================================================================================
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 September 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 November 4, 2004, there were issued and outstanding 21,716,765
shares of the Registrant's Common Stock, par value $0.0001.
================================================================================
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 22
Item 4.Controls and Procedures 22
PART II.
Item 6.Exhibits 23
Signatures 23
PART I--FINANCIAL INFORMATION
ITEM I Financial Statements
GRAPHON CORPORATION
CONDENSED BALANCE SHEETS
September 30, December 31,
2004 2003
ASSETS ------------- -----------
------------ (Unaudited)
Current Assets:
Cash and cash equivalents $ 1,084,300 $ 1,025,500
Accounts receivable, net of allowance for
doubtful accounts of $46,800 and $46,800 538,300 521,100
Prepaid expenses and other current assets 17,100 23,100
----------- -----------
Total Current Assets 1,639,700 1,569,700
----------- -----------
Property and equipment, net 92,200 144,800
Purchased technology, net - 335,000
Capitalized software, net 325,600 500,600
Other assets 6,700 11,900
----------- -----------
TOTAL ASSETS $ 2,064,200 $ 2,562,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 85,700 $ 52,300
Accrued expenses 390,000 470,800
Deferred revenue 843,600 763,000
----------- -----------
Total Current Liabilities 1,319,300 1,286,100
----------- -----------
Long-term Liabilities:
Deferred revenue 405,000 429,000
Commitments and contingencies
----------- -----------
TOTAL LIABILITIES 1,724,300 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, 21,686,097 and 16,618,459
shares issued and outstanding 2,200 1,700
Additional paid in capital 46,934,100 45,985,300
Notes receivable (50,300) (50,300)
Accumulated other comprehensive loss (1,000) (1,400)
Accumulated deficit (46,545,100) (45,088,400)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 339,900 846,900
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,064,200 $ 2,562,000
=========== ===========
See accompanying notes to condensed financial statements.
GRAPHON CORPORATION
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ----------------
2004 2003 2004 2003
----------- ----------- ----------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue:
Product licenses $ 568,800 $ 769,700 $ 1,645,800 $ 2,506,000
Service fees 257,700 208,000 751,700 599,600
Other 105,000 108,800 114,300 200,000
------------- ----------- ------------- -------------
Total Revenue 931,500 1,086,500 2,511,800 3,305,600
------------- ----------- ------------- -------------
Cost of Revenue
Product costs 60,000 253,300 517,100 754,100
Service costs 87,100 59,800 244,800 226,500
------------- ----------- ------------- -------------
Total Cost of Revenue 147,100 313,100 761,900 980,600
------------- ----------- ------------- -------------
Gross Profit 784,400 773,400 1,749,900 2,325,000
------------- ----------- ------------- -------------
Operating Expenses:
Selling and marketing 356,700 420,500 1,119,500 1,289,700
General and administrative 357,000 300,000 869,700 1,137,900
Research and development 366,800 486,800 1,226,400 1,133,600
Restructuring charge - 80,100 - 80,100
------------- ----------- ------------- -------------
Total Operating Expenses 1,080,500 1,287,400 3,215,600 3,641,300
------------- ----------- ------------- -------------
Loss From Operations (296,100) (514,000) (1,465,700) (1,316,300)
------------- ----------- ------------- -------------
Other Income (Expense):
Interest and other income 2,500 2,600 9,000 11,400
Interest and other expense - - - (4,300)
------------- ----------- ------------- -------------
Total Other Income 2,500 2,600 9,000 7,100
------------- ----------- ------------- -------------
Net Loss (293,600) (511,400) (1,456,700) (1,309,200)
Other Comprehensive Income (Loss), net of tax
Foreign currency translation gain (loss) (100) - 400 (600)
------------- ----------- ------------- -------------
Comprehensive Loss $ (293,700) $ (511,400) $ (1,456,300) $ (1,309,800)
============= =========== ============= =============
Basic and Diluted Loss per Common Share $ (0.01) $ (0.03) $ (0.07) $ (0.08)
============= =========== ============= =============
Weighted Average Common Shares Outstanding 21,679,723 16,613,155 21,218,971 16,603,577
============= =========== ============= =============
See accompanying notes to condensed financial statements.
GRAPHON CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
2004 2003
------------- -------------
(Unaudited) (Unaudited)
Cash Flows From Operating Activities:
Net loss $ (1,456,700) $ (1,309,200)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 596,000 943,500
Restructuring charge - 42,200
Loss on disposal of fixed assets - 4,300
Interest accrued on directors notes receivable (1,400) (1,700)
Provision for doubtful accounts - (3,500)
Changes in operating assets and liabilities:
Accounts receivable (17,200) (467,900)
Prepaid expenses and other assets 6,000 172,300
Accounts payable 33,400 (59,800)
Accrued expenses (80,800) (450,400)
Deferred revenue 56,600 124,700
------------- -------------
Net Cash Used In Operating Activities (864,100) (1,005,500)
------------- -------------
Cash Flows From Investing Activities:
Capitalization of software development costs - (282,200)
Capital expenditures (33,400) (1,600)
Other assets 5,200 58,100
------------- -------------
Net Cash Used In Investing Activities (28,200) (225,700)
------------- -------------
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 (215,200) -
Proceeds from sale of common stock under
employee stock purchase plan 9,000 4,500
------------- -------------
Net Cash Provided By Financing Activities 950,700 4,500
------------- -------------
Effect of exchange rate fluctuations on cash and
cash equivalents 400 (600)
------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents 58,800 (1,227,300)
Cash and Cash Equivalents, beginning of period 1,025,500 1,958,200
------------- -------------
Cash and Cash Equivalents, end of period $ 1,084,300 $ 730,900
============= =============
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 three and
nine-month periods ended September 30, 2004 and 2003, respectively) 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
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 $215,200 through the nine
months ended September 30, 2004.
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 periods' financial statements have been
reclassified to conform to the current periods' presentation.
2. Subsequent Event - Note Receivable
On October 6, 2004 the Company entered into a letter of intent to acquire a
privately held software engineering firm (the "Target"). Contemporaneously
therewith, the Company loaned $350,000 to the majority shareholder of the Target
to enable such shareholder to acquire all of the shares of the Target's
outstanding common stock held by a minority shareholder. A five-year promissory
note (the "Note") of the majority shareholder, which bears interest at a rate of
3.62 per annum, evidences this loan. The Company has the option to accelerate
the maturity date of the Note upon the occurrence of certain events.
The Note is secured by approximately 65% of the outstanding common shares of
the Target and any shares of the Company's common stock that may be received in
exchange for such shares (the "Pledged Shares"). In the event that the majority
shareholder sells or transfers any of the Pledged Shares, the Company shall be
paid 25% of the gross proceeds of such sale, which shall be applied in reduction
of the then outstanding balance of the Note.
There can be no assurance that the Company will execute a definitive
agreement to acquire the Target or if executed, that the acquisition of the
Target will be consummated.
3. Revenue
Product line revenue for the three-month periods ended September 30, 2004 and
2003, was as follows:
Change in
Product licenses 2004 2003 Dollars Percent
---------------- ------------------ ------------------ ----------------- --------------
Windows $ 284,900 $ 410,500 $ (125,600) (30.6)%
Unix 283,900 359,200 (75,300) (21.0)
------------------ ------------------ ----------------- --------------
568,800 769,700 (200,900) (26.1)
------------------ ------------------ ----------------- --------------
Service fees
Windows 126,900 63,500 63,400 99.8
Unix 130,800 144,500 (13,700) (9.5)
------------------ ------------------ ----------------- --------------
257,700 208,000 49,700 23.9
------------------ ------------------ ----------------- --------------
Other (1) 105,000 108,800 (3,800) (3.5)
------------------ ------------------ ----------------- --------------
Total Revenue $ 931,500 $ 1,086,500 $ (155,000) (14.3)%
================== ================== ================= ==============
Product line revenue for the nine-month periods ended September 30, 2004 and
2003, was as follows:
Change in
Product licenses 2004 2003 Dollars Percent
---------------- ------------------ ------------------ ----------------- --------------
Windows $ 893,900 $ 1,456,200 $ (562,300) (38.6)%
Unix 751,900 1,049,800 (297,900) (28.4)
------------------ ------------------ ----------------- --------------
1,645,800 2,506,000 (860,200) (34.3)
------------------ ------------------ ----------------- --------------
Service fees
Windows 380,200 154,400 225,800 146.2
Unix 371,500 445,200 (73,700) (16.6)
------------------ ------------------ ----------------- --------------
751,700 599,600 152,100 25.4
------------------ ------------------ ----------------- --------------
Other (1) 114,300 200,000 (85,700) (42.9)
------------------ ------------------ ----------------- --------------
Total Revenue $ 2,511,800 $ 3,305,600 $ (793,800) (24.0)%
================== ================== ================= ==============
(1) 2004 is comprised of the sale of a software developer's kit and
amortization of private labeling fees. 2003 is comprised of the
amortization of distribution and private labeling fees.
4. 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.
5. Stockholders' Equity
During the first and third quarters of 2004, the Company issued 17,638 and
20,000 shares of common stock, respectively, to employees under provisions of
the Employee Stock Purchase Plan (the ESPP), resulting in cash proceeds of
approximately $3,600 and $5,400, respectively.
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 $215,200 through the nine months ended September 30,
2004.
6. 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.
7. 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. 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 September 30,
2004 2003
----------------- ----------------
Net loss:
As reported: $ (293,600) $ (511,400)
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 (51,000) (42,400)
---------------- -----------------
Pro forma net loss $ (344,600) $ (553,800)
================ =================
Basic and diluted loss per share:
As reported $ (0.01) $ (0.03)
Pro forma $ (0.02) $ (0.03)
Nine months ended September 30,
2004 2003
----------------- -----------------
Net loss:
As reported: $ (1,456,700) $ (1,309,200)
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 (124,000) (232,600)
---------------- -----------------
Pro forma net loss $ (1,580,700) $ (1,541,800)
================ =================
Basic and diluted loss per share:
As reported $ (0.07) $ (0.08)
Pro forma $ (0.07) $ (0.09)
8. Commitments and Contingencies
Effective November 1, 2003, the Company commenced a one-year
month-to-month 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. During October 2004, this
lease was renewed for a one-year term and, commencing November 1, 2004, the
monthly rental payments increased to approximately $5,300.
All other facilities currently occupied by the Company are also 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
other month-to-month facilities currently being occupied are approximately
$3,000. The Company currently has no plans to vacate any of its current
facilities.
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.
We have experienced significant losses since we began operations. 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.
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 were unable to
raise alternative sources of financing, we might 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.
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 deferred and not recognized until the fee is
collected.
The Company recognizes revenue using the residual method pursuant to the
requirements of SOP 97-2, as amended by SOP 98-9. Revenues recognized from
multiple-element software arrangements are allocated to each element of the
arrangement based on the fair values of the elements, such as licenses for
software products, maintenance, consulting services or customer training. The
determination of fair value is based on objective evidence, which is specific to
the Company. The Company limits its assessment of objective evidence for each
element to either the price charged when the same element is sold separately or
the price established by management having the relevant authority to do so, for
an element not yet sold separately. If evidence of fair value of all undelivered
elements exists but evidence does not exist for one or more delivered elements,
then revenue is recognized using the residual method. Under the residual method,
the fair value of the undelivered elements is deferred and the remaining portion
of the arrangement fee is recognized as revenue.
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 employee
and directors stock options and employee 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 7.
Results of Operations for the Three and Nine-Month Periods Ended September 30,
2004 Versus the Three and Nine-Month Periods Ended September 30, 2003.
Revenue
Product line revenue for the three-month periods ended September 30, 2004 and
2003, was as follows:
Change in
Product licenses 2004 2003 Dollars Percent
---------------- ------------------ ------------------ ----------------- --------------
Windows $ 284,900 $ 410,500 $ (125,600) (30.6)%
Unix 283,900 359,200 (75,300) (21.0)
------------------ ------------------ ----------------- --------------
568,800 769,700 (200,900) (26.1)
------------------ ------------------ ----------------- --------------
Service fees
Windows 126,900 63,500 63,400 99.8
Unix 130,800 144,500 (13,700) (9.5)
------------------ ------------------ ----------------- --------------
257,700 208,000 49,700 23.9
------------------ ------------------ ----------------- --------------
Other (1) 105,000 108,800 (3,800) (3.5)
------------------ ------------------ ----------------- --------------
Total Revenue $ 931,500 $ 1,086,500 $ (155,000) (14.3)%
================== ================== ================= ==============
Product line revenue for the nine-month periods ended September 30, 2004 and
2003, was as follows:
Change in
Product licenses 2004 2003 Dollars Percent
---------------- ------------------ ------------------ ----------------- --------------
Windows $ 893,900 $ 1,456,200 $ (562,300) (38.6)%
Unix 751,900 1,049,800 (297,900) (28.4)
------------------ ------------------ ----------------- --------------
1,645,800 2,506,000 (860,200) (34.3)
------------------ ------------------ ----------------- --------------
Service fees
Windows 380,200 154,400 225,800 146.2
Unix 371,500 445,200 (73,700) (16.6)
------------------ ------------------ ----------------- --------------
751,700 599,600 152,100 25.4
------------------ ------------------ ----------------- --------------
Other (1) 114,300 200,000 (85,700) (42.9)
------------------ ------------------ ----------------- --------------
Total Revenue $ 2,511,800 $ 3,305,600 $ (793,800) (24.0)%
================== ================== ================= ==============
(1) 2004 is comprised of the sale of a software developer's kit and
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 third 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 deferral of the
revenue pertaining to the third quarter product order from one of our
distributors. Partially offsetting these decreases was the recognition of
revenue, which had been previously deferred, relating to two transactions
entered into with one of our distributors during the second quarter of 2004.
In the third quarter of 2004 we did not receive any product orders from one
of our significant ISV customers, whereas in the third quarter of 2003 we
received approximately $290,000 of product orders from this customer, which
represented approximately 24.9% of all orders received during the third 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 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.
In the third quarter of 2004, we received a product order of approximately
$176,900 from one of our distributors. Upon reviewing the order, we noted that
not all elements required for revenue recognition were present, so we concluded
that the revenue related to the order must be deferred until such time that all
the necessary elements are met. Consequently, we increased deferred revenue -
current liabilities on our balance sheet for this amount as we anticipate that
all the necessary elements for revenue recognition will be met during the fourth
quarter of 2004.
During the third quarter of 2004, the remaining elements required to
recognize revenue related to two transactions that we had entered into with one
of our distributors and deferred during the second quarter of 2004 were met.
Accordingly, we reduced deferred revenue - current liabilities and recognized
the revenue for these two transactions during the third quarter of 2004.
The decrease in Unix product license revenue in the third quarter of 2004, as
compared with the third quarter of 2003, was primarily due to the sporadic
nature of product license revenue derived from enterprise end users. During the
third quarter of 2003, we recorded product-licensing revenue of approximately
$159,600 from five particular enterprise end users, as compared with
approximately $0 from these customers during the third quarter of 2004. The
revenue decrease from these five customers accounts for the majority of the
overall decrease in Unix product license revenue. Partially offsetting these
decreases was product-licensing revenue of approximately $68,000 from one
enterprise end user, during the third quarter of 2004, as compared with
approximately $13,400 from this customer during the third quarter of 2003.
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 third quarter of 2004, as compared to the third 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 third quarter of 2004, as compared to the third quarter of
2003, primarily due to the reduction in Unix product sales, as discussed above.
The decrease in other revenue recognized during the third quarter of 2004 as
compared to the third quarter of 2003 was primarily due to a decrease in
distributor fee revenue of approximately $37,500. Partially offsetting this
decrease was an increase in revenue derived from the sale of software
developer's kits of approximately $32,000.
Included in Windows product revenue for the first nine 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 nine-month period
ended September 30, 2004 would have been $717,000, a decrease of $739,200, or
50.1% from $1,456,200 for the same period during 2003.
Excluding the 2003 sale recognized in 2004, the $739,200 decrease in
Windows-based product revenue for the nine-month period ended September 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 nine
months of 2004 we received approximately $146,300 in product orders from this
customer, as compared with approximately $877,500 for the first nine 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.
The decrease in Unix product license revenue for the first nine months of
2004, as compared with 2003, was primarily due to decreases in product license
revenue derived from enterprise end users. During the first nine months of 2003,
we recorded product-licensing revenue of approximately $275,400 from six
particular enterprise end users, as compared with approximately $105,500 from
these customers during the first nine months of 2004. The revenue decrease from
these customers accounts for more than half 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 nine months of 2004, as compared to the first nine 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 of the
service contracts sold during the first nine months of 2004, have been
recognized during the first nine months of 2004.
Service fees recognized from the sale of Unix-based service contracts
decreased in the first nine months of 2004, as compared to the first nine months
of 2003, primarily due to the reduction in Unix product sales, as discussed
above.
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.
The decrease in other revenue for the first nine-months of 2004 as compared
to the first nine-months of 2003 is primarily due to a decrease of approximately
$112,500 in distributor fee revenue. The distributor fee we had been recognizing
as revenue throughout 2002 and 2003 was fully amortized as of December 31, 2003;
consequently, no distributor fee revenue was recognized during the first nine
months of 2004. This decrease was partially offset by an increase in revenue
from the sale of software developer's kits of approximately $32,000.
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 and 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 third quarter of 2004 decreased by $166,000, or
53.0%, to $147,100 from $313,100 for the same period in 2003. Cost of revenue
for the first nine months of 2004 decreased by $218,700, or 22.3%, to $761,900
from $980,600 for the same period in 2003.
Product costs were lower in the third quarter and the first nine months of
2004, compared with the same periods of 2003, primarily because certain
purchased technologies were fully amortized as of year-end 2003 and the
remainder of our purchased technologies became fully amortized at the end of the
second quarter of 2004. Partially offsetting the fully amortized purchased
technologies was the commencement of amortization of certain in-house
development costs that were capitalized during 2003.
During the fourth quarter of 2003 we began classifying our customer service
employee benefits to cost of revenue - service costs, similar to the
classification of customer service wages. Had these costs been classified to
cost of revenue - service costs throughout 2003, then cost of revenue - service
costs for the three and nine-month periods ended September 30, 2004 and 2003
would have been reported as follows:
Three-month Period Ended Change in
September 30, 2004 2003 Dollars Percent
------------- ----------- ----------- ----------- --------
As reported $ 87,100 $ 59,800 $ 27,300 45.7%
Benefits incurred
during period - 14,600 (14,600) (100.0)%
----------- ----------- ----------- --------
Total, including
benefits incurred $ 87,100 $ 74,400 $ 12,700 17.1%
=========== =========== =========== ========
Nine-month Period Ended Change in
September 30, 2004 2003 Dollars Percent
------------- ----------- ----------- ----------- --------
As reported $ 244,800 $ 226,500 $ 18,300 8.1%
Benefits incurred
during period - 44,200 (44,200) (100.0)%
----------- ----------- ----------- --------
Total, including
benefits incurred $ 244,800 $ 270,700 $ (25,900) (9.6)%
=========== =========== =========== ========
Total service costs were higher in the third quarter of 2004 as compared to
the same period in 2003 primarily due to increased costs of healthcare and other
employee benefits. The decrease in total service costs for the first nine months
of 2004, as compared to the same period in 2003 is primarily due to the
resignation of one customer service engineer in early 2003.
We expect product costs to remain fairly constant over the next few reporting
periods. Cost of revenue was approximately 15.8% and 28.8% of revenue for the
quarters ended September 30, 2004 and 2003, respectively and 30.3% and 29.7% for
the nine-month periods then ended, respectively.
Selling and Marketing Expenses
Selling and marketing expenses primarily consist of salaries and associated
benefits, sales commissions, marketing expenses, travel expenses, trade show
related activities, and advertising costs. Selling and marketing expenses for
the third quarter of 2004 decreased by $63,800, or 15.2%, to $356,700 from
$420,500 for the third quarter of 2003. Selling and marketing expenses for the
first nine months of 2004 decreased by $170,200, or 13.2%, to $1,119,500 from
$1,289,700 for the first nine months of 2003.
Primary factors contributing to the net decreases are summarized as follows:
Three Month Nine Month
Dollars Dollars
Increase Increase
(Decrease) (Decrease)
Expense From 2003 From 2003
------- --------- ----------
Employee costs $ (36,400) $ (152,900)
Overhead allocations (44,900) (170,200)
Marketing expense 21,300 154,900
Other items (3,800) (2,000)
--------- ----------
$ (63,800) $ (170,200)
========= ==========
The decreases in employee costs was the aggregate wages, benefits and
commissions savings we realized by having an average of two fewer sales and
marketing staff in both the third quarter and first nine months of 2004, as
compared with the same periods of 2003.Commissions also decreased as a result of
the decreases in revenue for both the third quarter and the first nine months of
2004 as compared with the same periods in 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. The sales and marketing staff
that had been sharing the space prior to this time were terminated. We began
classifying such costs as general and administrative expense during the first
quarter of 2004.
The increases in marketing expense were because we increasingly utilized the
services of a marketing consulting firm throughout the third quarter and first
nine 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.
We anticipate that selling and marketing expenses for 2004 will be lower than
2003. Selling and marketing expenses were 38.3% and 38.7% of revenue for the
quarters ended September 30, 2004 and 2003, respectively, and 44.6% and 39.0%
for the nine-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, and bad debts expense.
General and administrative expenses for the third quarter of 2004 increased by
$57,000, or 19.0%, to $357,000 from $300,000 for the third quarter of 2003.
General and administrative expenses for the first nine months of 2004 decreased
by $268,200, or 23.6%, to $869,700 from $1,137,900 for the first nine months of
2003.
Primary factors contributing to the net decreases are summarized as follows:
Three Month Nine Months
Dollars Dollars
Increase Increase
(Decrease) (Decrease)
Expense From 2003 From 2003
------- --------- -----------
Legal Fees $ 71,600 $ (27,400)
D&O Insurance - (103,100)
Overhead allocations (33,600) (127,700)
Other items 19,000 (10,000)
--------- ----------
$ 57,000 $ (268,200)
========= ========== =
The three-month increase in legal fees is primarily related to work performed
in conjunction with the possible acquisition of a privately held software
company we began pursuing during the third quarter of 2004. The nine month
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,
partially offset by the acquisition legal fees referred to in the immediately
preceding sentence.
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 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 lower than 2003. General and administrative expenses were approximately
38.3% and 27.6% of revenues for the third quarter of 2004 and 2003,
respectively, and 34.6% and 34.4% for the nine 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 third quarter or first nine
months of 2004, whereas approximately $0 and $282,200 of product development
costs were capitalized during the third quarter and first nine 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 nine-month periods ended September 30, 2004 and 2003 would
have been reported as calculated in the following tables:
Three-month
Period Ended Change in
September 30, 2004 2003 Dollars Percent
------------- ------------ ------------ ------------ ---------
As reported $ 366,800 $ 486,800 $ (120,000) (24.7)%
Capitalized during
period - - - -
------------ ------------ ------------ ---------
Total, including
capitalized costs $ 366,800 $ 486,800 $ (120,000) (24.7)%
============ ============ ============ =========
Nine-month
Period Ended Change in
September 30, 2004 2003 Dollars Percent
------------- ------------ ------------ ------------ ---------
As reported $ 1,226,400 $ 1,133,600 $ 92,800 8.2%
Capitalized during
period - 282,200 (282,200) (100.0)
------------ ------------ ------------ ---------
Total, including
capitalized costs $ 1,226,400 $ 1,415,800 $ (189,400) (13.4)%
============ ============ ============ =========
Primary factors contributing to the net decreases in total research and
development costs, including capitalized costs, are summarized as follows:
Three Month Nine Months
Dollars Dollars
Increase Increase
(Decrease) (Decrease)
Expense From 2003 From 2003
------- ---------- -----------
Contract programmers $ (35,300) $ (102,400)
Rent (37,000) (54,000)
Depreciation (19,400) (55,200)
Other items (28,300) 22,200
---------- -----------
$ (120,000) $ (189,400)
========== ===========
The decreases in contract programmers for both the three and nine-month
periods ended September 30, 2004, as compared with the similar periods of the
prior year, is due to the non-renewal of certain contracts upon their
expiration. Once certain elements of the work being performed for us was
completed, the underlying programmers contracts were not renewed as their
services were not immediately required. We believe that we will be able to enter
into new contracts with these engineers, or ones with similar talents, without
difficulty in the future, should we need their services again.
Depreciation expense was lower in both the third quarter and first nine
months of 2004 because during 2003 and the first nine months of 2003, we
purchased virtually no new capitalizable assets in support of our research and
development efforts. Since the beginning of 2003, various assets became fully
depreciated and hence, did not generate depreciation expense during either the
three or nine-month periods ended September 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
rental market rates since the time of our previous lease and our relinquishing
of the space that had been previously occupied by our sublesse. We renewed our
lease on our Concord facility during October 2004 at a slightly hirer rate than
we had been paying; however, the new rate is still substantially lower than what
we had been paying during 2003. Consequently, we anticipate rent expense in 2004
to be significantly lower than rent expense in 2003.
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 39.4% and 44.8%
of revenues for the third quarter of 2004 and 2003, respectively, and 48.8% and
34.3% of revenues for the first nine 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 third quarter of 2004 decreased by $100, or
3.9%, to $2,500 from $2,600 for the third quarter of 2003. Interest and other
income for the first nine months of 2004 decreased by $2,400, or 21.1%, to
$9,000 from $11,400 for the first nine months of 2003. The decreases were
primarily due to lower average rates of interest being earned on excess cash
on-hand throughout the third quarter and first nine months of 2004 as compared
with the same periods 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 third quarter of 2004
was $293,600 an decrease of $217,800, or 42.6%, from a net loss of $511,400 for
the third quarter of 2003. Net loss for the first nine months of 2004 was
$1,456,700, an increase of $147,500, or 11.3%, from a net loss of $1,309,200 for
the first nine 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 September 30, 2004, cash and cash equivalents totaled $1,084,300, an
increase of $58,800, or 5.7%, from $1,025,500 as of December 31, 2003.
The increase in cash and cash equivalents was primarily attributable to the
$934,800 net cash infusion from the private placement we completed during the
first quarter of 2004. Offsetting the cash infusion was our $1,465,700 net loss
for the first nine 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
$596,000.
Our operating activities used $864,100 during the first nine months of 2004,
including a reduction in accrued liabilities of $80,800 and a $17,200 increase
in accounts receivable. Cash for operating activities was generated during the
first nine months of 2004 through increases of $56,600 in short and long-term
deferred revenue, $33,400 in accounts payable and $6,000 in other assets.
The increase in the total of short and long-term deferred revenue was
primarily due to the deferral of approximately $176,900 of aggregate
Windows-based product revenue we derived from a transaction entered into with a
distributor that did not meet all of the criteria for revenue recognition at the
end of the third quarter of 2004 as well as deferral of revenue from service
contracts sold throughout the first nine months of 2004. Partially offsetting
these increases was the recognition of revenue from service contracts sold
during the first nine months of 2004 and recognition of the revenue from a
transaction that had been deferred at year end 2003. During early 2004 all the
remaining elements necessary for revenue recognition had been met by this
transaction.
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 $950,700 net cash provided by financing activities consisted primarily of
the $934,800 net cash proceeds of the private placement as well as $9,000
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 September 30, 2004 increased by $17,200, or
3.0%, to $585,100, 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 third quarter, which were offset by
year to date cash collections.
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. No amortization expense
was charged to cost of sales during the third quarter of 2004 because the costs
basis of all of our purchased technology became fully amortized as of June 30,
2004. During the third quarter of 2003 approximately $207,000 of purchased
technology amortization was charged to cost of sales. For the first nine months
of 2004, purchased technology amortization decreased by $286,100, or 46.1%, to
$335,000 from $621,100 for the first nine months of 2003.
Accounts payable as of September 30, 2004 increased by $33,400, or 63.9%, to
$85,700 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 September 30, 2004 decreased by $80,800, or 17.2%, to
$390,000 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. Partially offsetting these decreases was an
increase in accrued accounting fees, primarily related to the 2004 annual audit,
and legal fees pertaining to the potential acquisition.
As of September 30, 2004, we had current assets of $1,639,700 and current
liabilities of $1,319,300, which netted to working capital of $320,400. Included
in current liabilities was the current portion of deferred revenue of $843,600.
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.
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 September 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 September 30, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II--OTHER INFORMATION
ITEM 6. Exhibits
Exhibit 31 - Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32 - Section 1350 Certifications
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
GraphOn Corporation
(Registrant)
Date: November 15, 2004
By: /s/ Robert Dilworth
-------------------
Robert Dilworth,
Chief Executive Officer (Interim) and
Chairman of the Board
(Principal Executive Officer)
Date: November 15, 2004
By: /s/ William Swain
-----------------
William Swain,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)