-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OEU+15GyxvAD5vL6trPslld1M2CcjLwYVoZ8F5UoOVOYSnoHl2IlJAU5Lo0e7U5u JgNC0ZT4Chsu8jCiH4KlFg== 0001021435-04-000034.txt : 20041115 0001021435-04-000034.hdr.sgml : 20041115 20041115133908 ACCESSION NUMBER: 0001021435-04-000034 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041115 DATE AS OF CHANGE: 20041115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRAPHON CORP/DE CENTRAL INDEX KEY: 0001021435 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 133899021 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21683 FILM NUMBER: 041143625 BUSINESS ADDRESS: STREET 1: 3130 WINKLE AVENUE CITY: SANTA CRUZ STATE: CA ZIP: 95065 BUSINESS PHONE: 8004727466 MAIL ADDRESS: STREET 1: 3130 WINKLE AVENUE CITY: SANTA CRUZ STATE: CA ZIP: 95065 FORMER COMPANY: FORMER CONFORMED NAME: UNITY FIRST ACQUISITION CORP DATE OF NAME CHANGE: 19960823 10-Q 1 form10q.txt FORM 10-Q ================================================================================ 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) EX-31 2 exhbt31.txt 302 CERTS Exhibit 31 I, Robert Dilworth, certify that: 1. I have reviewed this quarterly report on Form 10-Q of GraphOn Corporation ("registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 15, 2004 /s/ Robert Dilworth ------------------- Robert Dilworth Chief Executive Officer (Interim) and Chairman of the Board I, William Swain, certify that: 1. I have reviewed this quarterly report on Form 10-Q of GraphOn Corporation ("registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 15, 2004 /s/ William Swain ----------------- William Swain Chief Financial Officer EX-32 3 exhbt32.txt 906 CERTS Exhibit 32 (a) Certification of Quarterly Report by Chief Executive Officer. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of GraphOn Corporation (the "Company") on Form 10-Q for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert Dilworth, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Robert Dilworth ------------------- Robert Dilworth Chief Executive Officer November 15, 2004 (b) Certification of Quarterly Report by Chief Financial Officer. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of GraphOn Corporation (the "Company") on Form 10-Q for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William Swain, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ William Swain ------------------ William Swain Chief Financial Officer November 15, 2004 -----END PRIVACY-ENHANCED MESSAGE-----