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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, 2004
Commission File Number: 0-21683
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GraphOn Corporation
(Exact name of Registrant as specified in its charter)
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Delaware 13-3899021
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
105 Cochrane Circle
Morgan Hill, CA 95037
(Address of principal executive offices)
Registrant's telephone number: (800) 472-7466
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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 4, 2004 there were issued and outstanding 21,636,097 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
Condensed Balance Sheets 2
Condensed Statements of Operations and
Comprehensive Loss 3
Condensed Statements of Cash Flows 4
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
Item 4. Controls and Procedures 18
PART II.
Item 2. Changes in Securities, Uses of Proceeds and Issuer
Purchases of Equity Securities 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 21
PART I--FINANCIAL INFORMATION
ITEM I Financial Statements
GRAPHON CORPORATION
CONDENSED BALANCE SHEETS
March 31, December 31,
2004 2003
ASSETS ------------ ------------
------------ (Unaudited)
Current Assets:
Cash and cash equivalents ..................... $ 1,719,600 $ 1,025,500
Accounts receivable, net of allowance for
doubtful accounts of $46,800 and $46,800 ..... 368,800 521,100
Prepaid expenses and other current assets ..... 27,700 23,100
------------ ------------
Total Current Assets .......................... 2,116,100 1,569,700
------------ ------------
Property and equipment, net ...................... 115,600 144,800
Purchased technology, net ........................ 167,500 335,000
Capitalized software, net ........................ 445,100 500,600
Other assets ..................................... 11,900 11,900
------------ ------------
TOTAL ASSETS ................................ $ 2,856,200 $ 2,562,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable .............................. $ 124,400 $ 52,300
Accrued expenses .............................. 330,100 470,800
Deferred revenue .............................. 1,011,500 1,192,000
------------ ------------
Total Current Liabilities ..................... 1,466,000 1,715,100
------------ ------------
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, 21,636,097 and 16,618,459
shares issued and outstanding ................... 2,200 1,700
Additional paid in capital ....................... 46,958,600 45,985,300
Notes receivable ................................. (50,300) (50,300)
Accumulated other comprehensive loss ............. (800) (1,400)
Accumulated deficit .............................. (45,519,500) (45,088,400)
------------ ------------
Total Stockholders' Equity ....................... 1,390,200 846,900
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .. $ 2,856,200 $ 2,562,000
============ ============
See accompanying notes to condensed financial statements.
GRAPHON CORPORATION
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended March 31,
---------------------------
2004 2003
----------- -----------
(Unaudited) (Unaudited)
Revenue
Product Licenses .......................... $ 646,200 $ 813,200
Service Fees .............................. 252,100 189,100
Other ..................................... 4,600 41,700
----------- -----------
Total Revenue ........................... 902,900 1,044,000
----------- -----------
Cost of Revenue
Product Costs ............................. 226,300 252,300
Service Costs ............................. 83,900 72,300
----------- -----------
Total Cost of Revenue .................. 310,200 324,600
----------- -----------
Gross Profit .............................. 592,700 719,400
----------- -----------
Operating Expenses
Selling and marketing ..................... 358,100 420,900
General and administrative ................ 249,700 356,400
Research and development .................. 419,600 328,000
----------- -----------
Total Operating Expenses .................. 1,027,400 1,105,300
----------- -----------
Loss From Operations ...................... (434,700) (385,900)
Interest and other income ................. 3,600 5,800
----------- -----------
Net Loss .................................. $ (431,100) $ (380,100)
Other Comprehensive Loss, net of tax
Foreign currency translation gain (loss) 600 (600)
----------- -----------
Comprehensive Loss ........................ $ (430,500) $ (380,700)
=========== ===========
Basic and Diluted Loss per Common Share.... $ (0.02) $ (0.02)
=========== ===========
Weighted Average Common Shares Outstanding. 20,036,876 16,594,408
=========== ===========
See accompanying notes to condensed financial statements.
GRAPHON CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
---------------------------
2004 2003
----------- -----------
(Unaudited) (Unaudited)
Cash Flows From Operating Activities:
Net loss ........................................... $ (431,100) $ (380,100)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................... 258,800 319,500
Interest accrued on directors notes receivable ... (700) (1,000)
Changes in operating assets and liabilities:
Accounts receivable ............................. 152,300 (113,800)
Prepaid expenses and other assets ............... (4,600) 122,800
Accounts payable ................................ 72,100 (89,400)
Accrued expenses ................................ (140,700) (132,700)
Deferred revenue ................................ (180,500) 50,000
----------- -----------
Net Cash Used In Operating Activities .............. (274,400) (224,700)
----------- -----------
Cash Flows From Investing Activities:
Capitalization of software development costs ....... - (112,700)
Capital expenditures ............................... (6,600) (1,600)
----------- -----------
Net Cash Used In Investing Activities ........... (6,600) (114,300)
----------- -----------
Cash Flows From Financing Activities:
Net proceeds from issuance of common stock ......... 974,500 2,000
----------- -----------
Net Cash Provided By Financing Activities ....... 974,500 2,000
----------- -----------
Effect of exchange rate fluctuations on cash and
cash equivalents ................................ 600 (600)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 694,100 (337,600)
Cash and Cash Equivalents, beginning of period ..... 1,025,500 1,958,200
----------- -----------
Cash and Cash Equivalents, end of period ........... $ 1,719,600 $ 1,620,600
=========== ===========
Supplemental Disclosure of Cash Flow Information:
None.
Noncash Investing and Financing Activities:
None.
See accompanying notes to condensed financial statements.
GRAPHON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed 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, 2004) that are, in the opinion of management, necessary
to state fairly the results for the periods presented. This Quarterly Report on
Form 10-Q should be read in conjunction with the Company's audited financial
statements contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003, which was filed with the Securities and Exchange
Commission (the Commission) on March 30, 2004. 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, 2004, or any future
period.
The Company's condensed 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.
These matters raise substantial doubt about the ability of the Company to
continue in existence as a going concern. The condensed 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.
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. During the first quarter of 2004, the Company
successfully raised approximately $970,900, net, in a private placement of its
common stock.
The Company continues to operate its business on a cash basis by striving to
bring cash expenditures in line with revenues. The Company is simultaneously
looking at ways to improve or maintain its revenue stream. Additionally, the
Company continues to review potential merger opportunities as they present
themselves and at such time as a merger might make financial sense and add value
for the shareholders, the Company will pursue that merger opportunity. The
Company anticipates increasing its sales and marketing and research and
development expenditures during 2004 as it believes further development of these
areas are critical to its ability to continue its business as a going concern.
The Company believes that improving or maintaining its current revenue stream,
coupled with its cash on hand including the cash raised in the private
placement, will support these planned increases during 2004.
Certain amounts in the prior period's financial statements have been
reclassified to conform to the current period's presentation.
2. Revenue
Product line revenue for the first quarter of 2004 and 2003 was as follows:
Change in
-----------------------
Product licenses 2004 2003 Dollars Percent
---------------- ------------ ------------ ------------ ---------
Windows $ 429,700 $ 411,800 $ 17,900 4.3 %
Unix 216,500 401,400 (184,900) (46.1)
------------ ------------ ------------ ---------
646,200 813,200 (167,000) (20.5)
------------ ------------ ------------ ---------
Service fees
Windows 136,900 42,200 94,700 224.4
Unix 115,200 146,900 (31,700) (21.6)
------------ ------------ ------------ ---------
252,100 189,100 63,000 33.3
------------ ------------ ------------ ---------
Other (1) 4,600 41,700 (37,100) (89.0)
------------ ------------ ------------ ---------
Total Revenue $ 902,900 $ 1,044,000 $ (141,100) (13.5)%
============ ============ ============ =========
(1) 2004 is mainly comprised of the amortization of private labeling fees.
2003 is mainly comprised of the amortization of a distribution fee and
private labeling fees.
3. 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 not
included since they are antidilutive.
4. Stockholders' Equity
During the first quarter of 2004, the Company issued 5,000,000 shares of
common stock in a private placement transaction resulting in net cash proceeds
of approximately $970,900. The Company also issued 17,638 share of common stock
to employees pursuant to the purchase by those employees of common stock under
the Employee Stock Purchase Plan (the ESPP), resulting in cash proceeds of
approximately $3,600. These amounts are included in the Statements of Cash Flows
as a component of net proceeds from issuance of common stock.
5. Litigation
The Company is currently not involved in any litigation that it believes
would have a materially adverse affect upon its financial results.
6. Stock-Based Incentive Programs
The Company accounts for stock-based compensation under the intrinsic value
method of accounting for stock awards, in accordance with Accounting Principles
Board Opinion number 25, "Accounting for Stock Issued to Employees" (APB 25) as
permitted by Statement of Financial Accounting Standards number 123,
"Stock-Based Compensation" (collectively SFAS 123). The Company has not changed
to the fair value method of accounting for stock-based employee compensation.
Accordingly, the adoption of SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (SFAS 148) did not affect the
Company's financial condition or results of operations. However, SFAS 123, as
amended by SFAS 148, requires that information be provided as if the Company had
accounted for stock options under the fair value method of this statement,
including disclosing pro forma information regarding net loss and loss per share
beginning with the first quarter of 2003. Had the Company applied the fair value
recognition provisions of SFAS 123 to stock-based compensation, the Company's
net loss and basic and diluted loss per share would have been changed from the
"as reported" amounts to the "pro forma" amounts as follows:
Three months ended March 31,
----------------------------
2004 2003
----------- ------------
Net loss:
As reported: $ (431,100) $ (380,100)
Add: stock-based compensation expense
included in net loss, net of related
tax effects - -
Deduct: total stock-based compensation
expense determined under fair-value
method for all awards, net of related
tax effects (28,600) (133,400)
----------- ------------
Pro forma net loss $ (459,700) $ (513,500)
=========== ============
Basic and diluted loss per share:
As reported $ (0.02) $ (0.02)
Pro forma $ (0.02) $ (0.03)
7. Commitments and Contingencies
Effective November 1, 2003, the Company commenced a one-year operating
lease for its engineering facility in New Hampshire, which is cancelable by
either party with 30 days written notice. Monthly rent payments for this
facility are approximately $5,000.
All other facilities currently occupied by the Company are being rented on
a month-to-month basis and have no future minimum annual lease payments
associated with them. The aggregate monthly rental payments for the
month-to-month facilities currently being occupied are approximately $3,000.
There currently are no leases in effect that require minimum payments to
be made subsequent to October 31, 2004.
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, but not limited to:
o Our history of operating losses and expectation that these losses will
continue, at least for the near future;
o Our operating results in one or more future periods are likely to
fluctuate significantly and may fail to meet or exceed the
expectations of securities analysts or investors;
o Our business significantly benefits from strategic relationships and
there can be no assurance that such relationships will continue in the
future; and
other factors set forth under "Risk Factors" in our Annual Report on Form 10-K
for the year ended December 31, 2003 and in other documents we filed with the
Securities and Exchange Commission.
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 by 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 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.
In order to ensure that we will be able to realize our assets and settle our
liabilities within the normal course of our business operations, we must
consider several aggressive strategic initiatives aimed at increasing revenue or
securing additional alternative sources of financing. If we were unsuccessful in
increasing revenues or finding additional alternative sources of financing, we
would face a severe constraint on our ability to sustain operations in a manner
that would create future growth and viability, and we may need to cease
operations entirely.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires us
to make judgments, assumptions and estimates that affect 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.
In accordance with Statement of Position (SOP) 97-2, "Software Revenue
Recognition," we recognize revenue from the sale of software licenses when all
the following conditions are met:
o Persuasive evidence of an arrangement exists;
o Delivery has occurred or services have been rendered;
o Our price to the customer is fixed or determinable; and
o Collectibility is reasonably assured.
In general, software license revenues are recognized when a non-cancelable
license agreement has been signed and the customer acknowledges an unconditional
obligation to pay, the software product has been delivered, there are no
uncertainties surrounding product acceptance, the fees are fixed or determinable
and collection is considered probable. Delivery is considered to have occurred
when title and risk of loss have been transferred to the customer, which
generally occurs when the media containing the licensed programs is provided to
a common carrier. In the case of electronic delivery, delivery occurs when the
customer is given access to the licensed programs. If collectibility is not
considered probable, revenue is recognized when the fee is collected.
Under SOP 97-2, revenue earned on software arrangements involving multiple
elements is allocated to each element of the arrangement based on the relative
fair values of the elements. If there is no evidence of the fair value for all
the elements in a multiple element arrangement, all revenue from the arrangement
is deferred until such evidence exists or until all elements are delivered.
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.
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.
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.
We apply APB 25 and related interpretations when accounting for our stock
option and stock purchase plans. In accordance with APB 25, we apply the
intrinsic value method in accounting for employee stock options. Accordingly, we
generally recognize no compensation expense with respect to stock-based awards
to employees.
We have determined pro forma information regarding net income and earnings
per share as if we had accounted for employee stock options under the fair value
method as required by SFAS 123. The fair value of these stock-based awards to
employees was estimated using the Black-Scholes option-pricing model. Had
compensation cost for our stock option plans and employee stock purchase plan
been determined consistent with SFAS 123, our reported net loss and net loss per
share would have been changed to the amounts indicated in Note 6.
Results of Operations for the Three-Month Period Ended March 31, 2004 Versus the
Three-Month Period Ended March 31, 2003.
Revenue
Product line revenue for the three-month periods ended March 31, 2004 and
2003 was as follows:
Change in
-----------------------
Product licenses 2004 2003 Dollars Percent
---------------- ------------ ------------ ------------ ---------
Windows $ 429,700 $ 411,800 $ 17,900 4.3 %
Unix 216,500 401,400 (184,900) (46.1)
------------ ------------ ------------ ---------
646,200 813,200 (167,000) (20.5)
------------ ------------ ------------ ---------
Service fees
Windows 136,900 42,200 94,700 224.4
Unix 115,200 146,900 (31,700) (21.6)
------------ ------------ ------------ ---------
252,100 189,100 63,000 33.3
------------ ------------ ------------ ---------
Other (1) 4,600 41,700 (37,100) (89.0)
------------ ------------ ------------ ---------
Total Revenue $ 902,900 $ 1,044,000 $ (141,100) (13.5)%
============ ============ ============ =========
(1) 2004 is mainly comprised of the amortization of private labeling fees.
2003 is mainly comprised of the amortization of a distribution fee and
private labeling fees.
Revenue from our Windows-based products was virtually unchanged in the first
quarter of 2004 as compared with the same period in 2003. Included in the
$429,700 first quarter 2004 revenue is approximately $176,900 of revenue related
to a transaction that occurred during the fourth quarter of 2003 that had been
deferred due to various uncertainties surrounding issues pertaining to the
transaction. Had these uncertainties not occurred and all elements necessary for
revenue recognition been present during the fourth quarter of 2003 (at the time
of the transaction), then first quarter 2004 Windows-based product revenue would
have been $252,800, a decrease of $159,000, or 38.6%, from the first quarter of
2003.
The $159,800 decrease was due to an approximate $146,300 reduction in the
Windows-based product revenue recognized from a large customer during the first
quarter of 2004 as compared with the first quarter of 2003. This customer had
previously informed us that they would begin selling our Windows-based products
as an add-on to their software application products, instead of bundling our
products within theirs. Given the customer's change to this new sales model, we
are unable to assess what effect this may have on our total revenue from this
customer for the remainder of 2004.
The decrease in Unix product license revenue reflects how our revenue streams
can be affected on a quarterly basis due to the limited number of significant
customers we have. During the first quarter of 2003, Unix product license
revenue from three specific customers approximated $150,200, as compared to
$23,400 during the first quarter of 2004. The revenue decrease from just these
three customers accounts for the majority of the overall decrease in Unix
product license revenue. Customers such as these three have historically tended
to license our software sporadically, leading to the volatile nature of our
revenue streams.
Service fees recognized from the sale of Windows-based service contracts
increased in the first quarter of 2004, as compared to the first quarter of
2003, primarily as a result of the release of Go-Global for Windows during the
fourth quarter of 2002. Sales of our Windows-based products began increasing
with the release of Go-Global for Windows, including the sales of service
contracts to support the product. The sale of Windows-based products and service
contracts continued to grow throughout 2003 and into the first quarter of 2004.
Virtually all of our Windows-based service contracts are for annual service
support contracts, consequently, we recognize revenue from their sale over a
twelve-month period commencing in the month of sale.
Service fees recognized from the sale of Unix-based service contracts
decreased in the first quarter of 2004, as compared to the first quarter of
2003, primarily due to the reduction in Unix product sales, as discussed above.
The decrease in other revenue was due to fully recognizing the revenue
generated from the sale of a distribution license to our distributor in Japan.
The license was being amortized to revenue over a two-year period and that
period ended December 31, 2003.
Our customers typically purchase a maintenance contract at the time they
license our product. Our Windows-based maintenance contracts are primarily for a
one-year time period and generally are renewed upon expiration. Our Unix-based
maintenance contracts vary in term from one to five years and generally are
renewed upon expiration. Fees associated with maintenance contracts are deferred
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 2004.
Cost of Revenue
Cost of revenue consists primarily of the amortization of purchased
technology, capitalized technology developed in-house and customer service
costs. Shipping and packaging materials are immaterial as virtually all of our
deliveries are made via electronic means over the Internet. 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.
Cost of revenue for the first quarter of 2004 decreased by $14,400, or 4.4%,
to $310,200 from $324,600 for the same period in 2003.
Product costs were lower in the first quarter of 2004, compared with the
first quarter of 2003, primarily because certain purchased technologies were
fully amortized as of year-end 2003. Offsetting the fully amortized purchased
technologies was the commencement of amortization of certain in-house
development costs that were capitalized during 2003.
During the third quarter of 2004 we expect product costs to decline
significantly as the remaining elements of our purchased technologies become
fully amortized during the second quarter of 2004.
Service costs represent the aggregate costs of employees' time being spent on
customer service activities. The increase in the first quarter of 2004 from the
first quarter of 2003 is due to a mix of fielding more service requests as well
as more intricate service requests. Service costs can vary, sometimes
significantly, from quarter to quarter depending on the nature and amount of
requests received by customer service.
Cost of revenue was approximately 34.4% and 31.1% of revenue for the quarters
ended March 31, 2004 and 2003, respectively.
Selling and Marketing Expenses
Selling and marketing expenses primarily consist of salaries, sales
commissions, travel expenses, trade show related activities, promotional, public
relations and advertising costs. Selling and marketing expenses for the first
quarter of 2004 decreased by $62,800, or 14.9%, to $358,100 from $420,900 for
the first quarter of 2003.
Primary factors contributing to the net decrease are summarized as follows:
Dollars
Increase
(Decrease)
Expense From 2003
------- -----------
Human resources $ (63,700)
Overhead allocations (59,100)
Depreciation (16,000)
Outside services 88,500
Other items (12,500)
-----------
$ (62,800)
===========
The decrease in human resources costs was the aggregate wages, benefits and
commissions savings we realized by having two fewer sales and marketing staff in
the first quarter of 2004, as compared with the first quarter of 2003.
Once we successfully closed the negotiated buy out of the lease on our former
corporate offices, and moved to our current location during the fourth quarter
of 2003, we ceased allocating corporate overhead charges to sales and marketing.
Such costs were classified as general and administrative expense during the
first quarter of 2004.
The decrease in depreciation expense is due to the write-off of various
assets as part of the restructuring charges we have recorded over the last
several reporting periods as well as the aging of the assets that do remain in
service. In conjunction with the cost-cutting measures that we have been
following for the last two years, we have curtailed the purchasing and replacing
of assets to minimal levels. Accordingly, the assets that we still have
currently in service are approaching full depreciation.
The increase in outside services is because we utilized the services of a
marketing consulting firm during the first quarter of 2004 to assist us with
several marketing initiatives aimed at growing revenue. We did not use such
services during the first quarter of 2003. We expect to increase marketing
expenditures throughout the remainder of 2004. As a result of these increases,
we anticipate second quarter 2004 sales and marketing expenditures to
approximate those of the second quarter 2003 and second half 2004 sales and
marketing expenditures to exceed those of the second half of 2003.
Selling and marketing expenses were 39.7% and 40.3% of revenue for the first
quarter of 2004 and 2003, respectively.
General and Administrative Expenses
General and administrative expenses primarily consist of salaries and
associated benefits, legal, professional and other 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 first quarter of 2004 decreased by $106,700, or 29.9%, to
$249,700 from $356,400 for the first quarter of 2003.
Primary factors contributing to the net decrease are summarized as follows:
Dollars
Increase
(Decrease)
Expense From 2003
------- -----------
Insurance $ (47,000)
Overhead allocations (44,400)
Public company costs (24,000)
Other items 8,700
-----------
$ (106,700)
===========
The primary reason for the decrease in insurance costs was due to the
discontinuance of our Directors and Officers Insurance Policy upon its
expiration during 2003.
Our corporate overhead structure was significantly reduced when we
successfully closed the negotiated buy out of the lease on our former corporate
offices and moved into our new location during September 2003. Previously, we
had been incurring costs associated with occupying approximately 13,500 square
feet. Now we are incurring costs associated with occupying approximately 1,000
square feet of space.
The decrease in public company costs primarily resulted from being delisted
from the Nasdaq Small Cap Market during early 2003. We no longer are required to
pay annual listing fees to Nasdaq as we are now listed on the Over The Counter
Bulletin Board.
We anticipate that aggregate general and administrative expenses for 2004
will be significantly lower than 2003. General and administrative expenses were
approximately 27.7% and 34.1% of revenues for the first quarter of 2004 and
2003, respectively.
Research and Development Expenses
Research and development expenses consist primarily of salaries and benefits
to software engineers, payments to contract programmers, rent, depreciation and
computer related supplies. Research and development expenses for the first
quarter of 2004 increased by $91,600, or 27.9%, to $419,600 from $328,000 in the
first quarter of 2003.
Primary factors contributing to the net increase are summarized as follows:
Dollars
Increase
(Decrease)
From 2003
Expense ------------
Human resources $ 25,800
Rent 19,700
Outside services 37,700
Other items 8,400
------------
$ 91,600
============
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. No product
development costs were capitalized during the first quarter of 2004, whereas
approximately $112,700 of product development costs were capitalized during the
first quarter of 2003. The majority of these costs were incurred in the
development of Go-Global for Windows version 3.0, which became available for
release during March 2004.
Software development costs that we have capitalized are usually categorized
as human resources costs or outside services costs, whichever is applicable to
the particular cost. Approximately $33,900 of the $112,700 product development
costs that were capitalized during the first quarter of 2003 was human resources
costs. Had these costs not been capitalized, then human resources costs incurred
during the first quarter of 2004 would have been approximately the same as those
incurred during the first quarter of 2003. Approximately $78,800 of the $112,700
product development costs capitalized during the first quarter of 2003 was
outside services costs. Had these costs not been capitalized, then outside
services costs incurred during the first quarter of 2004 would have decreased by
approximately $32,500 from those incurred during the first quarter of 2003. The
decrease in outside services costs was due to not renewing certain engineering
consulting contracts upon their expirations as their underlying projects had
been completed.
The increase in rent was due to receiving an approximate $30,800 lump sum
sublease buy-out payment from our sublessee in the first quarter of 2003.
During the fourth quarter of 2003, we successfully renegotiated the lease on
our engineering office in Concord, New Hampshire at a significantly lower rate
than what we had been paying. The lower rate was a result of the decrease in
rental market rates since the time of our previous lease and our relinquishing
of the space that had been previously occupied by our sublesse. Consequently, we
anticipate rent expense in the second and third quarter of the 2004 to be
significantly lower than rent expense during the comparable periods of the prior
year. Our lease expires at the end of October 2004 and we expect to be able to
either renew our lease at that time or find alternative suitable facilities at
minimal cost.
We anticipate that research and development expense for the next few
quarterly reporting periods, inclusive of capitalized software development
costs, will approximate those incurred during the corresponding periods of the
prior year. Research and development expenses were approximately 46.5% and 31.4%
of revenues for the first quarter of 2004 and 2003, respectively.
Interest and other income
Interest and other income 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.
Interest and other income for the first quarter of 2004 decreased by $2,200,
or 37.9%, to $3,600 from $5,800 for the first quarter of 2003. The decrease was
primarily due to lower average rates of interest being earned on excess cash
on-hand throughout the first quarter of 2004 as compared with the first quarter
of 2003.
We expect interest and other income to be lower throughout the remainder of
2004, as compared with 2003, as we expect interest rates to remain low for the
next several months.
Net Loss
As a result of the foregoing items, net loss for the first quarter of 2004
was $431,100, an increase of $51,000 or 13.4%, from a net loss of $380,100 for
the first quarter of 2003. As a result of our continued operating loss we intend
to continue to pursue revenue growth opportunities through all available means.
Liquidity and Capital Resources
As of March 31, 2004, cash and cash equivalents totaled $1,719,600, an
increase of $694,100, or 67.7%, from $1,025,500 as of December 31, 2003.
The increase in cash and cash equivalents was primarily attributable to the
$970,900 net cash infusion from the private placement we completed during the
first quarter of 2004. Offsetting the cash infusion was our $431,100 net loss
for the first quarter of 2004, which resulted from the continued consumption of
cash by our operating activities. Our net loss for the first quarter of 2004
included non-cash charges, comprised of depreciation and amortization, which
aggregated approximately $258,800.
Our operating activities used $274,400 during the first quarter of 2004,
including reductions in accrued liabilities and deferred revenue of $140,700 and
$180,500, respectively. Operating activities that generated cash during the
first quarter of 2004 included a $153,700 reduction in accounts receivable and a
$72,100 increase in accounts payable.
The decrease in deferred revenue was primarily due to the recognition of
revenue from a year-end 2003 transaction that had been previously deferred, due
to various uncertainties surrounding certain issues pertaining to the
transaction. During the first quarter of 2004 these issues were resolved. When
we concluded that all elements necessary to recognize revenue were present, we
reclassified the product-licensing portion of the transaction from the deferred
revenue accounts to product licensing revenue. The service portion of the
transaction remains in deferred revenue and is being ratably amortized over a
two-year period.
Our condensed 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. These
matters raise substantial doubt about our ability to continue in existence as a
going concern. The condensed 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.
We are exploring all options available to increase revenues and to find
alternative sources of financing our operations. If we were unsuccessful in
obtaining 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.
The $974,500 net cash provided by financing activities consisted primarily of
the net cash proceeds of the private placement as well as cash proceeds received
from the issuance of our common stock to employees through our employee stock
purchase program.
Gross accounts receivable as of March 31, 2004 decreased by $152,300, or
26.8%, to $415,600, from $567,900 as of December 31, 2003. The primary reason
for the decrease was the receipt of cash during the first quarter of 2004
related to receivables that had been outstanding at year-end 2003.
As of March 31, 2004, the cost basis of purchased technology was $1,370,100.
There was no asset impairment charge recorded during the first quarter of 2004.
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 first quarter of 2004 decreased by $39,500, or
19.1%, to $167,500 from $207,000 for the first quarter of 2003. The decrease was
due primarily to various components of the purchased technology becoming fully
amortized during 2003.
The net book value of purchased technology as of March 31, 2004 was $167,500.
This amount will be amortized to cost of revenue in its entirety during the
second quarter of 2004. Consequently, we expect cost of revenue to decrease
significantly during the third and fourth quarters of 2004, as compared with the
respective periods in 2003.
Accounts payable as of March 31, 2004 increased by $72,100, or 137.9%, to
$124,400 from $52,300 as of December 31, 2003. Accounts payable are comprised of
our various operating expenses and increased due to the timing of the payment of
various invoices.
Accrued expenses as of March 31, 2004 decreased by $140,700, or 29.9%, to
$330,100 from $470,800 as of December 31, 2003. Accrued expenses are charges for
services rendered for which an invoice has not yet been received such as
consulting fees, legal and accounting fees, and utilities. Items that were
accrued as of December 31, 2003 that were paid out during the first quarter of
2004 included approximately $69,800 of employee costs (primarily accrued
salaries, commissions and benefits) and $72,900 of outside services, including
legal fees, accounting fees and engineering consulting fees.
As of March 31, 2004, we had current assets of $2,116,100 and current
liabilities of $1,466,000, which netted to working capital of $650,100. Included
in current liabilities was deferred revenue of $1,011,500.
We have been successful in significantly reducing operating costs through a
series of strategic restructurings and work force reductions that began in
September of 2001. With our reduced operating costs structure and the cash
raised in the private placement, which closed during the first quarter of 2004,
we believe that we will be able to support our operational needs with currently
available resources for at least the next few quarterly periods.
Stock Option Exchange Program
On June 24, 2003, we announced a voluntary stock option exchange program for
employees who were not executive officers or members of our Board of Directors.
Under the terms of the exchange program, eligible employees had the opportunity,
if they so chose, to cancel any of their outstanding unexercised options to
purchase our common stock that had an exercise price greater than or equal to
$0.50 in exchange for an equal number of new options to be granted at a future
date. The exchange program was open until 5:00 p.m., Eastern Time, on July 23,
2003. The new options were granted on January 26, 2004 at an exercise price of
$0.41 per share, the closing bid price per share of our common stock on the
grant date of the new options.
The following table sets forth details pertaining to the eligibility and
results of the exchange program as of the program's close on July 23, 2003:
Eligible to Elected to
Total Exchange Exchange
Number of eligible ---------- ----------- -----------
Employees 24 21 19
Percentage (1) 100.0% 87.5% 90.5%
Outstanding options 2,776,161 677,917 578,935
Percentage (1) 100.0% 24.42% 85.4%
(1) Elected to exchange percentage calculated as a percentage of eligible to
exchange. Eligible to exchange percentage calculated as a percentage of
total.
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
Our management carried out an evaluation, with the participation of our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of March 31, 2004. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the
Securities and Exchange Commission.
There has not been any change in our internal control over financial
reporting in connection with the evaluation required by Rule 13a-15(d) under the
Exchange Act that occurred during the quarter ended March 31, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II--OTHER INFORMATION
ITEM 2. Changes in Securities, Uses of Proceeds and Issuer Purchases of Equity
Securities
On January 29, 2004, we received gross proceeds of $1,150,000 through the
private placement of 5,000,000 shares of common stock and five-year warrants to
purchase 2,500,000 shares of common stock at an exercise price of $0.33 per
share. The net proceeds will be used for working capital and general corporate
purposes. We also issued as a placement agent fee to Griffin Securities, cash
equal to 10% of the gross proceeds, five-year warrants to purchase an aggregate
of 500,000 shares of our common stock at an exercise price of $0.23 per share
and an aggregate of 250,000 shares of our common stock at an exercise price of
$0.33 per share. The securities were not registered under the Securities Act of
1933 because such securities were offered and sold in transactions not involving
a public offering, exempt from registration under the Securities Act pursuant to
Section 4(2) and in compliance with Rule 506 thereunder.
During the first quarter of 2004, we granted stock options to certain of our
employees to purchase an aggregate of 578,935 shares of common stock at an
exercise price of $0.41 per share. The grant of such stock options to the
employees was not registered under the Securities Act because the stock options
either did not involve an offer or sale for purposes of Section 2(a)(3) of the
Securities Act, in reliance on the fact that the stock options were granted for
no consideration, or were offered and sold in transactions not involving a
public offering, exempt from registration under the Securities Act pursuant to
Section 4(2).
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 31 - Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32 - Section 1350 Certifications
(b) Reports on Form 8-K
During the quarter ended March 31, 2004, we filed or furnished the following
current reports on Form 8-K with the Securities and Exchange Commission:
Current report on Form 8-K, dated February 2, 2004, was furnished on February
3, 2004. The item reported was:
o Item 5 - Other Events, which reported the issuance of a press release
announcing the completion of a private offering of our common stock.
Current report on Form 8-K, dated February 6, 2004, was furnished on February
6, 2004. The item reported was:
o Item 5 - Other Events, which furnished the documents related to the
previously announced private offering.
Current report on Form 8-K, dated March 4, 2004, was furnished on March 5,
2004. The item reports was:
o Item 12 - Results of Operations and Financial Condition, which reported
the issuance of a press release announcing our financial results for
the quarter and year ended December 31, 2003.
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 17, 2004
By: /s/ Robert Dilworth
-------------------
Robert Dilworth,
Chief Executive Officer (Interim) and
Chairman of the Board
(Principal Executive Officer)
Date: May 17, 2004
By: /s/ William Swain
--------------------
William Swain,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)