-based computing and web enabling
markets as early as 1996. We expanded our product offerings by shipping Windows
web-enabling software in early 2000.
We are headquartered in Morgan Hill, California, with offices in Concord, New
Hampshire and Reading, United Kingdom.
In order to ensure that we will be able to realize our assets and settle our
liabilities within the normal course of our business operations, we must
consider several aggressive strategic initiatives including the exiting of
facilities, possible further work force reductions or the disposition of certain
operations.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires us
8
to make judgments, assumptions and estimates that effect the amounts reported in
the Condensed Financial Statements and accompanying notes. Estimates are used
for, but not limited to, the accounting for the allowance for doubtful accounts,
the impairment of intangible assets, contingencies and other special charges and
taxes. Actual results could differ materially from these estimates. The
following critical accounting policies are impacted significantly by judgments,
assumptions and estimates used in the preparation of the Condensed Financial
Statements.
The recognition of revenue is based on our assessment of the facts and
circumstances of the sales transaction. We will recognize revenue only when all
four of the following conditions have been met:
o Persuasive evidence of an arrangement exists;
o Delivery has occurred or services have been rendered;
o Our price to the customer is fixed or determinable; and
o Collectibility is reasonably assured
Software development costs incurred in the research and development of new
products are expensed as incurred until technological feasibility, in the form
of a working model, has been established, at which time such costs are
capitalized until the product is available for general release to customers.
Capitalized costs are amortized based on either estimated current and future
revenue for each product or straight-line amortization over the shorter of three
years or the remaining estimated life of the product, whichever produces the
higher expense for the period.
The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our historical experience, our estimates of
the recoverability of amounts due to us could be adversely affected.
We will perform impairment tests on our intangible assets on an annual basis
and between annual tests in certain circumstances. In response to changes in
industry and market conditions, we may strategically realign our resources,
dispose of, or otherwise exit businesses, and consider further restructurings,
which could result in an impairment of intangible assets in the future.
We are subject to the possibility of various loss contingencies arising in
the ordinary course of business. We consider the likelihood of the loss or
impairment of an asset or the incurrence of a liability as well as our ability
to reasonably estimate the amount of loss in determining loss contingencies. An
estimated loss contingency is accrued if it is probable that a liability has
been incurred or an asset has been impaired and the amount of the loss can be
reasonably estimated. We regularly evaluate current information available to us
to determine whether such accruals should be adjusted.
9
Results of Operations for the Three-Month Period Ended March 31, 2003 Versus
the Three-Month Period Ended March 31, 2002.
Revenue
Our revenues are primarily derived from product licensing fees. Other sources
of revenue include service fees from maintenance contracts and training fees.
Total revenue for the three-month period ended March 31, 2003 increased by
$458,300, or 78.2%, to $1,044,000 from $585,700 for the same period in 2002.
Revenue derived from our Windows-based products during the three-month period
ended March 31, 2003 increased by $116,900, or 39.1%, to $415,800 from $298,900
for the same period in the prior year. The increase in our Windows-based product
revenue was primarily due to sales of GO-Global for Windows, which was
introduced during the end of September 2002. Sales of our other Windows-based
products were virtually unchanged from the prior year.
Revenue derived from our UNIX-based products during the three-month period
ended March 31, 2003 increased by $237,800, or 145.2%, to $401,600 from $163,800
for the same period in the prior year. The increase in our UNIX-based product
revenue was primarily attributable to product licensing fees made during the
period that resulted from one-time transactions entered into with a limited
number of customers.
Revenue derived from the amortization of deferred maintenance fees during the
three-month period ended March 31, 2003 increased by $103,500, or 120.9%, to
$189,100 from $85,600 for the same period in the prior year. Our customers
typically purchase a maintenance contract at the time they license our product.
Fees associated with the maintenance contracts are capitalized and recognized as
revenue ratably over the underlying service period of the maintenance contract.
Currently, a significant portion of our licensing fees is derived from a
limited number of customers, which vary, sometimes significantly, from quarter
to quarter. We expect this trend to continue throughout 2003.
Cost of Revenue
Cost of revenue consists primarily of the amortization of acquired technology
or capitalized technology developed in-house. Under accounting principles
generally accepted in the United States, research and development costs for new
product development, after technological feasibility is established, are
recorded as "capitalized software" on our balance sheet and are subsequently
amortized as cost of revenue over the shorter of three years or the remaining
estimated life of the products. Other items included in cost of revenue are
customer service costs and shipping and packaging materials.
Cost of revenue for the three-month period ended March 31, 2003 decreased by
$130,000, or 28.6%, to $324,600 from $454,600 for the same period in 2002. The
carrying value of various elements of our acquired technologies was reduced to
zero as part of the fixed asset impairment charge we recorded as of September
30, 2002, accordingly, no amortization expense related to these acquired
technology assets was recorded during the current period.
We expect cost of revenue to remain at approximately the same level for the
next several quarterly reporting periods.
10
Selling and Marketing Expenses
Selling and marketing expenses primarily consist of salaries, sales
commissions, travel expenses, trade show related activities, promotional, and
advertising costs and the allocation of corporate overhead charges. Selling and
marketing expenses for the three-month period ended March 31, 2003 decreased by
$387,900, or 48.0%, to $420,900 from $808,800 for the same period in 2002.
The decrease was primarily due to decreases in headcount, resulting from our
March 31, 2002 restructuring. This restructuring led to decreases in human
resources costs, including salaries, fringe benefits and commissions. These
reductions also led to decreases in costs that typically fluctuate in direct
relation to head count level, such as travel expenses and the allocation of
corporate overhead charges. For the three-month period ended March 31, 2003,
human resources costs, net of commissions, decreased by $270,700, or 54.7%, to
$224,100 from $494,800 for the same period in the prior year. Travel expenses
decreased by $21,000, or 46.2%, to $24,500 from $45,500 for the same period in
the prior year. Corporate overhead charges allocated to the sales and marketing
department decreased by $57,100, or 49.1%, to $59,100 from $116,200 for the same
period in the prior period.
We anticipate that selling and marketing expenses in future periods will be
higher than those incurred in the three-month period ended March 31, 2003 as we
implement various marketing strategies aimed at growing revenue. Sales and
marketing expenses were approximately 40.3% and 138.1% of revenue for the
three-month periods ended March 31, 2003 and 2002, respectively.
General and Administrative Expenses
General and administrative expenses primarily consist of salaries and
associated benefits, legal, professional and outside services, certain costs
associated with being a publicly held corporation, the allocation of corporate
overhead charges and bad debts expense. General and administrative expenses for
the three-month period ended March 31, 2003 decreased by $287,300, or 44.6%, to
$356,400 from $643,700 for the same period in 2002.
The decrease was primarily due to a decrease in headcount, resulting from our
September 2002 restructuring, a decrease in the amortization of deferred
compensation expense and a decrease in outside services.
The headcount reductions led to decreases in human resources costs, including
salaries and fringe benefits as well as decreases in costs that typically
fluctuate in direct relation to head count level, such as travel expenses and
the allocation of corporate overhead charges. For the three-month period ended
March 31, 2003, human resource costs decreased by $55,000, or 28.8%, to $135,800
from $190,800 for the same period in the prior year. For the three-month period
ended March 31, 2003, travel expenses decreased by $85,500, or 89.4%, to $10,100
from $95,600 for the same period in the prior year. For the three-month period
ended March 31, 2003, corporate overhead charges allocated to the general and
administrative department decreased by $18,200, or 29.1%, to $44,400 from
$62,600 for the same period in the prior year.
For the three-month period ended March 31, 2003, deferred compensation
amortization expense was $0 due to the expiration of certain third party
consulting contracts, over whose lifetime deferred compensation expense was
being amortized. Under the terms of these contracts, consultants had been issued
11
stock options, in lieu of cash, for the performance of their respective services
to us. Using the Black-Scholes pricing model, a cost was calculated and assigned
to each of these contracts, and capitalized as a component of equity on our
balance sheet in accordance with accounting principles generally accepted in the
United States. The total costs of such contracts were amortized over the
respective contract's service period, all of which expired by the end of
December 2002.
Outside services decreased for the three-month period ended March 31, 2003 by
$80,600, or 68.4%, to $37,300 from $117,900 for the same period in the prior
year. The decrease was primarily due to one-time outside consulting costs
incurred during the prior year when various consultants assisted us in the
assessment of our products and their potential for future enhancements and the
development of short and long-term strategic initiatives to increase revenues,
reduce costs and enhance shareholder value.
We anticipate that general and administrative expense in future periods will
approximate those incurred during the three-month period ended March 31, 2003.
General and administrative expenses were approximately 34.1% and 109.9% of
revenues for the three-month periods ended March 31, 2003 and 2002,
respectively.
Research and Development Expenses
Research and development expenses consist primarily of salaries and benefits
to software engineers, payments to contract programmers, allocation of corporate
overhead charges, depreciation and computer related supplies. Research and
development expenses for the three-month period ended March 31, 2003 decreased
by $484,800, or 59.6%, to $328,000 from $812,800 for the same period in the
prior year.
The decrease was primarily due to decreases in headcount, resulting from our
March 31, 2002 restructuring, and in rent expense, which were partially offset
by an increase in capitalized software development costs.
The headcount reductions led to decreases in human resources costs,
principally salaries and fringe benefits. For the three-month period ended March
31, 2003, human resources costs decreased by $257,800, or 42.9%, to $343,200
from $601,000 for the same period in the prior year. For the three-month period
ended March 31, 2003, rent expense was approximately $0. Rent expense for the
current period reflects the impact of the sublease termination payment received
from the sublesse who had been occupying the unused portion of our New Hampshire
facility, which was received during the current period. The termination payment
was approximately equal to the total lease payments we made to the landlord
during the period.
Under accounting principles generally accepted in the United States, all
costs of product development incurred once technological feasibility has been
established, but prior to general release of the product, are to be capitalized
and amortized to expense over the estimated life of the underlying product,
rather than being charged to expense in the period incurred. Approximately
$112,700 and $63,300 of product development costs were capitalized during the
three-month periods ended March 31, 2003 and 2002, respectively.
We anticipate that research and development expense in future periods will
approximate those incurred during the three-month period ended March 31, 2003.
Research and development expenses were approximately 31.4% and 138.8% of
12
revenues for the three-month periods ended March 31, 2003 and 2002,
respectively.
Other Income (Expense)
Other income (expense) consists primarily of interest income on excess cash.
Our excess cash is held in interest bearing money market accounts with minimum
net assets greater than or equal to one billion U.S. dollars.
Other income (expense) for the three-month period ended March 31, 2003
decreased by $28,300, or 83.0%, to $5,800 from $34,100 for the same period in
the prior year. The decrease was primarily due to lower amounts of excess cash
on-hand as compared with the prior year. All of our excess cash is invested and
the interest rates being paid on our invested cash during the current year were
lower than those in the prior year.
Offsetting the decrease in other income (expense) for the three-month period
ended March 31, 2003 was the $28,600, or 100%, reduction in interest expense to
$0 from $28,600 in the prior year.
We expect other income (expense) to be lower throughout the remainder of 2003
as we expect our cash balances to be significantly lower as compared with the
respective periods of the prior year, and we expect the Federal Reserve Bank to
keep interest rates low for the next several months.
Net Loss
As a result of the foregoing items, net loss for the three-month period ended
March 31, 2003 was $380,100, a decrease of $3,210,400 or 89.4%, from a net loss
of $3,590,500 for the same period during 2001. As a result of our continued
operating loss we intend to continue to aggressively reduce our operating costs
during 2003 and to pursue financing opportunities through all available means.
Liquidity and Capital Resources
As of March 31, 2003, cash and cash equivalents totaled $1,620,600, a
decrease of $337,600, or 17.2%, from $1,958,200 as of December 31, 2002.
The decrease in cash and cash equivalents was primarily attributable to net
cash used in operating activities, which was substantially comprised of our net
loss of $380,100. Operating activities that increased cash flow included: a
decrease in prepaid expenses and other current assets totaling $122,800, and an
increase in deferred revenue, $50,000. Offsetting these amounts were decreases
in accounts payable, $89,400 and accrued expenses, 132,700, and an increase in
accounts receivable, net of the allowance for doubtful accounts, $113,800.
Our financial statements have been presented on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities in the
normal course of business. We have suffered from recurring losses and have
absorbed significant cash in our operating activities. Further, our cash
balances, including both cash and cash equivalents and available-for-sale
securities have declined significantly as of March 31, 2003 as compared to March
31, 2002. These matters raise substantial doubt about our ability to continue in
existence as a going concern. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
assets or the amount and classification of liabilities that might result should
we be unable to continue as a going concern.
13
Revenues as reported for the current period are significantly higher than the
same period in the prior year and management believes that revenue for the
second half of 2003 will be greater than revenue for the first half of 2003.
Although there can be no assurances that these revenues will materialize,
management has been encouraged by the performance of GO-Global for Windows since
its December 2002 commercial rollout as well as the growth in revenue being
generated by the Unix product line. In a little over three months since its
commercial release, GO-Global for Windows has replaced the legacy Windows
products for new Windows orders, and it is now the only Windows-based product
being shipped.
We are exploring all options available to aggressively reduce costs, to
increase revenues and to find alternative sources of financing our operations.
Such options will likely include the exiting of facilities and could possibly
include further work force reductions or the disposition of certain operations
if we were unable to match our operations to currently available resources. If
we were unsuccessful in obtaining any of these strategic goals, we would face a
severe constraint on our ability to sustain operations in a manner that would
create future growth and viability, and we may need to cease operations
entirely.
We have used approximately $223,700 net cash in operating activities for the
three-month period ended March 31, 2003.
The net cash used in investing activities of $115,300 decreased cash and cash
equivalents. The only significant investing activity during the current period
was the capitalization of software development costs incurred in the development
of the next release of our windows-based product. The purchasing of capital
assets has been curtailed to a minimum amount in order to preserve our cash
balances as long as possible.
Gross accounts receivable as of March 31, 2003 increased by $113,800, or
29.3%, to $502,000, from $388,200 as of December 31, 2002. The primary reason
for the increase was the timing of sales transactions during the current period
when several sales transactions occurred within the last few weeks of March
2003.
As of March 31, 2003, the net basis of purchased technology, as adjusted by
the impact of the asset impairment charge recorded during 2002, was $1,509,000,
unchanged from December 31, 2002. Purchased technology is comprised of various
acquired technologies that have been incorporated into one or more of our
products. These amounts are amortized to cost of revenue, generally over a
three-year period. Purchased technology amortization expense for the three-month
period ended March 31, 2003 decreased by $122,000, or 37.1%, to $207,000 from
$329,000 for the same period in the prior year. The decrease was due primarily
to the asset impairment charges we recorded during the year ended December 31,
2002 against various components of our purchased technology.
Accounts payable as of March 31, 2003 decreased by $89,400, or 39.1%, to
$139,300 from $228,700 as of December 31, 2002. Accounts payable are comprised
of our various operating expenses and decreased due to the timing of the payment
of various invoices.
Accrued expenses as of March 31, 2003 decreased by $132,700, or 16.7%, to
$662,400 from $795,100 as of December 31, 2002. Accrued expenses are charges for
services rendered for which an invoice has not yet been received such as
14
consulting fees, legal and accounting fees, and utilities. The decrease in
accrued expenses is primarily due to the payment of consulting and accounting
during the current period, which had been accrued as of December 31, 2003. As of
March 31, 2003, accrued expenses includes restructuring charges of $282,200
representing the approximate aggregate amount of estimated minimum lease
payments we believe that we may ultimately have to pay for the offices we closed
during 2002.
Deferred revenue as of March 31, 2003 increased by $50,000, or 6.3%, to
$846,100 from $796,100 as of December 31, 2002. The increase is due to the terms
of the various licensing agreements and maintenance contracts we entered into
during the current period as compared with the prior year, which were offset by
previously deferred items being recognized as revenue, or being written off as
uncollectible. Increases in deferred revenue reflect the application of
generally accepted accounting principles in the United States, which set forth
certain criteria for the current recognition of revenue in the financial
statements. Revenues which do not currently meet the criteria for current
recognition are charged to deferred revenue and are recognized either ratably
over the time period during which purchased services are provided to the
customer, such as maintenance contracts, or at such time that all revenue
recognition criteria have been met.
As of March 31, 2003, we had current assets of $2,141,500 and current
liabilities of $1,647,800, which netted to working capital of $493,700. Included
in current liabilities was deferred revenue of $846,100.
The following table discloses our contractual commitments, which are comprised
of future lease obligations:
Year ending
December 31,
------------
2003 $ 408,900 (1)
2004 395,400
2005 328,100
2006 55,000
2007 -
----------
Total $1,187,400
==========
(1) For the period April 1 through December 31, 2003.
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities,"
which addresses consolidation by business enterprises of variable interest
entities that either: (1) do not have sufficient equity investment at risk to
permit the entity to finance its activities without additional subordinated
financial support, or (2) the equity investors lack an essential characteristic
of a controlling financial interest. FIN 46 requires disclosure of Variable
Interest Entities (VIEs) in financial statements issued after January 31, 2003,
if it is reasonably possible that as of the transition date: (1) we will be the
primary beneficiary of an existing VIE that will require consolidation or, (2)
we will hold a significant variable interest in, or have significant involvement
with, an existing VIE. We do not have any entities that will require disclosure
or new consolidation as a result of adopting the provisions of FIN 46.
15
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
We are currently not exposed to any significant financial market risks from
changes in foreign currency exchange rates or changes in interest rates and do
not use derivative financial instruments. A substantial majority of our revenue
and capital spending is transacted in U.S. dollars. However, in the future, we
may enter into transactions in other currencies. An adverse change in exchange
rates would result in a decline in income before taxes, assuming that each
exchange rate would change in the same direction relative to the U.S. dollar. In
addition to the direct effects of changes in exchange rates, such changes
typically affect the volume of sales or foreign currency sales price as
competitors' products become more or less attractive.
ITEM 4. Controls and Procedures
Within the 90 days prior to the date of this report, under the supervision
and with the participation of management, including our Chief Executive Officer
and our Chief Financial Officer, we have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, our Chief Executive
Officer and our Chief Financial Officer have concluded that our disclosure
controls and procedures are effective in timely alerting them about material
information relating to us (including our consolidated subsidiaries) required to
be included in our periodic SEC filings. There have been no significant changes
in our internal controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation.
16
PART II--OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports of Form 8-K
On March 28, 2003 we filed with the Commission a report on Form 8-K dated
March 27, 2003 under Items 5 (Other Events) and 7 (Financial Statements,
Proforma Financial Information and Exhibits) announcing that we had received a
Nasdaq Staff Determination Letter.
On March 31, 2003 we filed with the Commission a report on Form 8-K dated
March 31, 2003 under Item 9 (Regulation FD Disclosure) furnishing the Section
906 Certifications of our Annual Report required by the Sarbanes-Oxley Act of
2002.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
GraphOn Corporation
(Registrant)
Date: May 15, 2003
By: /s/ Robert Dilworth
---------------------------------
Robert Dilworth,
Chief Executive Officer (Interim) and
Chairman of the Board
(Principal Executive Officer)
Date: May 15, 2003
By: /s/ William Swain
---------------------------------
William Swain,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Certifications
I, Robert Dilworth, certify that:
1. I have reviewed this quarterly report on Form 10-Q of GraphOn Corporation
("registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
18
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Robert Dilworth
-------------------
Robert Dilworth
Chief Executive Officer (Interim) and
Chairman of the Board
I, William Swain, certify that:
1. I have reviewed this quarterly report on Form 10-Q of GraphOn Corporation
("registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
19
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ William Swain
-----------------
William Swain
Chief Financial Officer
20