10-Q 1 f10q1q08.txt FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2008 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM 10-Q -------------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2008 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.) 5400 Soquel Avenue, Suite A2 Santa Cruz, CA 95062 (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 past 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Non-accelerated filer [ ] Accelerated filer [ ] Smaller reporting company [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No |X| As of May 15, 2008 there were issued and outstanding 47,596,401 shares of the issuer's common stock, par value $0.0001. GRAPHON CORPORATION FORM 10-Q Table of Contents
PART I. FINANCIAL INFORMATION PAGE ------------- ------------------------------------------------------------------------ ----------- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2008 (unaudited) and December 31, 2007 2 Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2008 and 2007 3 Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007 4 Notes to Unaudited Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 Item 4. Controls and Procedures 18 PART II. OTHER INFORMATION ------------- ------------------------------------------------------------------------ Item 1. Legal Proceedings 19 Item 1A. Risk Factors 19 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19 Item 3. Defaults Upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits 19 Signatures
PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements
GraphOn Corporation Condensed Consolidated Balance Sheets ------------------------------------- (Unaudited) Assets March 31, 2008 December 31, 2007 ------ ------------------- ------------------- Current Assets Cash and cash equivalents $ 4,780,500 $ 5,260,800 Accounts receivable, net 747,700 886,600 Prepaid expenses 99,600 42,600 ------------------- ------------------- Total Current Assets 5,627,800 6,190,000 Patents, net 2,519,000 2,741,300 Other assets, net 145,000 143,100 ------------------- ------------------- Total Assets $ 8,291,800 $ 9,074,400 =================== =================== Liabilities and Stockholders' Equity Current Liabilities Accounts payable and accrued expense $ 717,000 $ 867,200 Deferred revenue 1,416,500 1,475,000 ------------------- ------------------- Total Current Liabilities 2,133,500 2,342,200 Deferred revenue 1,802,400 1,833,100 ------------------- ------------------- Total Liabilities 3,935,900 4,175,300 ------------------- ------------------- Commitments and contingencies - - Stockholders' Equity Common stock, $0.0001 par value, 195,000,000 shares authorized, 47,596,401 and 47,576,401 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively 4,800 4,800 Additional paid-in capital 59,527,700 59,399,000 Accumulated deficit (55,176,600) (54,504,700) ------------------- ------------------- Total Stockholders' Equity 4,355,900 4,899,100 ------------------- ------------------- Total Liabilities and Stockholders' Equity $ 8,291,800 $ 9,074,400 =================== =================== See accompanying notes to unaudited condensed consolidated financial statements
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GraphOn Corporation Condensed Consolidated Statements of Operations ----------------------------------------------- Three Months Ended March 31, ------------------------------------ 2008 2007 (Unaudited) (Unaudited) ---------------- ---------------- Revenue $ 1,312,300 $ 1,137,600 Costs of revenue 158,600 118,900 ---------------- ---------------- Gross profit 1,153,700 1,018,700 ---------------- ---------------- Operating expenses Selling and marketing 408,500 432,500 General and administrative 965,400 974,000 Research and development 486,400 671,500 ---------------- ---------------- Total operating expenses 1,860,300 2,078,000 ---------------- ---------------- Loss from operations (706,600) (1,059,300) ---------------- ---------------- Other income, net 35,500 19,600 ---------------- ---------------- Loss before provision for income tax (671,100) (1,039,700) Provision for income tax 800 1,700 ---------------- ---------------- Net loss $ (671,900) $ (1,041,400) ================ ================ Basic and diluted loss per share $ (0.01) $ (0.02) ================ ================ Average weighted common shares outstanding 47,089,808 46,238,191 ================ ================ See accompanying notes to unaudited condensed consolidated financial statements
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GraphOn Corporation Condensed Consolidated Statements of Cash Flows ----------------------------------------------- (Unaudited) (Unaudited) For the Three Months Ended ------------------------------------ March 31, 2008 March 31, 2007 ---------------- ---------------- Cash Flows Provided By (Used In) Operating Activities: --------------------------------------------------- Net Loss $ (671,900) $ (1,041,400) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 238,800 243,500 Stock-based compensation expense 125,100 138,900 Provision for doubtful accounts 4,600 - Proceeds from note receivable - shareholder - 4,800 Interest accrued on note receivable - shareholder - (2,400) Changes in operating assets and liabilities Accounts receivable, net 134,300 (185,200) Prepaid expense (57,000) (135,700) Accounts payable and accrued expense (150,200) (169,800) Deferred revenue (89,200) 62,900 ---------------- ---------------- Net Cash Used In Operating Activities (465,500) (1,084,400) ---------------- ---------------- Cash Flows Used In Investing Activities: --------------------------------------------------- Purchases of equipment (18,200) (13,400) Other assets (200) - ---------------- ---------------- Net Cash Used In Investing Activities (18,400) (13,400) ---------------- ---------------- Cash Flows Provided By Financing Activities: --------------------------------------------------- Proceeds from sale of common stock - employee stock purchase plan 3,600 3,800 ---------------- ---------------- Net Cash Provided By Financing Activities 3,600 3,800 ---------------- ---------------- Net Decrease in Cash and Cash Equivalents (480,300) (1,094,000) Cash and cash equivalents, beginning of period 5,260,800 2,937,100 ---------------- ---------------- Cash and cash equivalents, end of period $ 4,780,500 $ 1,843,100 ================ ================ See accompanying notes to unaudited condensed consolidated financial statements
4 GraphOn Corporation Notes to Unaudited Condensed Consolidated Financial Statements 1. Basis of Presentation The unaudited condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") applicable to interim financial information and the rules and regulations promulgated by the Securities and Exchange Commission (the "SEC"). Accordingly, such financial statements do not include all information and footnote disclosures required in annual financial statements. The unaudited condensed consolidated financial statements included herein reflect all adjustments, which include only normal, recurring adjustments, 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 audited consolidated financial statements of GraphOn Corporation (the "Company") contained in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2007, which was filed with the SEC on March 31, 2008 ("2007 10-KSB Report"). 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, 2008, or any future period. 2. Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. While the Company believes that such estimates are fair when considered in conjunction with the unaudited condensed consolidated financial statements and accompanying notes, the actual amount of such estimates, when known, will vary from those estimates. Intercompany Accounts and Transactions Significant intercompany accounts and transactions are eliminated upon consolidation. Revenue Recognition The Company markets and licenses products through various means, such as; channel distributors, independent software vendors ("ISVs"), value-added resellers ("VARs") (collectively "resellers") and direct sales to enterprise end users. Its product licenses are generally perpetual. The Company also separately sells maintenance contracts, which are comprised of license updates and customer service access, private-label branding kits, software developer kits and product training services. Generally, software license revenues are recognized when: o Persuasive evidence of an arrangement exists, (i.e., when the Company signs a non-cancelable license agreement wherein the customer acknowledges an unconditional obligation to pay, or upon receipt of the customer's purchase order) and o Delivery has occurred or services have been rendered and there are no uncertainties surrounding product acceptance, (i.e., 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 or, in the case of electronic delivery, when the customer is given access to the licensed programs) and o The price to the customer is fixed or determinable, as typically evidenced in a signed non-cancelable contract, or a customer's purchase order, and o Collectibility is probable. If collectibility is not considered probable, revenue is recognized when the fee is collected. Revenue recognized on software arrangements involving multiple elements is allocated to each element of the arrangement based on vendor-specific objective evidence ("VSOE") of the fair values of the elements; such elements include licenses for software products, maintenance, and customer training. The Company limits its assessment of VSOE 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. 5 If sufficient VSOE of fair values does not exist so as to permit the allocation of revenue to the various elements of the arrangement, all revenue from the arrangement is deferred until such evidence exists or until all elements are delivered. If evidence of VSOE 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. There are no rights of return granted to resellers or other purchasers of the Company's software programs. Revenue from maintenance contracts is recognized ratably over the related contract period, which generally ranges from one to five years. Long-Lived Assets Long-lived assets, which consist primarily of patents, are assessed for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable, whenever the Company has committed to a plan to dispose of the assets or, at a minimum, as it relates to the Company's patents, annually. Measurement of the impairment loss is based on the fair value of the assets. Generally, fair value is determined based on appraisals, current market value, comparable sales value, and undiscounted future cash flows, as appropriate. Assets to be held and used affected by such impairment loss are depreciated or amortized at their new carrying amount over the remaining estimated life; assets to be sold or otherwise disposed of are not subject to further depreciation or amortization. No such impairment charge was recorded during either of the three-month periods ended March 31, 2008 or 2007. Patents The Company's patents are being amortized over their estimated remaining economic lives, currently estimated to be until approximately December 31, 2010. Costs associated with filing, documenting or writing method patents are expensed as incurred. Contingent legal fees paid in connection with a patent lawsuit, or settlements thereof, are charged to cost of goods sold. All other non-contingent legal fees and costs incurred in connection with a patent lawsuit, or settlements thereof, are charged to general and administrative expense. 3. Stock-Based Compensation On January 1, 2006 the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123R, "Share-Based Payment," and related interpretations ("FAS123R") using the modified prospective transition method. Under that method, compensation cost recognized in the three-month periods ended March 31, 2008 and 2007 includes (a) compensation cost for all stock-based awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("FAS123") and (b) compensation cost for all stock-based awards granted on or subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of FAS123R. The valuation provisions of FAS123R apply to new awards and to awards that were outstanding on the adoption date and subsequently modified or cancelled. Estimated compensation expense for awards outstanding at the adoption date is recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FAS123. Results for periods prior to adoption were not restated. Valuation and Expense Information under FAS123R The Company recorded stock-based compensation expense of $125,100 and $138,900 in the three-month periods ended March 31, 2008 and 2007, respectively. As required by FAS123R, the Company estimates forfeitures of employee stock-based awards and recognizes compensation cost only for those awards expected to vest. Forfeiture rates are estimated based on an analysis of historical experience and are adjusted to actual forfeiture experience as needed. The following table illustrates the stock-based compensation expense recorded during the three-month periods ended March 31, 2008 and 2007 by income statement classification: 6
Three months ended March 31, ---------------------------- Income Statement Classification 2008 2007 ------------------------------- ------------ ------------ Cost of revenue $ 5,300 $ 4,400 Selling and marketing expense 10,600 10,700 General and administrative expense 74,900 92,500 Research and development expense 34,300 31,300 ------------ ------------ $ 125,100 $ 138,900 ============ ============
The Company estimated the fair value of each stock-based award granted during the three-month periods ended March 31, 2008 and 2007 as of the date of grant using a binomial model, with the assumptions set forth in the following table:
Three Expected Months Annualized Option Estimated Risk-Free Ended Estimated Forfeiture Term Exercise Interest March 31, Volatility Rate (Years) Factor Rate Dividends ---------- ------------ ------------ ------------ ------------ ------------ ------------ 2008 159.00% 4.00% 7.5 10.00% 3.15% - 2007 155.44% 5.06% 7.5 10.00% 4.58% -
The Company also recognized compensation costs for common shares purchased under its Employee Stock Purchase Plan ("ESPP") during the three-month periods ended March 31, 2008 and 2007 applying the same variables as noted in the table above to the calculation of such costs, except that the expected term was 0.5 years for each respective period. The time span from the date of grant of ESPP shares to the date of purchase is six months. The Company does not anticipate paying dividends on its common stock for the foreseeable future. Expected volatility is based on the historical volatility of the Company's common stock over the 7.5 year period ended on the end of each respective quarterly reporting period noted in the above table. The approximate risk free interest rate was based on the implied yield available on U.S. Treasury issues with remaining terms equivalent to the Company's expected term on its stock-based awards. The expected term of the Company's stock-based option awards was based on historical award holder exercise patterns and considered the market performance of the Company's common stock and other items. The annualized forfeiture rate was based on an analysis of historical data and considered the impact of events such as the work force reductions the Company carried out during previous years. The estimated exercise factor was based on an analysis of historical data and included a comparison of historical and current share prices. For stock-based awards granted during the three-month periods ended March 31, 2008 and 2007, exclusive of common shares purchased pursuant to the Company's ESPP, the weighted average fair values were $0.340 and $0.146, respectively. The weighted average fair value of common shares purchased pursuant to the Company's ESPP during the three-month periods ended March 31, 2008 and 2007 were $0.410 and $0.156, respectively. The following table presents a summary of the status and activity of the Company's stock option awards for the three-month period ended March 31, 2008.
Weighted Weighted Average Average Remaining Aggregate Number of Exercise Contractual Intrinsic Shares Price Term (Years) Value ------------- ------------ ---------------- -------------- Outstanding - December 31, 2007 6,569,286 $ 0.46 Granted 915,000 0.38 Exercised - - Forfeited or expired - - 7 ------------- Outstanding - March 31, 2008 7,484,286 $ 0.45 6.86 $ 391,000 =============
Of the options outstanding as of March 31, 2008, 5,729,566 were vested, 1,620,428 were estimated to vest in future periods and 134,292 were estimated to be forfeited prior to their vesting. All options are exercisable immediately upon grant. Options vest, generally ratably over a 33-month period commencing in the fourth month after the grant date. The Company has the right to repurchase exercised options that have not vested upon their forfeiture at the respective option's exercise price. As of March 31, 2008, there was approximately $365,400 of total unrecognized compensation cost, net of estimated forfeitures, related to stock-based compensation. That cost is expected to be recognized over a weighted-average period of approximately one year and three months. 4. Revenue Revenue for the three-month periods ended March 31, 2008 and 2007 was comprised as follows:
2008 Over (Under) 2007 ---------------------------- Revenue 2008 2007 Dollars Percent -------------------------- ---------------- ---------------- ------------- ----------- Product Licenses Windows $ 429,600 $ 432,800 $ (3,200) -0.74% Unix 348,200 173,200 175,000 101.04% ---------------- ---------------- ------------- 777,800 606,000 171,800 28.35% ---------------- ---------------- ------------- Service Fees Windows 243,700 219,100 24,600 11.23% Unix 279,600 221,700 57,900 26.12% ---------------- ---------------- ------------- 523,300 440,800 82,500 18.72% ---------------- ---------------- ------------- Other 11,200 90,800 (79,600) -87.67% ---------------- ---------------- ------------- Total Revenue $ 1,312,300 $ 1,137,600 $ 174,700 15.36% ================ ================ =============
5. Patents Patents consisted of the following:
March 31, 2008 December 31, 2007 ---------------- ------------------- Patents $ 5,340,400 $ 5,340,400 Accumulated amortization (2,821,400) (2,599,100) ---------------- ------------------- $ 2,519,000 $ 2,741,300 ================ ===================
Patent amortization, which aggregated $222,300 during each of the three-month periods ended March 31, 2008 and 2007, is a component of general and administrative expenses. 6. Accounts Receivable, Net Accounts receivable were net of allowances totaling $233,600 and $229,000 as of March 31, 2008 and December 31, 2007, respectively. 7. Supplemental Disclosure of Cash Flow Information The Company disbursed no cash for the payment of either income taxes or interest expense during either of the three-month periods ended March 31, 2008 or 2007. 8. Loss Per Share Potentially dilutive securities have been excluded from the computation of diluted loss per common share, as their effect is antidilutive. For the three-month periods ended March 31, 2008 and 2007, 21,108,486 and 21,248,237 shares, respectively, of common stock equivalents were excluded from the computation of diluted loss per share since their effect would be antidilutive. 8 9. Segment Information SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," establishes standards for reporting information about operating segments. This standard requires segmentation based on the Company's internal organization and reporting of revenue and operating income based on internal accounting methods. The Company's financial reporting systems present various data for management to operate the business prepared in methods consistent with GAAP. The segments were defined in order to allocate resources internally. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or the decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker is its Chief Executive Officer. The Company has determined that it operates its business in two segments: software and intellectual property. Segment revenue was as follows:
Quarter Ended March 31, 2008 2007 ----------------------- ------------- ------------- Revenue: Software $ 1,312,300 $ 1,137,600 Intellectual Property - - ------------- ------------- Consolidated Revenue $ 1,312,300 $ 1,137,600 ============= =============
Segment loss from operations was as follows:
Quarter Ended March 31, 2008 2007 --------------------------------- ------------- ------------- Loss From Operations: Software $ (247,500) $ (612,200) Intellectual Property (459,100) (447,100) ------------- ------------- Consolidated Loss From Operations $ (706,600) $ (1,059,300) ============= =============
The Company does not allocate interest and other income, interest and other expense or income tax to its segments. As of March 31, 2008, segment fixed assets (long-lived assets) were as follows:
Accumulated Depreciation Net, Fixed Assets Cost Basis /Amortization as Reported -------------- --------------- --------------- Software $ 1,148,400 $ (1,008,400) $ 140,000 Intellectual Property 5,340,400 (2,821,400) 2,519,000 Unallocated 5,000 - 5,000 -------------- --------------- --------------- $ 6,493,800 $ (3,829,800) $ 2,664,000 ============== =============== ===============
The Company does not allocate other assets, which consists primarily of deposits, to its segments. Products and services provided by the software segment include all currently available versions of GO-Global for Windows, GO-Global for Unix, OEM private labeling kits, software developer's kits, maintenance contracts and product training and support. The intellectual property segment provides licenses to our intellectual property. The Company's two segments do not engage in cross-segment transactions. 10. New Accounting Pronouncements In March 2008, the Financial Accounting Standards Board ("FASB") issued SFAS No. 161, "Disclosures about Derivatives Instruments and Hedging Activities, an Amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 requires enhanced disclosures about a company's derivative and hedging activities. SFAS is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of the adoption of SFAS 161 and does not expect adoption to have a material impact on results of operations, cash flows or financial position. 9 In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141R") which replaces SFAS No. 141, "Business Combinations." SFAS 141R establishes principles and requirements for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed and any noncontrolling interest in a business combination at their fair value at acquisition date. SFAS 141R alters the treatment of acquisition related costs, business combinations achieved in stages (referred to as a step acquisition), the treatment of gains from a bargain purchase, the recognition of contingencies in business combinations, the treatment of in-process research and development in a business combination as well as the treatment of recognizable deferred tax benefits. SFAS 141R is effective for business combinations closed in fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of SFAS 141R and expects results of operations, cash flows or financial position would only be impacted in relation to future business combination activities, if any. In December 2007, FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51" ("SFAS 160"), the objective of which is to improve the relevance, comparability and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company is assessing the impact of SFAS 160, but does not expect it to have a material impact on results of operations, cash flows or financial position. In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159") which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective as of an entity's first fiscal year that begins after November 15, 2007. The adoption of SFAS 159 did not have a material impact on results of operations, cash flows or financial position. In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157") which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements, however, for some entities; application of SFAS 157 will change current practice. SFAS 157 is effective for financial statements issued for the first fiscal year beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, FASB issued FASB Staff Position No. 157-2 that defers the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. In addition, FASB also agreed to exclude from the scope of FASB 157 fair value measurements made for purposes of applying SFAS No. 13, "Accounting for Leases" and related interpretive accounting pronouncements. The adoption of SFAS 157 did not have a material impact on results of operations, cash flows or financial position. In May 2008, FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"), which is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernmental entities. SFAS 162 is effective 60 days following SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles." The Company is currently evaluating the impact of adoption of SFAS 162 and does not expect adoption to have a material impact on results of operations, cash flows or financial position. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including: 10 o our history of operating losses, and expectation that those losses will continue; o that a significant portion of our revenue has been and continues to be earned from a very limited number of significant customers; o that our stock price has been volatile and you could lose your investment; and o other factors, including those set forth under Item 6. "Management's Discussion and Analysis or Plan of Operation - Risk Factors" in our 2007 10-KSB Report 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. 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 and/or resale by independent software vendors ("ISVs"), 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. Critical Accounting Policies We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as "critical" because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimates, and different estimates, which also would have been reasonable, could have been used, which would have resulted in different financial results. Our critical accounting policies are identified in our 10-KSB Report, and included: revenue recognition, the allowance for doubtful accounts, patents, long-lived assets, capitalized software development costs, impairment of intangible assets, loss contingencies and stock-based compensation expense. The following operating results should be read in conjunction with our critical accounting policies. Stock-Based Compensation On January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123R, "Share-Based Payment," ("FAS123R") and related interpretations using the modified prospective transition method. Under that method, compensation cost recognized in the three-month periods ended March 31, 2008 and 2007 includes (a) compensation cost for all stock-based awards granted prior to, but not yet vested as of January 1, 2006 based on the grant date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("FAS123") and (b) compensation cost for all stock-based awards granted on or subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of FAS123R. The valuation provisions of FAS123R apply to new awards and to awards that were outstanding on the adoption date and subsequently modified or cancelled. Estimated compensation expense for awards outstanding at the adoption date is recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FAS123. 11 The valuation of employee stock options is an inherently subjective process since market values are generally not available for long-term, non-transferable employee stock options. Accordingly, an option pricing model is utilized to derive an estimated fair value. In calculating the estimated fair value of our stock options, we used a binomial pricing model which requires the consideration of the following variables for purposes of estimating fair value: o the expected volatility of our common stock, o the annualized forfeiture/termination rate, o the prior forfeiture/termination rate, o the expected term of the option, o the exercise factor for optionees, o the risk free interest rate for the expected option term, and o expected dividends on our common stock (we do not anticipate paying dividends for the foreseeable future). Of the variables above, the selection of an expected term, an annualized forfeiture rate and expected stock price volatility are the most subjective. In estimating our stock price volatility for stock option grants awarded during the three-month periods ended March 31, 2008 and 2007, we analyzed our historic volatility over the period commensurate with the expected life of the options, by reference to actual stock prices, and calculated an estimated volatility of approximately 159.00% and 154.44%, respectively. Our estimate of the expected option term was 7.5 years, for each period, and was derived based on our analysis of historical data and future projections. We derived an annualized forfeiture rate of 4.00% and 5.06%, respectively, and a prior forfeiture rate of 5.3% and 5.5%, respectively, by analyzing our historical forfeiture data, including consideration of the impact of certain non-recurring events, such as reductions in work force. We believe that each of these estimates is reasonable in light of the data we analyzed. However, as with any estimate, the ultimate accuracy of these estimates is only verifiable over time. We applied the same variables to the valuation of shares purchased under our Employee Stock Purchase Plan ("ESPP"), except that the expected term was 0.5 years, as the time span from the date of grant of ESPP shares to the date of purchase is six months. We expect that stock-based compensation expense will continue to have a material impact on our financial results for the remainder of the fiscal year. For the remainder of fiscal 2008 we expect to incur stock-based compensation expense of approximately $231,000. Results of Operations for the Three-Month Periods Ended March 31, 2008 and 2007. Revenue Our software revenue has historically been primarily derived from product licensing fees and service fees from maintenance contracts. Other sources of software revenue include sales of software development kits and training. Software development kits are tools that allow end users to develop, interface and brand their own applications for use in conjunction with either our Windows or Unix/Linux products. Currently, we do not generate a significant amount of revenue from either the sale of software development kits nor do we anticipate generating a significant amount from them during 2008. Revenue for the three-month periods ended March 31, 2008 and 2007 was as follows:
2008 Over (Under) 2007 ---------------------------- Revenue 2008 2007 Dollars Percent -------------------------- ---------------- ---------------- ------------- ----------- Product Licenses Windows $ 429,600 $ 432,800 $ (3,200) -0.74% Unix 348,200 173,200 175,000 101.04% ---------------- ---------------- ------------- 777,800 606,000 171,800 28.35% ---------------- ---------------- ------------- Service Fees Windows 243,700 219,100 24,600 11.23% Unix 279,600 221,700 57,900 26.12% ---------------- ---------------- ------------- 523,300 440,800 82,500 18.72% ---------------- ---------------- ------------- Other 11,200 90,800 (79,600) -87.67% 12 ---------------- ---------------- ------------- Total Revenue $ 1,312,300 $ 1,137,600 $ 174,700 15.36% ================ ================ =============
The changes in both Windows and Unix-based product licenses revenue for the three-month period ended March 31, 2008 as compared with the same period of 2007 were reflective of how such revenue can vary from period to period because a significant portion of this revenue has historically been earned, and continues to be earned, from a limited number of significant customers, most of whom are resellers. Consequently, if any of these significant customers change their order level, or fail to order during the reporting period, our product licensing revenue could be materially impacted. We expect this situation to continue throughout the next several quarterly reporting periods. The increase in Unix product license revenue for the three-month period ended March 31, 2008, as compared with the same period of the prior year, was primarily due to increased purchases from just two customers, including Ericsson, one of our strategic partners. These two customers purchased an aggregate $160,200 of Unix product licenses during the period, an increase of $150,700 over their purchases for the same period of the prior year. Our customers typically purchase a maintenance contract at the time they license our product. Such maintenance contracts vary in term from one to five years and generally are renewed upon expiration. Service fees associated with maintenance contracts are deferred and recognized as revenue ratably over the underlying service period of the maintenance contract. The increase in service fees for the three-month period ended March 31, 2008, as compared with the same period of the prior year is primarily due to the higher level of maintenance contract purchases that have occurred since March 31, 2007. We expect aggregate service fees revenue for 2008 to exceed those of 2007. Segment Revenue For the three-month periods ended March 31, 2008 and 2007 all of our revenue was derived from our software segment. Revenues from our intellectual property segment are non-predictable and are dependent upon the outcome of pending litigation and the results of licensing discussions with companies potentially infringing upon our patents. As a result, we expect all 2008 revenue to be earned from our software segment. Cost of Revenue Cost of revenue is comprised primarily of service costs, which represent the costs of customer service, and product costs. We incur no shipping or packaging costs as all of our deliveries are made via electronic means over the Internet. Under GAAP, research and development costs for new product development, after technological feasibility is established, are recorded as "capitalized software" on our balance sheet. Such capitalized costs are subsequently amortized as cost of revenue over the shorter of three years or the remaining estimated life of the products. Cost of revenue increased by $39,700 or 33.4%, to $158,600, for the three months ended March 31, 2008, from $118,900 for the same period of 2007. Cost of revenue was 12.1% and 10.5% of revenue for the three months ended March 31, 2008 and 2007, respectively. Factors contributing to the increase in cost of revenue included service costs, which increased by $35,400 during the three-month period ended March 31, 2008, as compared with the same period in 2007, resulting primarily from increased engineering time spent performing customer service, in order to better meet the needs of our customers. We expect service costs to remain higher throughout 2008, as compared with 2007, as we plan on having a higher number of engineers providing such services. Included in service costs for the three-month periods ended March 31, 2008 and 2007 was non-cash stock-based compensation costs aggregating approximately $5,300 and $4,400, respectively. Also contributing to the increased costs of revenue were product costs, which increased by $4,300 during the three-month period ended March 31, 2008, as compared with the same period in 2007, primarily due to costs associated with the expansion of our GO-Global for Unix product's ability to web-enable various Linux platforms as well as increased costs from our supplier of certain licensing technology that we incorporate into both GO-Global for Windows and GO-Global for Unix. 13 Selling and Marketing Expenses Selling and marketing expenses primarily consist of employee costs (inclusive of non-cash stock-based compensation expense), outside services and travel and entertainment expense. Selling and marketing expenses decreased by $24,000, or 5.6%, to $408,500, for the three-month period ended March 31, 2008, from $432,500 for the same period of 2007. Selling and marketing expenses were 31.1% and 38.0% of revenue for the three-month periods ended March 31, 2008 and 2007, respectively. Factors contributing to the decrease in selling and marketing expenses included outside services, which decreased by $20,100 during the three-month period ended March 31, 2008, as compared with the same period in 2007, primarily as the result of changes in the mixture of the outside services provided. Outside services charged to selling and marketing expense are primarily related to marketing activities such as developing marketing collateral and external web site enhancements and also includes certain legal fees associated with sales contracts review. Also contributing to the overall decrease in selling and marketing expense was travel and entertainment, which decreased by $9,900 during the three-month period ended March 31, 2008, as compared with the same period in 2007, primarily as a result of having one less sales representative. Partially offsetting these decreases were higher employee costs, which increased by $17,500 during the three-month period ended March 31, 2008, as compared with the same period in 2007, primarily as a result of higher commissions earned by a sales representative as a result of obtaining quota, which was partially offset by having one fewer sales representative. Included in employee costs for the three-month periods ended March 31, 2008 and 2007 were non-cash stock-based compensation costs aggregating approximately $10,600 and $10,700, respectively. We currently expect our full-year 2008 sales and marketing expense will approximate 2007 levels. General and Administrative Expenses General and administrative expenses primarily consist of employee costs (inclusive of non-cash stock-based compensation expense), amortization and depreciation, legal, professional and other outside services (including those related to realizing benefits from our patent-related assets), travel and entertainment, certain costs associated with being a publicly held corporation, and bad debts expense. General and administrative expenses decreased by $8,600, or 0.9%, to $965,400, for the three-month period ended March 31, 2008, from $974,000 for the same period of 2007. General and administrative expenses were approximately 73.6% and 85.6% of revenues for the three-month periods ended March 31, 2008 and 2007, respectively. Factors which contributed to the decrease in general and administrative expense included lower legal and accounting fees. During the three-month period ended March 31, 2007 we filed various reports with the SEC that were not required to be filed during the same period of 2008. Because of this, legal and accounting fees for the three-month period ended March 31, 2008, as compared with 2007, were $14,100 lower. Also contributing to the lower general and administrative expense were outside services for the three-month period ended March 31, 2008, which decreased by $19,100, as compared with the same period of the prior year, as neither of the two active patent infringement lawsuits had progressed far enough to require the use of outside consultants with expertise in patents and patent infringement lawsuits. Partially offsetting these decreases was an overall increase in employee costs. General and administrative employee costs for the three-month periods ended March 31, 2008 and 2007 included non-cash stock-based compensation costs aggregating approximately $74,900 and $92,500, respectively. The decrease in non-cash stock-based compensation costs were offset by increases in other elements of employee costs including salary adjustments and benefits. Overall, employee costs for the three-month period ended March 31, 2008 were $8,500 higher than those for the same period of 2007. Also partially offsetting the decreases noted above were increased costs associated with being a publicly-held company, which increased $7,800 during the three-month period ended March 31, 2008, as compared with the same period of 2007, primarily due to having one additional meeting of our board of directors during the three-month period ended March 31, 2008 as compared with the same period of 2007. 14 Costs associated with other major components of general and administrative expense, notably; depreciation and amortization, insurance, and rent, did not change significantly during the three-month period ended March 31, 2008, as compared with the same period of the prior year. We currently expect 2008 general and administrative expenses to approximate 2007 levels. Research and Development Expenses Research and development expenses consist primarily of employee costs (inclusive of stock-based compensation expense), payments to contract programmers and rent. Research and development expenses decreased by $185,100, or 27.6%, to $486,400, for the three-month period ended March 31, 2008, from $671,500 for the same period of 2007. Research and development expenses were approximately 37.1% and 59.0% of revenues for the three-month periods ended March 31, 2008 and 2007, respectively. Under GAAP, 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 such product development costs were capitalized during either of the three-month periods ended March 31, 2008 or 2007. Employee costs for the three-month periods ended March 31, 2008 and 2007 are net of $144,800 and $109,400, respectively, which related to the costs of engineering time spent performing customer service. Customer service costs are reported as a component of cost of revenue. Included in employee costs for the three-month periods ended March 31, 2008 and 2007 were non-cash stock-based compensation costs aggregating $34,300 and $31,300, respectively. Factors contributing to the decrease in research and developments costs were employee costs, which decreased by $166,800 during the three-month period ended March 31, 2008 as compared with the respective period of 2007, primarily due to having the equivalent of four fewer engineers as a result of terminations that occurred at various times subsequent to March 31, 2007, the hiring two engineers during the three-month period ended March 31, 2008 as well as a full-time engineer during the prior year switching to part-time status in the current year. Our use of outside services for the three-month period ended March 31, 2008, as compared with the same period of the prior year, decreased primarily due to the completion of certain assignments, including assignments by consultants who were involved in providing engineering services for the upgraded version of GO-Global for Windows, which was released during the second quarter of 2007. The reduction in outside services also contributed to the decrease in research and development costs as outside services decreased by $20,400 for the three-month period ended March 31, 2008, as compared with the same period of the prior year. We currently expect 2008 research and development expenses to be higher as compared with 2007 levels as we plan on increasing our engineering staff and our overall investment in this area. Segment Operating Loss Segment operating loss for the three-month periods ended March 31, 2008 and 2007 was as follows:
Increase (Decrease) ---------------------------- 2008 2007 Dollars Percentage ------------ ------------ ------------ ------------ Software $ (247,500) $ (612,200) $ (364,700) -59.6% Intellectual Property (459,100) (447,100) 12,000 2.7% ------------ ------------ ------------ Consolidated Loss From Operations $ (706,600) $(1,059,300) $ (352,700) -33.3% ============ ============ ============
The $364,700 decrease in the operating loss we experienced from our software segment for the three-month period ended March 31, 2008, as compared with same period of the prior year was primarily due to the $174,700 increase in software revenue and the $185,100 decrease in research and development expense, each discussed elsewhere in this Form 10-Q. The $12,000 increase in the operating loss from our intellectual property segment for the three-month period ended March 31, 2008, as compared with the same period of 2007, was primarily due to a $33,500 increase in legal fees that resulted from having two active patent infringement lawsuits underway during the current year, as compared with only one in the prior year. Partially offsetting the increased legal fees was a $14,000 decrease in outside services, which 15 resulted from having fewer outside consultants with expertise in patents and patent infringement suits engaged during the current year, as compared with the prior year, as discussed elsewhere in this Form 10-Q. Also, stock-based compensation expense incurred by our intellectual property segment decreased by $14,500 during the three-month period ended March 31, 2008, as compared with the same period of the prior year, as a significant portion of options underlying such compensation expense became full vested. Other Income During the three-month periods ended March 31, 2008 and 2007, other income consisted primarily of interest income on excess cash. During the three-month period ended March 31, 2007, other income also included interest income on note receivable - shareholder. The increases in other income were primarily as a result of higher cash balances throughout the three-month period ended March 31, 2008, as compared with the same period of 2007, as a result of the Autotrader.com settlement that occurred in December 2007. We anticipate that interest and other income for 2008 will exceed 2007 levels as we anticipate having higher average cash balances for the remainder of the year. Net Loss As a result of the foregoing items, net loss for the three-month period ended March 31, 2008 was $671,900, a decrease of $369,500, or 35.5%, from a net loss of $1,041,400 for the same period of 2007. We currently do not expect to be profitable during or for the year ended December 31, 2008. Liquidity and Capital Resources We are planning to increase investments in our operations during 2008 and to fund these increases through our cash on hand as of March 31, 2008 and our 2008 anticipated revenue streams. We are aggressively looking at ways to improve our revenue stream, including through the development of new products and further acquisitions. We continue to review potential acquisition opportunities as they present themselves to us. We believe that maintaining our current revenue stream, coupled with our cash on hand, will be sufficient to support our operational plans for 2008. During the three-month periods ended March 31, 2008 and 2007 our cash and cash equivalents balances decreased by $480,300 and $1,094,000, respectively, primarily as a result of our operations consuming approximately $465,500 and $1,084,400 of cash during the respective periods. During the three-month periods ended March 31, 2008 and 2007 our reported net losses of $671,900 and $1,041,400 respectively, included two significant non-cash items, namely; depreciation and amortization of $238,800 and $243,500, respectively, which were primarily related to amortization of our patents, and stock-based compensation expense of $125,100 and $138,900, respectively. During the three-month periods ended March 31, 2008 and 2007 we closely monitored our investing activities, spending approximately a net $18,400 and $13,400, respectively, in those activities. Our investing activities were primarily comprised of fixed asset purchases, mainly office furniture and computer equipment. Our financing activities during the three-month periods ended March 31, 2008 and 2007 were comprised of sale of stock to our employees under the terms of our employee stock purchase plan. Cash and Cash Equivalents As of March 31, 2008, cash and cash equivalents were $4,780,500, as compared with $5,260,800 as of December 31, 2007, a decrease of $480,300, or 9.1%. The majority of this decrease was due to the consumption of $465,500 of cash and cash equivalents by our operations. We anticipate that our cash and cash equivalents as of March 31, 2008, together with revenue from 2008 operations will be sufficient to fund our anticipated expenses during the next twelve months. 16 Accounts Receivable, net At March 31, 2008 and December 31, 2007, we had approximately $747,700 and $886,600, respectively, in accounts receivable, net of allowances totaling $233,600 and $229,000, respectively. From time to time, we could maintain individually significant accounts receivable balances from one or more of our significant customers. If the financial condition of any of these significant customers should deteriorate, our operating results could be materially affected. Working Capital As of March 31, 2008, we had current assets of $5,627,800 and current liabilities of $2,133,500, which netted to working capital of $3,494,300. Included in current liabilities was the current portion of deferred revenue of $1,416,500. Segment Fixed Assets As of March 31, 2008, segment fixed assets (long-lived assets) were as follows:
Accumulated Depreciation Net, Fixed Assets Cost Basis /Amortization as Reported -------------- --------------- --------------- Software $ 1,148,400 $ (1,008,400) $ 140,000 Intellectual Property 5,340,400 (2,821,400) 2,519,000 Unallocated 5,000 - 5,000 -------------- --------------- --------------- $ 6,493,800 $ (3,829,800) $ 2,664,000 ============== =============== ===============
New Accounting Pronouncements In March 2008, the Financial Accounting Standards Board ("FASB") issued SFAS No. 161, "Disclosures about Derivatives Instruments and Hedging Activities, an Amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 requires enhanced disclosures about a company's derivative and hedging activities. SFAS is effective for financial statements issued for fiscal years beginning after December 15, 2008. We are currently evaluating the impact of the adoption of SFAS 161 and do not expect adoption to have a material impact on results of operations, cash flows or financial position. In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141R") which replaces SFAS No. 141, "Business Combinations." SFAS 141R establishes principles and requirements for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed and any noncontrolling interest in a business combination at their fair value at acquisition date. SFAS 141R alters the treatment of acquisition related costs, business combinations achieved in stages (referred to as a step acquisition), the treatment of gains from a bargain purchase, the recognition of contingencies in business combinations, the treatment of in-process research and development in a business combination as well as the treatment of recognizable deferred tax benefits. SFAS 141R is effective for business combinations closed in fiscal years beginning after December 15, 2008. We are currently evaluating the impact of SFAS 141R and expect that results of operations, cash flows or financial position would only be impacted in relation to future business combination activities, if any. In December 2007, FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51" ("SFAS 160"), the objective of which is to improve the relevance, comparability and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We are assessing the impact of SFAS 160, but do not expect it to have a material impact on results of operations, cash flows or financial position. In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159") which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective as of an entity's 17 first fiscal year that begins after November 15, 2007. The adoption of SFAS 159 did not have a material impact on results of operations, cash flows or financial position. In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157") which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements, however, for some entities; application of SFAS 157 will change current practice. SFAS 157 is effective for financial statements issued for the first fiscal year beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, FASB issued FASB Staff Position No. 157-2 that defers the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. In addition, FASB also agreed to exclude from the scope of FASB 157 fair value measurements made for purposes of applying SFAS No. 13, "Accounting for Leases" and related interpretive accounting pronouncements. The adoption of SFAS 157 did not have a material impact on results of operations, cash flows or financial position. In May 2008, FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"), which is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernmental entities. SFAS 162 is effective 60 days following SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles." We are currently evaluating the impact of adoption of SFAS 162 and do not expect adoption to have a material impact on results of operations, cash flows or financial position. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable ITEM 4. Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2008. There has not been any change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 18 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings On August 28, 2007, we filed a proceeding against Juniper Networks, Inc. ("Juniper") in the United States District Court in the Eastern District of Texas alleging that certain of Juniper's products infringe three of our patents, namely; U.S. Patent Nos. 5,826,014, 6,061,798 and 7,028,336, (the "'014," "'798" and "'336" patents, respectively) which protect our fundamental network security and firewall technologies. We seek preliminary and permanent injunctive relief along with unspecified damages and fees. Juniper filed its Answer and Counterclaims on October 26, 2007 seeking a declaratory judgment that it does not infringe the `014, `798 and `336 patents and that all three of these patents are invalid and unenforceable. Subsequent to October 26, 2007 and through the date hereof, we and Juniper have filed further replies and responses addressing the issues raised in our original complaint and Juniper's Answer and Counterclaims. On March 10, 2008, we initiated a proceeding against Classified Ventures, LLC; IAC/InterActiveCorp; Match.com (an operating business of IAC/InterActiveCorp); Yahoo! Inc.; eHarmony.com; and CareerBuilder, LLC in the United States District Court in the Eastern District of Texas alleging infringement of four of our patents, namely; U.S. Patent Nos. 6,324,538, 6,850,940, 7,028,034 and 7,269,591, which protect our unique method of maintaining an automated and network-accessible database. The suit alleges that the named companies infringe our patents on each of their Web sites. The suit seeks permanent injunctive relief along with unspecified damages. ITEM 1A. Risk Factors Not Applicable ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds During the three-month period ended March 31, 2008, we granted the following stock options and awards: o stock options to purchase an aggregate 465,000 shares of common stock, at exercise prices ranging from $0.32 to $0.38, were granted to various non-executive employees. o stock options to purchase an aggregate 425,000 shares of common stock, at an exercise price of $0.38, were granted to our directors and executive employees. o stock options to purchase an aggregate 25,000 shares of common stock, at an exercise price of $0.38 were granted to an outside consultant. The grant of such stock options to the above-listed persons was not registered under the Securities Act of 1933, because the stock options either did not involve an offer or sale for purposes of Section 2(a)(3) of the Securities Act, in reliance on the fact that the stock options were granted for no consideration, or were offered and sold in transactions not involving a public offering, exempt from registration under the Securities Act pursuant to Section 4(2). ITEM 3. Defaults Upon Senior Securities Not Applicable ITEM 4. Submission of Matters to a Vote of Security Holders Not Applicable ITEM 5. Other Information Not Applicable ITEM 6. Exhibits Exhibit 31 - Rule 13a-14(a)/15d-14(a) Certifications Exhibit 32 - Section 1350 Certifications 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GraphOn Corporation (Registrant) Date: May 15, 2008 By: /s/ Robert Dilworth ------------------- Robert Dilworth Chief Executive Officer and Chairman of the Board (Principal Executive Officer) Date: May 15, 2008 By: /s/ William Swain ----------------- William Swain Chief Financial Officer (Principal Financial Officer and (Principal Accounting Officer)