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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 June 30, 2004
Commission File Number: 0-21683
----------------------
GraphOn Corporation
(Exact name of Registrant as specified in its charter)
----------------------
Delaware 13-3899021
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3130 Winkle Avenue
Santa Cruz, CA 95065-1913
(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 August 3, 2004, there were issued and outstanding 21,696,765 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 8
Item 3.Quantitative and Qualitative Disclosures About
Market Risk 21
Item 4.Controls and Procedures 21
PART II.
Item 2.Changes in Securities, Uses of Proceeds and Issuer
Purchases of Equity Securities 22
Item 5.Other Information 22
Item 6.Exhibits and Reports on Form 8-K 22
Signatures 23
PART I--FINANCIAL INFORMATION
ITEM I Financial Statements
GRAPHON CORPORATION
CONDENSED BALANCE SHEETS
June 30, December 31,
2004 2003
ASSETS ----------- -----------
------------ (Unaudited)
Current Assets:
Cash and cash equivalents ........................ $ 1,258,800 $ 1,025,500
Accounts receivable, net of allowance for
doubtful accounts of $46,800 and $46,800 ........ 716,300 521,100
Prepaid expenses and other current assets ........ 24,100 23,100
----------- -----------
Total Current Assets ............................. 1,999,200 1,569,700
----------- -----------
Property and equipment, net ........................ 99,600 144,800
Purchased technology, net .......................... -- 335,000
Capitalized software, net .......................... 382,800 500,600
Other assets ....................................... 10,800 11,900
----------- -----------
TOTAL ASSETS .................................... $ 2,492,400 $ 2,562,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable ................................. $ 109,200 $ 52,300
Accrued expenses ................................. 413,900 470,800
Deferred revenue ................................. 915,800 763,000
----------- -----------
Total Current Liabilities ........................ 1,438,900 1,286,100
----------- -----------
Long-term Liabilities:
Deferred revenue ................................. 422,000 429,000
Commitments and contingencies
----------- -----------
TOTAL LIABILITIES ............................... 1,860,900 1,715,100
----------- -----------
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, 21,666,097 and 16,618,459
shares issued and outstanding 2,200 1,700
Additional paid in capital 46,931,900 45,985,300
Notes receivable (50,300) (50,300)
Accumulated other comprehensive loss (900) (1,400)
Accumulated deficit (46,251,400) (45,088,400)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 631,500 846,900
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,492,400 $ 2,562,000
=========== ===========
See accompanying notes to condensed financial statements.
2
GRAPHON CORPORATION
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue:
Product licenses .......................... $ 430,800 $ 931,100 $ 1,077,000 $ 1,748,300
Service fees .............................. 241,900 202,500 494,000 391,700
Other ..................................... 4,700 41,700 9,300 79,100
----------- ----------- ----------- -----------
Total Revenue .......................... 677,400 1,175,300 1,580,300 2,219,100
----------- ----------- ----------- -----------
Cost of Revenue:
Product costs ............................. 230,800 248,500 457,100 500,700
Service costs ............................. 73,800 94,500 157,700 166,800
----------- ----------- ----------- -----------
Total Cost of Revenue .................. 304,600 343,000 614,800 667,500
----------- ----------- ----------- -----------
Gross Profit ........................... 372,800 832,300 965,500 1,551,600
----------- ----------- ----------- -----------
Operating Expenses:
Selling and marketing ..................... 404,700 448,300 762,800 869,200
General and administrative ................ 263,000 481,700 512,700 838,000
Research and development .................. 440,000 318,800 859,600 646,800
----------- ----------- ----------- -----------
Total Operating Expenses .................. 1,107,700 1,248,800 2,135,100 2,354,000
----------- ----------- ----------- -----------
Loss From Operations ...................... (734,900) (416,500) (1,169,600) (802,400)
----------- ----------- ----------- -----------
Other Income (Expense):
Interest and other income .............. 2,900 3,100 6,500 8,900
Interest and other expense ............. - (4,300) - (4,300)
----------- ----------- ----------- -----------
Total Other Income (Expense) ........... 2,900 (1,200) 6,500 4,600
----------- ----------- ----------- -----------
Net Loss .................................. $ (732,000) $ (417,700) $(1,163,100) $ (797,800)
Other Comprehensive Loss, net of tax
Foreign currency translation gain (loss) (100) - 500 (600)
----------- ----------- ----------- -----------
Comprehensive Loss ........................ $ (732,100) $ (417,700) $(1,162,600) $ (798,400)
=========== =========== =========== ===========
Basic and Diluted Loss per Common Share.... $ (0.03) $ (0.03) $ (0.06) $ (0.05)
=========== =========== =========== ===========
Weighted Average Common Shares Outstanding. 21,647,086 16,602,719 20,869,550 16,598,708
=========== =========== =========== ===========
See accompanying notes to condensed financial statements.
3
GRAPHON CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
2004 2003
----------- -----------
(Unaudited) (Unaudited)
Cash Flows From Operating Activities:
Net loss ........................................... $(1,163,100) $ (797,800)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................... 517,400 632,000
Loss on disposal of fixed assets ................ - 4,300
Interest accrued on directors notes receivable ... (700) (1,000)
Provision for doubtful accounts ................. - 5,200
Changes in operating assets and liabilities:
Accounts receivable ............................. (195,200) (230,000)
Prepaid expenses and other assets ............... (1,000) 175,400
Accounts payable ................................ 56,900 (66,000)
Accrued expenses ................................ (56,900) (327,800)
Deferred revenue ................................ 145,800 45,400
----------- -----------
Net Cash Used In Operating Activities .............. (696,800) (560,300)
----------- -----------
Cash Flows From Investing Activities:
Capitalization of software development costs ....... - (282,200)
Capital expenditures ............................... (18,600) (1,600)
Other assets ....................................... 1,100 40,400
----------- -----------
Net Cash Used In Investing Activities ........... (17,500) (243,400)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from exercise of warrants ................. 6,900 -
Proceeds from private placement
of common stock ................................... 1,150,000 -
Costs of private placement of common stock ......... (213,400) -
Proceeds from sale of common stock under
employee stock purchase plan ...................... 3,600 2,000
----------- -----------
Net Cash Provided By Financing Activities ....... 947,100 2,000
----------- -----------
Effect of exchange rate fluctuations on cash and
cash equivalents ................................ 500 (600)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 233,300 (802,300)
Cash and Cash Equivalents, beginning of period ..... 1,025,500 1,958,200
----------- -----------
Cash and Cash Equivalents, end of period ........... $ 1,258,800 $ 1,155,900
=========== ===========
Supplemental Disclosure of Cash Flow Information:
None.
Noncash Investing and Financing Activities:
None.
See accompanying notes to condensed financial statements.
4
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 three and
six-month periods ended June 30, 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 $936,600, 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 while simultaneously looking at
ways to improve its revenue stream. Additionally, the Company continues to
review potential business combination opportunities as they present themselves
and at such time as one might make financial sense and add value for the
shareholders, the Company will pursue it. The Company believes that improving
its current revenue stream, coupled with its cash on hand, including the cash
raised in the private placement, will support its planned operations during
2004.
Certain amounts in the prior period's financial statements have been
reclassified to conform to the current period's presentation.
5
2. Revenue
Product line revenue for the three-month periods ended June 30, 2004 and
2003, was as follows:
Change in
Product licenses 2004 2003 Dollars Percent
---------------- ----------- ----------- ----------- ---------
Windows ..... $ 179,200 $ 645,100 $ (465,900) (72.2)%
Unix ........ 251,600 286,000 (34,400) (12.0)
----------- ----------- ----------- ---------
430,800 931,100 (500,300) (53.7)
----------- ----------- ----------- ---------
Service fees
Windows ..... 116,300 48,600 67,700 139.3
Unix ........ 125,600 153,900 (28,300) (18.4)
----------- ----------- ----------- ---------
241,900 202,500 39,400 19.5
----------- ----------- ----------- ---------
Other (1) ... 4,700 41,700 (37,000) (88.7)
----------- ----------- ----------- ---------
Total Revenue $ 677,400 $ 1,175,300 $ (497,900) (42.4)%
=========== =========== =========== =========
Product line revenue for the six-month periods ended June 30, 2004 and 2003,
was as follows:
Change in
Product licenses 2004 2003 Dollars Percent
---------------- ----------- ----------- ----------- ---------
Windows ..... $ 608,900 $ 1,057,700 $ (448,800) (42.4)%
Unix ........ 468,100 690,600 (222,500) (32.2)
----------- ----------- ----------- ---------
1,077,000 1,748,300 (671,300) (38.4)
----------- ----------- ----------- ---------
Service fees
Windows ..... 253,300 90,900 162,400 178.7
Unix ........ 240,700 300,800 (60,100) (20.0)
----------- ----------- ----------- ---------
494,000 391,700 102,300 26.1
----------- ----------- ----------- ---------
Other (1) ... 9,300 79,100 (69,800) (88.2)
----------- ----------- ----------- ---------
Total Revenue $ 1,580,300 $ 2,219,100 $ (638,800) (28.8)%
=========== =========== =========== =========
(1) 2004 is comprised of the amortization of private labeling fees. 2003 is
comprised of the amortization of distribution and private labeling fees.
3. Loss Per Share
Basic loss per share is calculated using the weighted average number of
shares outstanding during the period. Diluted loss per share is not included
since they are antidilutive.
4. Stockholders' Equity
During the second quarter of 2004, the Company issued 30,000 shares of common
stock upon the exercise of warrants issued in conjunction with the private
placement transaction consummated during the first quarter of 2004. The Company
received cash proceeds of $6,900 as a result of the exercise of these warrants.
During the first quarter of 2004, the Company issued 5,000,000 shares of
common stock in a private placement transaction resulting in cash proceeds of
$1,150,000. The costs of the private placement, which include commissions, legal
fees, accounting fees, registration and other miscellaneous fees, have
aggregated approximately $213,400 through the six months ended June 30, 2004.
Also during the first quarter, the Company issued 17,638 share of common
stock to employees under provisions of the Employee Stock Purchase Plan (the
ESPP), resulting in cash proceeds of approximately $3,600.
6
5. Litigation
The Company is currently not involved in any litigation that it believes
would have a materially adverse affect upon its financial results or financial
position.
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" (SFAS 123). The Company has not changed to the fair
value method of accounting for stock-based employee compensation. SFAS 123, as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure" 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 for each of the
respective periods:
Three months ended
June 30,
2004 2003
--------- ---------
Net loss:
As reported: ......................... $(732,000) $(417,700)
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 .......................... (44,400) (56,800)
--------- ---------
Pro forma net loss ................... $(776,400) $(474,500)
========= =========
Basic and diluted loss per share:
As reported .......................... $ (0.03) $ (0.03)
Pro forma ............................ $ (0.04) $ (0.03)
Six months ended
June 30,
2004 2003
----------- -----------
Net loss:
As reported: ......................... $(1,163,100) $ (797,800)
Add: stock-based compensation expense
included in net loss, net of related
tax effects .......................... - -
7
Deduct: total stock-based compensation
expense determined under fair-value
method for all awards, net of related
tax effects .......................... (73,000) (190,200)
----------- -----------
Pro forma net loss ................... $(1,236,100) $ (988,000)
=========== ===========
Basic and diluted loss per share:
As reported .......................... $ (0.06) $ (0.05)
Pro forma ............................ $ (0.06) $ (0.06)
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.
As of June 30, 2004 there 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. Such factors, including those that follow, 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, could have a material adverse effect upon our business,
results of operations and financial condition.
We Have A History Of Operating Losses And Expect These Losses To Continue, At
Least For The Near Future.
We have experienced significant losses since we began operations. We expect
to continue to incur losses at least for the near future. We have slashed our
expenses over the course of the last three years; however, we cannot give
assurance that revenues will increase sufficiently to exceed current expense
levels. If revenues grow more slowly than anticipated, or if operating expenses
exceed expectations, we may not become profitable. Even if we become profitable,
we may be unable to sustain profitability.
If We Are Unable To Generate a Positive Cash Flow From Operations, Or Are
Unsuccessful In Securing Alternative Means Of Financing, We May Not Be Able To
Continue Our Operations.
8
We have not been able to generate positive cash flow from our operations and
have been financing our operations primarily from the cash raised when we called
various warrants in 1999 and 2000, and from the sale of common stock in the
private placement that occurred during the first quarter of 2004. If we were
unable to generate positive cash flow from our operations or we were unable to
raise alternative sources of financing, we may need to discontinue our
operations entirely.
Our Revenue Is Typically Generated From A Very Limited Number Of
Significant Customers.
A material portion of our revenue during any reporting period is typically
generated from a very limited number of customers. Consequently, if any of these
significant customers reduce their order level or fail to order during a
reporting period, our revenue could be materially adversely impacted.
Several of our significant customers are independent software vendors (ISVs)
who have bundled our products with theirs to sell as web-enabled versions of
their products. Other significant customers include distributors who sell our
products directly. We do not control our significant customers. Some of our
significant customers maintain inventories of our products for resale to smaller
end-users. If they reduce their inventory of our products, our revenue and
business could be materially adversely impacted.
If We Are Unable To Develop New Products And Enhancements To Our Existing
Products, Our Business, Results Of Operations And Financial Condition Could Be
Materially Adversely Impacted.
Our future success depends on our ability to continually enhance our current
products and develop and introduce new products that our customers choose to
buy. If we are unable to satisfy our customers' demands and remain competitive
with other products that could satisfy their needs by introducing new products
and enhancements, our business, results of operations and financial condition
could be materially adversely impacted.
Our future success could be limited by:
o severely constrained resources currently available to dedicate
to development;
o delays in introductions of new products; and
o competitors with more resources whose new products,
enhancements or technologies could replace or shorten the
life cycle of our existing products.
Our Stock Price Has Historically Been Volatile And You Could Lose The Value Of
Your Investment.
Our stock price has historically been volatile; it has fluctuated
significantly to date. The trading price of our stock is likely to continue to
be highly volatile and subject to wide fluctuations. Your investment in our
stock could lose value.
9
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
10
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 deferred and not recognized until 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 typically
capitalized until the product is available for general release to customers.
Capitalized costs are amortized based on either estimated current and future
revenue for the 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.
11
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 and Six-Month Periods Ended June 30, 2004
Versus the Three and Six-Month Periods Ended June 30, 2004.
Revenue
Product line revenue for the three-month periods ended June 30, 2004 and 2003
was as follows:
Change in
Product licenses 2004 2003 Dollars Percent
---------------- ----------- ----------- ----------- ---------
Windows ..... $ 179,200 $ 645,100 $ (465,900) (72.2)%
Unix ........ 251,600 286,000 (34,400) (12.0)
----------- ----------- ----------- ---------
430,800 931,100 (500,300) (53.7)
----------- ----------- ----------- ---------
Service fees
Windows ..... 116,300 48,600 67,700 139.3
Unix ........ 125,600 153,900 (28,300) (18.4)
----------- ----------- ----------- ---------
241,900 202,500 39,400 19.5
----------- ----------- ----------- ---------
Other (1) ... 4,700 41,700 (37,000) (88.7)
----------- ----------- ----------- ---------
Total Revenue $ 677,400 $ 1,175,300 $ (497,900) (42.4)%
=========== =========== =========== =========
Product line revenue for the six-month periods ended June 30, 2004 and 2003,
was as follows:
Change in
Product licenses 2004 2003 Dollars Percent
---------------- ----------- ----------- ----------- ---------
Windows ..... $ 608,900 $ 1,057,700 $ (448,800) (42.4)%
Unix ........ 468,100 690,600 (222,500) (32.2)
----------- ----------- ----------- ---------
1,077,000 1,748,300 (671,300) (38.4)
----------- ----------- ----------- ---------
Service fees
Windows ..... 253,300 90,900 162,400 178.7
Unix ........ 240,700 300,800 (60,100) (20.0)
----------- ----------- ----------- ---------
494,000 391,700 102,300 26.1
----------- ----------- ----------- ---------
Other (1) ... 9,300 79,100 (69,800) (88.2)
----------- ----------- ----------- ---------
Total Revenue $ 1,580,300 $ 2,219,100 $ (638,800) (28.8)%
=========== =========== =========== =========
(1) 2004 is comprised of the amortization of private labeling fees. 2003 is
comprised of the amortization of distribution and private labeling fees.
The decrease in Windows-based product revenue in the second quarter of 2004,
as compared with the same period in 2003, was primarily due to decreased product
ordering levels from one of our significant ISV customers and the deferral of
product revenue related to two transactions entered into with one of our
distributors.
In the second quarter of 2004 we did not receive any product orders from one
of our significant ISV customers, whereas in the second quarter of 2003 we
received approximately $290,000 of product orders from this customer. 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 changed
12
sales model, we are unable to assess what effect this may have on our total
revenue from this customer for the remainder of 2004.
During the second quarter of 2004, we entered into two transactions with one
of our distributors that we ended up deferring because not all elements required
to recognize revenue had been met. We deferred approximately $276,900 of
Windows-based product revenue, in the aggregate, from these two transactions.
This amount is reported as a component of deferred revenue - current liabilities
on our balance sheet. We anticipate collecting these amounts and recognizing the
revenue during the third quarter of 2004.
The decrease in Unix product license revenue in the second quarter of 2004,
as compared with the second quarter of 2003, was primarily due to the sporadic
nature of product license revenue derived from enterprise end users. During the
second quarter of 2003, we recorded product-licensing revenue of approximately
$97,000 from four particular enterprise end users, as compared with
approximately $52,700 from these customers during the second quarter of 2004.
The revenue decrease from these four customers accounts for the majority of the
overall decrease in Unix product license revenue. Enterprise customers such as
these have historically tended to license our software intermittently, leading
to the volatile nature of our revenue streams.
Service fees recognized from the sale of Windows-based service contracts
increased in the second quarter of 2004, as compared to the second 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 second quarter of 2004, as compared to the second quarter of
2003, primarily due to the reduction in Unix product sales, as discussed above.
Additionally, a few of our larger Unix customers have opted to purchase service
contracts with service periods longer than one year. Although the price of these
contracts are more than a one-year contract, the amount of revenue recognized in
any one year will be lower than that from a one-year contract, due to the
pricing discounts offered on them.
The decrease in other revenue was related to the distribution agreement we
had signed with our distributor in Japan in 2001. We completed recognizing the
distributors' fee revenue from the distributors agreement as of year-end 2003.
Included in Windows product revenue for the first six months of 2004 is
approximately $176,900 of revenue related to a transaction that occurred during
the fourth quarter of 2003 for which revenue recognition had been deferred, at
year-end 2003, 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 Windows product revenue for the six-month period ended
June 30, 2004 would have been $432,000, a decrease of $625,700, or 59.2% from
$1,057,700 for the same period during 2003.
13
Excluding the 2003 sale recognized in 2004, the $625,700 decrease in
Windows-based product revenue for the six-month period ended June 30, 2004, as
compared with the same period in 2003, was primarily due to decreased ordering
levels from one of our significant ISV customers. During the first six months of
2004 we received approximately $146,300 in product orders from this customer, as
compared with approximately $585,000 for the first six months 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 changed
sales model, we are unable to assess what effect this may have on our total
revenue from this customer for the remainder of 2004.
Another factor contributing to the decrease in Windows-based product revenue
for the six-month period ended June 30, 2004, as compared with the same period
in 2003, was the deferral of approximately $276,000 of revenue from two
transactions entered into with one of our distributors during the period, as
previously mentioned. During the six-month period ended June 30, 2003, we
recognized approximately $160,000 in Windows-based product revenue from
transactions entered into with this distributor.
The decrease in Unix product license revenue for the first six months of
2004, as compared with 2003, was primarily due to decreases in product license
revenue derived from enterprise end users. During the first six months of 2003,
we recorded product-licensing revenue of approximately $242,500 from five
particular enterprise end users, as compared with approximately $26,400 from
these customers during the first six months of 2004. The revenue decrease from
these customers accounts for the majority of the overall decrease in Unix
product licensing revenue. Enterprise customers such as these have historically
tended to license our software intermittently, leading to the volatile nature of
our revenue streams.
Service fees recognized from the sale of Windows-based service contracts
increased in the first six months of 2004, as compared to the first six months
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, including the
sales of service contracts to support the products, began increasing with the
release of Go-Global for Windows and continued throughout 2003. Revenue from a
significant number of the service contracts sold during 2003, and all those sold
during the first six months of 2004 has been recognized during the first six
months of 2004.
Service fees recognized from the sale of Unix-based service contracts
decreased in the first six months of 2004, as compared to the first six months
of 2003, primarily due to the reduction in Unix product sales, as discussed
above. Additionally, a few of our larger Unix customers have opted to purchase
service contracts with service periods longer than one year.
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.
14
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 second quarter of 2004 decreased by $38,400, or
11.2%, to $304,600 from $343,000 for the same period in 2003. Cost of revenue
for the first six months of 2004 decreased by $52,700, or 7.9%, to $614,800 from
$667,500 for the same period in 2003.
Product costs were lower in the second quarter and the first six months of
2004, compared with the second quarter and first six months 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. Service costs were lower in the second quarter and the first six months of
2004, compared with the second quarter and first six months of 2003, primarily
due to severance costs associated with the termination of one engineer during
the second quarter of 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.
Cost of revenue was approximately 45.0% and 29.2% of revenue for the quarters
ended June 30, 2004 and 2003, respectively and 38.9% and 30.1% for the six-month
periods then ended, 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 second
quarter of 2004 decreased by $43,600, or 9.7%, to $404,700 from $448,300 for the
second quarter of 2003. Selling and marketing expenses for the first six months
of 2004 decreased by $106,400, or 12.2%, to $762,800 from $869,200 for the first
six months of 2003.
Primary factors contributing to the net decreases are summarized as follows:
Three Month Six Month
Dollars Dollars
Increase Increase
(Decrease) (Decrease)
Expense From 2003 From 2003
------- --------- ---------
Human resources ........ $ (41,600) $(105,200)
15
Overhead allocations ... (66,300) (125,300)
Marketing expense ...... 45,100 133,600
Travel and entertainment 19,700 15,900
Other items ............ (500) (25,400)
--------- ---------
$ (43,600) $(106,400)
========= =========
The decreases in human resources costs was the aggregate wages, benefits and
commissions savings we realized by having two fewer sales and marketing staff in
both the second quarter and first six months of 2004, as compared with the
second quarter and first six months of 2003.
During the fourth quarter of 2003 we ceased allocating corporate overhead
charges to sales and marketing as no sales and marketing staff were physically
sharing office space at our corporate offices in Morgan Hill. The sales and
marketing staff that had been sharing the space prior to this time were
terminated. Such costs were classified as general and administrative expense
during the first quarter of 2004.
The increases in marketing expense is because we utilized the services of a
marketing consulting firm throughout the second quarter and first six months of
2004 to assist us with several marketing initiatives aimed at growing revenue.
We began incurring such expenses during the second quarter of 2003.
Selling and marketing expenses were 59.7% and 38.1% of revenue for the
quarters ended June 30, 2004 and 2003, respectively, and 48.3% and 39.2% for the
six-month periods then ended, 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 second quarter of 2004 decreased by $218,700, or 45.4%, to
$263,000 from $481,700 for the second quarter of 2003. General and
administrative expenses for the first six months of 2004 decreased by $325,300,
or 38.8%, to $512,700 from $838,000 for the first six months of 2003.
Primary factors contributing to the net decreases are summarized as follows:
Three Month Six Months
Dollars Dollars
Increase Increase
(Decrease) (Decrease)
Expense From 2003 From 2003
------- --------- ---------
Legal Fees ......... $ (90,500) $ (99,000)
Insurance .......... (42,000) (93,500)
Overhead allocations (49,700) (94,100)
Other items ........ (36,500) (38,700)
--------- ---------
$(218,700) $(325,300)
========= =========
The decrease in legal fees is primarily due to the legal fees incurred with
the offer to exchange stock options we made to our employees during July 2003.
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.
16
Our corporate overhead structure was significantly reduced when we
successfully closed the negotiated buy out of the 400 Cochrane Circle lease
during September 2003. Previously, we had been incurring costs associated with
occupying approximately 13,500 square feet. Beginning in September 2003, when we
began occupying 105 Cochrane Circle, our corporate overhead structure was based
on incurring costs associated with occupying approximately 1,000 square feet of
space. During the fourth quarter of 2003 all corporate overheads began being
classified as general and administrative as the corporate facilities were no
longer being shared by sales and marketing personnel, as previously discussed.
We anticipate that aggregate general and administrative expenses for 2004
will be significantly lower than 2003. General and administrative expenses were
approximately 38.8% and 41.0% of revenues for the second quarter of 2004 and
2003, respectively, and 32.4% and 37.8% for the six months periods then ended,
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.
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 typically
capitalized and amortized to expense over the estimated life of the underlying
product, rather than being charged to expense in the period incurred. No product
development costs were capitalized during either the second quarter or first six
months of 2004, whereas approximately $169,400 and $282,200 of product
development costs were capitalized during the second quarter and first six
months of 2003, respectively. 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.
Had these costs not been capitalized, then research and development expenses
for the three and six-month periods ended June 30, 2004 and 2003 would have been
reported as follows:
Period Ended Change in
June 30, 2004 2003 Dollars Percent
-------- -------------- -------------- -------------- -----------
Three-months $ 440,000 $ 488,200 $ (48,200) (9.9)%
Six-months 859,600 929,000 (69,400) (7.5)
During the first quarter of 2003, we reduced our research and development
staff by one. The decrease in salaries and related benefits associated with this
former engineer is the primary reason for the reduction in expenses, as set
forth above. Also contributing to the decrease is lower depreciation expense.
During the first six months of 2003, we purchased no new assets in support of
our research and development efforts. Since that time, various assets became
fully depreciated and hence, did not generate depreciation expense during either
the three or six-month periods ended June 30, 2004.
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
17
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 2004 to be significantly lower than rent expense in
2003. 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 65.0% and 27.1%
of revenues for the second quarter of 2004 and 2003, respectively, and 54.4% and
29.1% of revenues for the first six months then ended, 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 second quarter of 2004 decreased by $200,
or 6.5%, to $2,900 from $3,100 for the second quarter of 2003. Interest and
other income for the first six months of 2004 decreased by $2,400, or 27.0%, to
$6,500 from $8,900 for the first six months of 2003. The decreases were
primarily due to lower average rates of interest being earned on excess cash
on-hand throughout the second quarter and first six months of 2004 as compared
with the second quarter and first six months of 2003.
Although there are indications that the Federal Reserve Bank may be modestly
raising interest rates in the near term, we anticipate that lower levels of
excess cash will offset any such raise. Accordingly, we anticipate that interest
income for the remainder of 2004 will be lower than comparable periods from
2003.
Net Loss
As a result of the foregoing items, net loss for the second quarter of 2004
was $732,000 an increase of $314,300, or 75.0%, from a net loss of $417,700 for
the second quarter of 2003. Net loss for the first six months of 2004 was
$1,163,100, an increase of $365,300, or 45.8%, from a net loss of $797,800 for
the first six months 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 June 30, 2004, cash and cash equivalents totaled $1,258,800, an
increase of $233,300, or 22.8%, from $1,025,500 as of December 31, 2003.
The increase in cash and cash equivalents was primarily attributable to the
$936,600 net cash infusion from the private placement we completed during the
first quarter of 2004. Offsetting the cash infusion was our $1,163,100 net loss
for the first six months of 2004, which resulted from the continued consumption
of cash by our operating activities. Included in net loss are non-cash charges,
comprised of depreciation and amortization, which aggregated approximately
$517,400.
18
Our operating activities used $696,800 during the first six months of 2004,
including a reduction in accrued liabilities of $56,900 and a $195,200 increase
in accounts receivable. Cash for operating activities was generated during the
first six months of 2004 through an increase of $56,900 in accounts payable and
$145,800 in short and long-term deferred revenue.
The increase in the total of short and long-term deferred revenue was
primarily due to the deferral of approximately $276,900 of aggregate
Windows-based product revenue we derived from transactions entered into with a
distributor that did not meet all of the criteria for revenue recognition at the
end of the second quarter of 2004. Offsetting this increase was 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. Upon
resolution of theses issues, we concluded that all elements necessary to
recognize revenue were present. Consequently, 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 $947,100 net cash provided by financing activities consisted primarily of
the $936,600 net cash proceeds of the private placement as well as $3,600
received from the issuance of our common stock to employees through our employee
stock purchase program. Another source of cash from financing activities was the
receipt of approximately $6,900 from the exercise of warrants that were issued
in conjunction with the private placement.
Gross accounts receivable as of June 30, 2004 increased by $195,200, or
34.4%, to $763,100, from $567,900 as of December 31, 2003. The primary reason
for the increase was the timing of a small number of large sales transactions
that occurred during the last few days of the second quarter, which were offset
by year to date cash collections.
As of June 30, 2004, the costs basis of our purchased technology became fully
amortized. 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 second quarter of 2004 decreased by
$39,500, or 19.1%, to $167,500 from $207,000 for the first quarter of 2003. For
the first six months of 2004, purchased technology amortization decreased by
$79,000, or 19.1%, to $335,000 from $414,000 for the first six months of 2003.
19
The decrease was due primarily to various components of the purchased technology
becoming fully amortized during 2003.
Since the net book value of purchased technology as of June 30, 2004 was $0,
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 June 30, 2004 increased by $56,900, or 108.8%, to
$109,200 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 June 30, 2004 decreased by $56,900, or 12.1%, to
$413,900 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 six months
of 2004, thereby decreasing accrued expenses, 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. Offsetting these decreases was an increase in
accrued accounting fees, primarily related to the 2004 annual audit.
As of June 30, 2004, we had current assets of $1,999,200 and current
liabilities of $1,438,900, which netted to working capital of $560,300. Included
in current liabilities was the current portion of deferred revenue of $915,800.
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. Based on our current operating revenues and reduced operating
cost 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%
20
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 June 30, 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 June 30, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
21
PART II--OTHER INFORMATION
ITEM 2. Changes in Securities, Uses of Proceeds and Issuer Purchases of Equity
Securities
During the second quarter of 2004, we granted stock options to certain of our
employees to purchase an aggregate of 410,000 shares of common stock at an
average exercise price of $0.65 per share. We also granted stock options to our
outside directors to purchase an aggregate 152,500 shares of common stock at an
exercise price of $0.56 per share. The grant of such stock options to the
employees and directors 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).
During the second quarter of 2004, we received gross proceeds of $6,900
through the exercise of five-year warrants to purchase 30,000 shares of common
stock at an exercise price of $0.23 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.
ITEM 5. Other Information.
Effective August 1, 2004, we commenced a one-year operating lease for our
corporate offices in California. Monthly rental payments for this facility are
approximately $1,400. We anticipate moving into these facilities, which are
located at 3130 Winkle Avenue, Santa Cruz, California 95065, during August 2004
and do not anticipate that any material costs will be incurred as part of the
move.
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 June 30, 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 May 11, 2004, was furnished on May 12,
2004. The item reported 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 ended March 31, 2004.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
GraphOn Corporation
(Registrant)
Date: August 16, 2004
By: /s/ Robert Dilworth
---------------------------------
Robert Dilworth,
Chief Executive Officer (Interim) and
Chairman of the Board
(Principal Executive Officer)
Date: August 16, 2004
By: /s/ William Swain
---------------------------------
William Swain,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
23