ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth, for the periods indicated, the high and low
reported sales price of our common stock. Since March 27, 2003 our common stock
has been quoted on the Over-the-Counter Bulletin Board. Our common stock is
quoted under the symbol "GOJO."
Fiscal 2007 * Fiscal 2006 *
---------------- ----------------
Quarter High Low High Low
------ ------ ------ ------
1st $ 0.28 $ 0.15 $ 0.30 $ 0.18
2nd $ 0.22 $ 0.13 $ 0.25 $ 0.17
3rd $ 0.29 $ 0.16 $ 0.23 $ 0.16
4th $ 0.45 $ 0.14 $ 0.22 $ 0.15
* The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
On March 18, 2008, there were approximately 153 holders of record of our common
stock. Between January 1, 2008 and March 18, 2008 the high and low reported
sales price of our common stock was $0.46 and $0.30, respectively, and on March
18, 2008 the closing price of our common stock was $0.30.
We have never declared or paid dividends on our common stock, nor do we
anticipate paying any cash dividends for the foreseeable future. We currently
intend to retain future earnings, if any, to finance the operations and
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of our Board of Directors and will be dependent upon the
earnings, financial condition, operating results, capital requirements and other
factors as deemed necessary by the Board of Directors.
During the three-month period ended December 31, 2007, we granted no stock
options.
9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the consolidated
financial statements and related notes provided elsewhere in this Annual Report
on Form 10-KSB.
Critical Accounting Policies. The preparation of financial statements and
related disclosures in conformity with accounting principles generally accepted
in the United States requires management to make judgments, assumptions and
estimates that affect the amounts reported in the Consolidated Financial
Statements and accompanying notes. The Summary of Significant Accounting
Policies appears in Part II, Item 7 - Financial Statements, of this Form 10-KSB,
which describes the significant accounting policies and methods used in the
preparation of the Consolidated Financial Statements. Estimates are used for,
but not limited to, the amount of stock-based compensation expense, the
allowance for doubtful accounts, the estimated lives of intangible assets,
depreciation of fixed assets, accruals for liabilities 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 Consolidated Financial
Statements.
Revenue Recognition
We market and license 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.
Our product licenses are generally perpetual. We also separately sell
intellectual property licenses, maintenance contracts, which are comprised of
license updates and customer service access, private-label branding kits,
software developer kits ("SDKs") and product training services.
Generally, software license revenues are recognized when:
o Persuasive evidence of an arrangement exists, (i.e., when we sign 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, or customer training. We limit our
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.
If sufficient VSOE of fair value 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 our
software programs.
We recognize revenue from maintenance contracts 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 we have committed to a plan to
dispose of the assets or, at a minimum, as it relates to our patents, annually.
Measurement of the impairment loss is based on the fair value of the assets.
Generally, we determine fair value based on appraisals, current market value,
comparable sales value, and undiscounted future cash flows, as appropriate.
10
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 the year ended
December 31, 2007.
Patents
Our patents are being amortized over their estimated remaining economic lives,
currently estimated to be approximately three years, as of December 31, 2007.
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.
Stock-Based Compensation
Effective January 1, 2006, we adopted the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123R, "Share-Based Payment,"
("FAS No. 123R") and related interpretations using the modified prospective
transition method. Under that method, compensation cost recognized in the year
ended December 31, 2006 included (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
FAS No. 123 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 FAS No. 123R.
Results for prior periods were not restated.
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 the 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. The
following table sets forth the assumptions we used during the years ended
December 31, 2007 and 2006:
In estimating our stock price volatility for grants awarded during the years
ended December 31, 2007 and 2006, we analyzed our historic volatility over the
7.5 year period ended December 31, 2007 and December 2006, respectively, by
reference to actual stock prices during this period. We derived an annualized
forfeiture rate by analyzing our historical forfeiture data, including
consideration of the impact of certain non-recurring events, such as reductions
in our work force. Our estimates of the expected option term and the estimated
exercise factor were derived from our analysis of historical data and future
projections. The approximate risk-free interest rate was based on the implied
yield available on U. S. Treasury issues with remaining terms equivalent to our
expected option term. 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 also recognized compensation costs for shares purchased under our Employee
Stock Purchase Plan ("ESPP") during the years ended December 31, 2007 and 2006.
We applied the same variables to the calculation of the costs associated with
the ESPP shares purchased in each respective year as the stock option grants
11
noted above, except that the expected term was 0.5 years. The time span from the
date of grant of ESPP shares to the date of purchase is six months.
We have not historically paid dividends on our common stock and do not
anticipate doing so for the foreseeable future.
Results of Operations
During the year ended December 31, 2007, we determined that we operated our
business in two segments versus one for prior years. Our two segments are
software and intellectual property.
Set forth below is statement of operations data for the years ended December 31,
2007 and 2006 along with the dollar and percentage changes from 2006 to 2007 in
the respective line items. Percentage changes that are not meaningful are marked
NM.
Year Ended December 31, Change in
-------------------------------------- ------------------------------------
2007 2006 Dollars Percentage
Revenue: ----------------- ----------------- ------------------- -------------
Product licenses $ 3,325,100 $ 3,513,000 $ (187,900) -5.3%
Intellectual property license 6,250,000 - 6,250,000 NM
Service fees 1,794,400 1,588,300 206,100 13.0%
Other 116,100 69,300 46,800 67.5%
----------------- ----------------- -------------------
Total Revenue 11,485,600 5,170,600 6,315,000 122.1%
Cost of revenue 2,623,000 534,000 2,089,000 391.2%
----------------- ----------------- -------------------
Gross profit 8,862,600 4,636,600 4,226,000 91.1%
----------------- ----------------- -------------------
Operating expenses:
Selling and marketing 1,819,900 1,650,600 169,300 10.3%
General and administrative 4,703,000 3,975,900 727,100 18.3%
Research and development 2,162,700 2,093,700 69,000 3.3%
----------------- ----------------- -------------------
Total operating expenses 8,685,600 7,720,200 965,400 12.5%
----------------- ----------------- -------------------
Income (loss) from operations 177,000 (3,083,600) 3,260,600 NM
----------------- ----------------- -------------------
Other income (expense):
Interest and other income 62,700 57,000 5,700 10.0%
Interest and other expense (4,100) (4,200) 100 2.4%
----------------- ----------------- -------------------
Total other income 58,600 52,800 5,800 11.0%
----------------- ----------------- -------------------
Income (loss) before income taxes 235,600 (3,030,800) 3,266,400 107.8%
Income taxes 42,100 4,300 37,800 879.1%
----------------- ----------------- -------------------
Net income (loss) attributable to common
shareholders $ 193,500 $ (3,035,100) $ 3,228,600 NM
================= ================= ===================
Revenue. During December 2007, we entered into a $6,250,000 settlement and
licensing agreement with AutoTrader.com (as explained elsewhere in this Form
10-KSB), under which they, their parent company Cox Enterprises, Inc. and all of
their affiliates received an irrevocable, perpetual, world-wide, non-exclusive
license to all of our patents and patent applications, including the `538 and
`940 patents.
Although we intend to attempt to further exploit and monetize our intellectual
property in the future, there can be no assurances that we will be successful.
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 the sale of software development kits nor do we anticipate
generating a significant amount from them during 2008.
12
The table that follows summarizes product licensing fees for the years ended
December 31, 2007 and 2006 and calculates the change in dollars and percentage
from 2006 to 2007 in the respective line item.
The changes in both Windows and Unix-based product licensing fees revenue for
the year ended December 31, 2007 as compared with the prior year was reflective
of how such revenue varies 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, our product
licensing fees revenue can be materially adversely impacted. We expect this
situation to continue during 2008.
Revenue recognized from Windows product licenses for the year ended December 31,
2007 was virtually unchanged from the prior year. During June 2007, we released
an updated version of our Windows product, GO-Global for Windows, version 3.2,
which enhanced the functionality and performance of earlier versions.
The decrease in Unix product license revenue for the year ended December 31,
2007, as compared with 2006, was primarily due to a $250,000 one-time sale to an
enterprise customer during 2006, which was partially offset by an overall
increase in sales made to various other Unix customers.
We anticipate that many of our customers will enter into, and periodically
renew, maintenance contracts to ensure continued product updates and support.
Currently we offer maintenance contracts for one, two, three or five-year
periods. Revenue from maintenance contracts totaled approximately $1,794,400 in
2007, an increase of $206,100, or 13.0%, from the $1,588,300 reported for 2006.
Revenue from maintenance contracts comprised approximately 15.6% and 30.7% of
total revenue for the years ended December 31, 2007 and 2006, respectively. We
expect revenue from maintenance contracts in 2008 to exceed 2007 levels due to
an increase in maintenance contract sales in 2007, the continued growth in the
size of our channel partner base and anticipated maintenance contract renewals
in 2008.
For the year ended December 31, 2007 our three most significant customers
accounted for approximately 21.3%, 8.1% and 5.0%, respectively, of total sales.
These three customers' December 31, 2007 year-end accounts receivable balances
represented approximately 43.2%, 2.6%, and 8.9% of reported net accounts
receivable, respectively, and included a significant sale made to our largest
customer during December 2007. By March 12, 2008, we had collected approximately
88% of these outstanding balances.
Segment Revenue. Segment revenue was as follows:
Year Ended December 31 2007 2006
----------------------- --------------- --------------
Software $ 5,235,600 $ 5,170,600
Intellectual Property 6,250,000 -
--------------- --------------
Consolidated Total $ 11,485,600 $ 5,170,600
=============== ==============
As set forth above, the increase in software revenues for the year ended
December 31, 2007, as compared with the prior year was primarily due to
increased service fees and other revenues, which were partially offset by a
decrease in product license revenue. During December 2007 we recognized
$6,250,000 of revenue related to the settlement and licensing agreement of our
intellectual property that we entered into with Autotrader.com. For the year
ended December 31, 2006 we did not license our intellectual property.
Cost of Revenue. Cost of revenue is comprised primarily of contingent legal fees
resulting from settlements and/or licensing agreements incurred as a result of
our patent litigation efforts, service costs, which represent the costs of
customer service (and is inclusive of non-cash stock-based compensation expense
calculated in accordance with FAS123R), and product costs. Shipping and
packaging materials are immaterial as virtually all of our license deliveries
are made via electronic means over the Internet. Under accounting principles
generally accepted in the United States, research and development costs for new
13
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 $2,089,000, or 391.2%, to $2,623,000 for the year
ended December 31, 2007 from $534,000 for the prior year. Cost of revenue for
the year ended December 31, 2007 represented approximately 22.8% of total
revenue, as compared with 10.3% for the prior year. Had we not entered into the
settlement and licensing agreement with AutoTrader.com, we would have reported
cost of revenue of approximately $503,900 for the year ended December 31, 2007,
a decrease of $30,100, or 5.6%, from the prior year.
We recorded $2,119,100 of contingent legal fees as a cost of revenue for the
year ended December 31, 2007 as a result of the $6,250,000 settlement and
license agreement we entered into with Autotrader.com during December 2007. No
such contingent legal fees were recorded in the prior year.
Service costs increased by $44,600, or 10.3%, to $475,600 for the year ended
December 31, 2007 from $431,000 for the prior year. The increase resulted
primarily from increasing the amount of engineering time spent performing
customer service. Service costs for the years ended December 31, 2007 and 2006
were inclusive of $13,300 and $17,500 of non-cash stock-based compensation
expense, respectively.
Product costs decreased by $74,700, or 72.5%, to $28,300 for the year ended
December 31, 2007 from $103,000 for the prior year. The decrease was primarily
due to a decrease in the amortization of capitalized software development costs
as almost all of the elements of our capitalized software development costs
became fully amortized during either 2006 or 2007. Amortization of capitalized
software development costs charged to cost of revenue aggregated $5,800 and
$74,300 for the years ended December 31, 2007 and 2006, respectively.
We expect that cost of revenue for 2008, assuming that we incur no contingent
legal fees during 2008, will approximate 2007 levels, net of the contingent
legal fees recorded during 2007.
Selling and Marketing Expenses. Selling and marketing expenses primarily consist
of employee costs (inclusive of non-cash stock-based compensation expense
calculated in accordance with FAS123R), outside services and travel and
entertainment expenses.
Selling and marketing expenses for the year ended December 31, 2007 increased by
$169,300, or 10.3%, to $1,819,900 from $1,650,600 for 2006. Selling and
marketing expenses represented approximately 15.8% and 31.9% of total revenue,
respectively, for the years ended December 31, 2007 and 2006. Included in
selling and marketing expenses for the years ended December 31, 2007 and 2006
were approximately $32,100 and $35,100, respectively, of non-cash stock-based
compensation expense.
Our selling and marketing expenses were higher in 2007 than 2006 primarily
because employee costs were higher, resulting from having approximately two more
sales representatives in 2007 as compared with 2006, higher commissions expense
resulting from an increase in commissionable sales, and changes in which sales
representatives attained quarterly and annual quotas. Also, costs related to
outside services in 2007 exceeded 2006 levels mainly due to increased marketing
activities from our marketing consultants as well as recruiting costs incurred
in the hiring of a new sales representative. Partially offsetting these
increases was a decrease in travel and entertainment expense in 2007, as
compared with 2006, that primarily resulted from participating in fewer
tradeshows as a vendor and costs associated with a 2006 incentive program that
was not repeated during 2007.
We expect aggregate 2008 selling and marketing expenses to approximate 2007
levels.
General and Administrative Expenses. General and administrative expenses
primarily consist of employee costs (inclusive of non-cash stock-based
compensation expense calculated in accordance with FAS123R), amortization and
depreciation, legal, professional and other outside services (including those
related to realizing benefits from our patents), rent, travel and entertainment
and insurance. Certain costs associated with being a publicly-held corporation
are also included in general and administrative expenses, as well as bad debts
expense.
General and administrative expenses for the year ended December 31, 2007
increased by $727,100, or 18.3%, to $4,703,000 from $3,975,900 for 2006. General
and administrative expenses for the years ended December 31, 2007 and 2006
represented approximately 40.9% and 76.9% of total revenue, respectively.
Included in general and administrative expenses for the years ended December 31,
2007 and 2006 were approximately $366,300 and $337,100, respectively, of
non-cash stock-based compensation expense.
14
During 2007 non-contingent legal fees and outside services fees associated with
our lawsuit against Autotrader.com (as explained elsewhere in this Form 10-KSB)
exceeded 2006 levels by approximately $768,400, which was primarily comprised of
costs associated with trial preparation.
During 2007 we increased our allowance for doubtful accounts by approximately
$182,200 primarily as the result of a downward evaluation of the current
financial condition of a significant customer's aggregate outstanding balance
due us. Although we currently anticipate continuing our relationship with this
customer, we do not anticipate delivering further product until their receivable
has been fully satisfied.
Partially offsetting these increases were decreases in travel and entertainment,
primarily as a result of less travel by our Chief Executive Officer and using
short-term housing, versus hotels, for extended trips to our New Hampshire
engineering facility, and non-patent related outside services, which was due to
our hiring our Chief Executive Officer on a full-time basis during September
2006. Employee costs were not significantly impacted by the hiring of our Chief
Executive Officer on a full-time basis as prior to his hiring, our former Chief
Operating Officer was terminated in July 2006.
Costs associated with other major components of general and administrative
expenses, notably, depreciation and amortization, insurance, rent and costs
associated with being a public entity did not change significantly during the
year ended December 31, 2007, as compared with the prior year.
The ending balance of our allowance for doubtful accounts as of December 31,
2007 and 2006 was $229,000 and $46,800, respectively. Bad debts expense was
approximately $182,200 and $0 for the years ended December 31, 2007 and 2006,
respectively.
We anticipate that cumulative general and administrative expense in 2008 will be
lower than those incurred during 2007, primarily resulting from lower legal fees
associated with intellectual property litigation. Although we currently have two
legal actions underway (See Note 12 to the Financial Statements), we believe
that increased expenditures associated with trail preparation, such as those we
incurred during the last few months before the AutoTrader.com litigation was
scheduled to commence during December 2007, will tend to occur closer to the
actual trial dates. No trial dates have been set for either action currently
underway and we believe that such dates will be set for the second half of 2009,
at the earliest.
Research and Development Expenses. Research and development expenses consist
primarily of employee costs (inclusive of non-cash stock-based compensation
expense calculated in accordance with FAS123R), payments to contract
programmers, all costs of GraphOn Research Labs Limited, and rent.
Under accounting principles generally accepted in the United States, all costs
of product development incurred once technological feasibility has been
established, but prior to the 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. There was
no significant capitalization of product development costs during either 2007 or
2006.
Research and development expenses increased by $69,000, or 3.3%, to $2,162,700
for the year ended December 31, 2007 from $2,093,700 in the prior year. Research
and development expenses for the years ended December 31, 2007 and 2006
represented approximately 18.8% and 40.5% of total revenue, respectively.
Research and development costs for the years ended December 31, 2007 and 2006
are inclusive of $101,500 and $80,700, respectively, of non-cash stock-based
compensation.
Employee costs were higher in 2007 than 2006 primarily resulting from hiring
three additional engineers at various times throughout 2006, including; a
vice-president of engineering, a president for our Israeli subsidiary, a staff
engineer and an additional staff engineer during January 2007. Partially
offsetting the increased costs associated with these hires was lowered employee
costs associated with the termination of four staff engineers at various times
throughout 2007.
Costs associated with outside consultants, including recruiters, were lower
during the year ended December 31, 2007, as compared with 2006, primarily due to
the hiring of a president for our Israeli subsidiary, the curtailing of certain
consulting contracts as various projects were completed and the hiring of a
vice-president of engineering during 2006. Prior to hiring the president of our
Israeli subsidiary, the individual had been providing engineering consulting
services to us. During August 2006, he was hired on a full-time basis and no
longer charged us consulting fees. Additionally, as certain engineering projects
that had been outsourced to consultants were completed during 2006 and 2007, the
consultants' underlying contracts were not renewed as we were trying to conserve
our cash. We believe that we have sufficient resources to rehire the consultants
if needed. Also, fees paid to a recruiter who found the vice president of
engineering we hired during 2006 were not repeated during 2007.
15
Rent expense increased by almost 50% during the year ended December 31, 2007, as
compared with the prior year, primarily because we expanded the size of our New
Hampshire engineering facility during October 2006, and we paid a full year's
worth of rent for our Israeli subsidiary, which opened during August 2006.
Our research and development efforts currently are focused on further enhancing
the functionality, performance and reliability of existing products. We
historically have made significant investments in our protocol and in the
performance and development of our server-based software, and we expect to
continue to make significant product investments during 2008. We also anticipate
increasing the size of our in-house research and development workforce during
2008 so that we may accelerate our efforts to further stabilize and enhance our
current and new product offerings. Consequently, we expect 2008 research and
development expense to be higher than 2007 levels.
Interest and Other Income. During 2007 and 2006, the primary component of
interest and other income was interest income derived on excess cash. Our excess
cash was held in interest bearing money market accounts with institutions whose
minimum net assets were greater than or equal to one billion U.S. dollars.
Interest and other income was approximately 0.5% and 1.1% of total revenues for
the years ended December 31, 2007 and 2006, respectively. The increase in
interest income in 2007, as compared to 2006, was primarily due to higher
average interest rates being earned by our money market account.
Segment Operating Income (Loss). As a result of the foregoing items, segment
operating income (loss) was as follows:
We do not allocate interest and other income, interest and other expense or
income tax to our segments.
Provision for Income Taxes. For the years ended December 31, 2007 and 2006 we
recorded current tax provisions of approximately $42,100 and $4,300,
respectively. At December 31, 2007, we had approximately $39 million of federal
net operating loss carryforwards, which will begin to expire in 2010. Also at
December 31, 2007, we had approximately $12 million of California state net
operating loss carryforwards available to reduce future taxable income, which
will began to expire in 2010. During the year ended December 31, 2007, we
utilized $2,268,700 and $1,289,000 of our federal and California net operating
losses, respectively.
Net Income (Loss). Primarily as the result of the $6,250,000 settlement and
licensing agreement we entered into with Autotrader.com we reported net income
of $193,500 for the year ended December 31, 2007, as compared with a net loss of
$3,035,100 for the prior year. Absent the settlement and licensing agreement
with Autotrader.com, we would have reported a net loss of approximately
$3,901,300 for the year ended December 31, 2007 as a result of the factors
described above.
Liquidity and Capital Resources
During 2007 our cash and cash equivalents balance increased by $2,323,700,
primarily as a result of our operations generating approximately $2,329,500 of
cash during the year. Our reported net income of $193,500 included three
significant non-cash items, namely; depreciation and amortization of $958,700,
which was primarily related to amortization of our patents, stock-based
compensation expense of $513,200 and an increase to our allowance for doubtful
accounts of $182,200.
A large source of cash for us during 2007 was the $6,250,000 settlement and
license agreement we entered into with Autotrader.com during December 2007.
During 2007, we closely monitored our investing activities, spending
approximately $73,900, primarily on fixed asset purchases, mainly comprised of
computer equipment. Our financing activities generated approximately $68,100 of
cash, which resulted from proceeds we received from the exercise of employee
stock options and proceeds we received from the sale of stock to our employees
through our employee stock purchase plan.
16
We are planning to increase investments in our operations during 2008 and to
fund these increases through our cash on hand, as of December 31, 2007, 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 merger opportunities as
they present themselves to us and at such time as a merger might make financial
sense and add value for our shareholders, we will pursue that merger
opportunity. We believe that maintaining our current revenue stream, coupled
with our cash on hand, will be sufficient to support our operational plans for
2008.
Cash and cash equivalents
As of December 31, 2007, cash and cash equivalents were approximately $5,260,800
as compared with $2,937,100 as of December 31, 2006. The $2,329,500 of cash
generated by our operations, which is inclusive of the net proceeds generated by
the $6,250,000 settlement and licensing agreement entered into with
Autotrader.com, was the substantial majority of the year to year change in our
cash and cash equivalents. We anticipate that our cash and cash equivalents as
of December 31, 2007, together with revenue from 2008 operations will be
sufficient to fund our anticipated expenses during the next twelve months.
Accounts receivable, net
At December 31, 2007 and 2006, we had approximately $886,600 and $680,400,
respectively, in accounts receivable, net of allowances totaling $229,000 and
$46,800, respectively. The increase in our net accounts receivable balance was
primarily due to an approximate $200,600 order received from Alcatel-Lucent, a
major customer, late in 2007 that was not paid until early 2008. During 2007 we
increased our allowance for doubtful accounts by $182,200 primarily as a result
of a downward evaluation of the current financial condition of a significant
customer's aggregate outstanding balance due us. 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 adversely affected.
Segment fixed assets
As of December 31, 2007, segment fixed assets (long-lived assets) were as
follows:
Fixed assets attributable to our software segment are primarily comprised of
equipment, furniture and leasehold improvement and those attributable to our
intellectual property segment are primarily comprised of our patents and patent
related assets. We do not allocate other assets, which consists primarily of
deposits, to our segments.
Commitments and contingencies
We do not have nor do we anticipate any material capital expenditure commitments
for the next twelve months.
The following table discloses our contractual commitments for future periods,
which consist entirely of leases for office space. The table assumes that we
will occupy all currently leased facilities for the full term of the underlying
leases:
Rent expense aggregated approximately $195,700 and $154,100 for the years ended
December 31, 2007 and 2006, respectively.
New Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (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 is 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
17
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 our 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. We do not expect SFAS 159
to have a material impact on our 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 generally accepted accounting principles 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. We do not expect SFAS 157 to have a material impact on our
results of operations, cash flows or financial position.
Effective January 1, 2007, we adopted FASB Interpretation No. 48, "Accounting
for Uncertainties in Income Taxes - An Interpretation of FASB Statement No. 109"
("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of uncertain tax
positions taken or expected to be taken in a company's income tax return, and
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
As a result of the implementation of FIN 48, we recognized no change in the
liability for unrecognized tax benefits related to tax positions taken in prior
years, and no corresponding change in retained deficit. Additionally, we
recognized no material adjustment in the liability for unrecognized income tax
benefits as of the January 1, 2007 adoption date and December 31, 2007. Also, we
had no amounts of unrecognized tax benefits that, if recognized, would affect
our effective tax rate for January 1, 2007 and December 31, 2007.
Our policy for deducting interest and penalties is to treat interest as interest
expense and penalties as taxes. As of December 31, 2007, we had no amount
accrued for the payment of interest and penalties related to the unrecognized
tax benefits as of the adoption date of FIN 48.
We file federal consolidated income tax returns and income tax returns in
various state jurisdictions. Our 2003 through 2006 federal tax years and state
tax years from 2002 through 2006, inclusive, remain subject to income tax
examinations by the respective tax jurisdictions. Net operating loss
carryforwards generated in 1991 through 2006, and from 2000 through 2006, for
federal and state tax purposes, respectively, remain open to examination by the
respective tax jurisdictions.
Risk Factors
The risks and uncertainties described below are not the only ones facing our
company. Additional risks and uncertainties not presently known to us, or risks
that we do not consider significant, may also impair our business. This document
also contains forward-looking statements that involve risks and uncertainties,
and actual results may differ materially from the results we discuss in the
forward-looking statements. If any of the following risks actually occur, they
could have a severe negative impact on our financial results and stock price.
We have a history of operating losses and expect these losses to continue, at
least for the near future.
We have experienced significant losses since we began operations. We expect to
continue to incur losses at least for the near future. We incurred an operating
loss of approximately $3,083,600 for the year ended December 31, 2006, and had
we not entered into the $6,250,000 settlement and licensing agreement with
Autotrader.com, we would have incurred an operating loss of approximately
$3,901,300 for the year ended December 31, 2007. We do not expect to be
profitable in 2008. Our expenses have increased as we have begun our efforts to
further enforce our rights under our patents; however, we cannot give assurance
18
that our software revenues will increase sufficiently to exceed total operating
expenses. In future reporting periods, 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.
We may not realize the anticipated benefits of acquiring Network Engineering
Software.
We acquired Network Engineering Software in January 2005 with the anticipation
that we would realize various benefits, including, among other things, licensing
revenues through expansion of our product offerings or enhancement of our
current product line, ownership of 11 issued patents and another 43 patent
applications in process. We may not fully realize some or all of these benefits
and the acquisition may result in the diversion of management time and cash
resources to the detriment of our core software business. Costs incurred and
liabilities assumed in connection with this acquisition could also have an
adverse impact our future operating results.
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 significant 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 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.
The market for our products and services are characterized by:
o frequent new product and service introductions and enhancements;
o rapid technological change;
o evolving industry standards;
o fluctuations in customer demand; and
o changes in customer requirements.
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 hindered by:
o delays in our introduction of new products and/or enhancements
of existing products;
o delays in market acceptance of new products and/or enhancements
of existing products; and
o our, or a competitor's, announcement of new products and/or product
enhancements or technologies that could replace or shorten the life
cycle of our existing products.
For example, sales of our GO-Global for Windows software could be affected by
the announcement from Microsoft of the release and the actual release of a new
Windows-based operating system or an upgrade to a previously released
Windows-based operating system version as these new or upgraded systems may
contain similar features to our products or they could contain architectural
changes that temporarily prevent our products from functioning properly within a
Windows-based operating system environment.
Our business could be adversely impacted by conditions affecting the
information technology market.
The demand for our products depends substantially upon the general demand for
business-related software, which fluctuates on numerous factors, including
capital spending levels, the spending levels and growth of our current and
prospective customers and general economic conditions. Fluctuations in the
demand for our products could have a material adverse effect on our business,
results of operations and financial condition.
19
Our business could be adversely impacted by changes pending in the United
States Patent and Trademark Office ("PTO") or by cases being reviewed by the
United States Supreme Court ("Supreme Court").
Currently, proposed rule changes are pending in the PTO that will affect how
currently pending and new patent applications are processed by the PTO. These
rule changes may have an adverse affect on our presently pending patent
applications and any patent applications we may file in the future.
Several cases have been selected for review this term by the Supreme Court that
involve patent law. In particular, KSR v. Teleflex examines the standard for
finding a patent obvious and therefore invalid. One possible outcome is that the
standard for invalidating a patent as being obvious may change. Such a result
could adversely affect both the validity of our issued patents, and the
patentability of our patent applications currently pending in the PTO.
Additionally, legislation is pending in Congress that would reform patent law.
The legislation, if passed, may affect our ability to file lawsuits in certain
jurisdictions and may adversely impact our ability to collect damages if enacted
as currently drafted.
Sales of products within our GO-Global product line constitute a substantial
majority of our revenue.
We anticipate that sales of products within our GO-Global product line, and
related enhancements, will continue to constitute a substantial majority of our
revenue for the foreseeable future. Our ability to continue to generate revenue
from our GO-Global product line will depend on continued market acceptance of
GO-Global. Declines in demand for our GO-Global product line could occur as a
result of:
o lack of success with our strategic partners;
o new competitive product releases and updates to existing competitive
products;
o decreasing or stagnant information technology spending levels;
o price competition;
o technological changes, or;
o general economic conditions in the market in which we operate.
If our customers do not continue to purchase GO-Global products as a result of
these or other factors, our revenue would decrease and our results of operations
and financial condition would be adversely affected.
If we determine that any of our intangible assets, including the patents
acquired from Network Engineering Software, are impaired, we would be
required to write down the value of the asset(s) and record a charge to our
income statement, which could have a material adverse effect on our results
of operations.
We have a significant amount of intangible assets reported on our balance sheet
as of December 31, 2007, primarily comprised of a net balance of $2,741,300
reported as Patents. We review our intangible assets for impairment annually, or
sooner if events or changes in circumstances indicate that the carrying amounts
could be impaired. Due to uncertain market conditions, potential changes in our
strategy and product portfolio, and other factors, it is possible that the
forecasts we use to support our intangible assets could change in the future,
which could result in non-cash charges that would adversely affect our results
of operations and financial condition.
Our stock price has been historically 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.
Our operating results in one or more future periods are likely to fluctuate
significantly and may fail to meet or exceed the expectations of securities
analysts or investors.
Our operating results are likely to fluctuate significantly in the future on a
quarterly and on an annual basis due to a number of factors, many of which are
outside our control. Factors that could cause our revenues to fluctuate include
the following:
o Our ability to maximize the revenue opportunities of our patents;
o The degree of success of products or product enhancements that we may
introduce;
o Variations in the size of orders by our customers;
o Increased competition;
20
o The proportion of overall revenues derived from different sales channels
such as distributors, original equipment manufacturers (OEMs) and others;
o Changes in our pricing policies or those of our competitors;
o The financial stability of major customers;
o New product introductions or enhancements by us or by competitors;
o Delays in the introduction of products or product enhancements by us or by
competitors;
o The degree of success of new products;
o Any changes in operating expenses; and
o General economic conditions and economic conditions specific to the
software industry.
In addition, our royalty and license revenues are impacted by fluctuations in
OEM licensing activity from quarter to quarter, which may involve one-time
orders from non-recurring customers, or customers who order infrequently. Our
expense levels are based, in part, on expected future orders and sales;
therefore, if orders and sales levels are below expectations, our operating
results are likely to be materially adversely affected. Additionally, because
significant portions of our expenses are fixed, a reduction in sales levels may
disproportionately affect our net income. Also, we may reduce prices or increase
spending in response to competition or to pursue new market opportunities.
Because of these factors, our operating results in one or more future periods
may fail to meet or exceed the expectations of securities analysts or investors.
In that event, the trading price of our common stock would likely be adversely
affected.
We may not be successful in attracting and retaining key management or other
personnel.
Our success and business strategy is also dependent in large part on our ability
to attract and retain key management and other personnel. The loss of the
services of one or more members of our management group and other key personnel,
including our Chief Executive Officer, may have a material adverse effect on our
business.
Our failure to adequately protect our proprietary rights may adversely affect
us.
Our commercial success is dependent, in large part, upon our ability to protect
our proprietary rights. We rely on a combination of patent, copyright and
trademark laws, and on trade secrets and confidentiality provisions and other
contractual provisions to protect our proprietary rights. These measures afford
only limited protection. We cannot assure you that measures we have taken will
be adequate to protect us from misappropriation or infringement of our
intellectual property. Despite our efforts to protect proprietary rights, it may
be possible for unauthorized third parties to copy aspects of our products or
obtain and use information that we regard as proprietary. In addition, the laws
of some foreign countries do not protect our intellectual property rights as
fully as do the laws of the United States. Furthermore, we cannot assure you
that the existence of any proprietary rights will prevent the development of
competitive products. The infringement upon, or loss of any proprietary rights,
or the development of competitive products despite such proprietary rights,
could have a material adverse effect on our business.
As regards our intention to maximize the revenue opportunities the portfolio of
patents that we acquired from Network Engineering Software:
o Although we believe the Network Engineering Software patents to be
strong, there can be no assurance that they will not be found invalid
either in whole or in part if challenged;
o Invalidation of their broadest claims could result in very narrow claims
that do not have the potential to produce meaningful license revenues;
o Many of the companies that we intend to seek licenses from are very large
with significant financial resources. We currently lack the ability to
defend our patents against claims of invalidity if such litigation is
heavily contested over an extended period of months or even years;
o We have engaged attorneys that work on our behalf on a contingent fee
basis and intend to pursue litigation until a resolution is achieved that
is favorable to us. Such attorneys may seek to limit their exposure
either by advocating licensing settlements that are not favorable to us
or may abandon their efforts on our behalf; and
o Because Network Engineering Software obtained no foreign patents or
filed any foreign patent applications, infringing companies may seek to
avoid our demand for licenses by moving the infringing activities
offshore where U.S. patents cannot be enforced.
21
We face risks of claims from third parties for intellectual property
infringement that could adversely affect our business.
At any time, we may receive communications from third parties asserting that
features or content of our products may infringe upon their intellectual
property rights. Any such claims, with or without merit, and regardless of their
outcome, may be time consuming and costly to defend. We may not have sufficient
resources to defend such claims and they could divert management's attention and
resources, cause product shipment delays or require us to enter into new royalty
or licensing agreements. New royalty or licensing agreements may not be
available on beneficial terms, and may not be available at all. If a successful
infringement claim is brought against us and we fail to license the infringed or
similar technology, our business could be materially adversely affected.
Our business significantly benefits from strategic relationships and there
can be no assurance that such relationships will continue in the future.
Our business and strategy relies to a significant extent on our strategic
relationships with other companies. There is no assurance that we will be able
to maintain or develop any of these relationships or to replace them in the
event any of these relationships are terminated. In addition, any failure to
renew or extend any licenses between any third party and us may adversely affect
our business.
We rely on indirect distribution channels for our products and may not be
able to retain existing reseller relationships or to develop new reseller
relationships.
Our products are primarily sold through several distribution channels. An
integral part of our strategy is to strengthen our relationships with resellers
such as OEMs, systems integrators, VARs, distributors and other vendors to
encourage these parties to recommend or distribute our products and to add
resellers both domestically and internationally. We currently invest, and intend
to continue to invest, significant resources to expand our sales and marketing
capabilities. We cannot assure you that we will be able to attract and/or retain
resellers to market our products effectively. Our inability to attract resellers
and the loss of any current reseller relationships could have a material adverse
effect on our business, results of operations and financial condition.
Additionally, we cannot assure you that resellers will devote enough resources
to provide effective sales and marketing support to our products.
The market in which we participate is highly competitive and has more
established competitors.
The market we participate in is intensely competitive, rapidly evolving and
subject to technological changes. We expect competition to increase as other
companies introduce additional competitive products. In order to compete
effectively, we must continually develop and market new and enhanced products
and market those products at competitive prices. As markets for our products
continue to develop, additional companies, including companies in the computer
hardware, software and networking industries with significant market presence,
may enter the markets in which we compete and further intensify competition. A
number of our current and potential competitors have longer operating histories,
greater name recognition and significantly greater financial, sales, technical,
marketing and other resources than we do. We cannot assure you that our
competitors will not develop and market competitive products that will offer
superior price or performance features, or that new competitors will not enter
our markets and offer such products. We believe that we will need to invest
increased financial resources in research and development to remain competitive
in the future. Such financial resources may not be available to us at the time
or times that we need them, or upon terms acceptable to us. We cannot assure you
that we will be able to establish and maintain a significant market position in
the face of our competition and our failure to do so would adversely affect our
business.
22
ITEM 7. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
------------------------------------------
Page
Report of Independent Registered Public Accounting Firm 24
Consolidated Balance Sheet as of December 31, 2007 25
Consolidated Statements of Operations for the Years Ended December 31, 2007 and 2006 26
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2007 and 2006 27
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007 and 2006 28
Notes to Consolidated Financial Statements 29
23
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of GraphOn Corporation
We have audited the accompanying consolidated balance sheet of GraphOn
Corporation and subsidiaries (the "Company") as of December 31, 2007 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the two years in the period ended December 31, 2007. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GraphOn Corporation
and subsidiaries as of December 31, 2007, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 2007,
in conformity with accounting principles generally accepted in the United States
of America.
/s/ Macias Gini & O'Connell LLP
-------------------------------
Macias Gini & O'Connell LLP
Sacramento, California
March 31, 2008
24
GraphOn Corporation
Consolidated Balance Sheet
As of December 31, 2007
Assets
Current Assets:
Cash and cash equivalents $ 5,260,800
Accounts receivable, net of allowance for doubtful accounts
of 229,000 886,600
Prepaid expenses and other current assets 42,600
-----------------
Total Current Assets 6,190,000
-----------------
Property and equipment, net 134,700
Capitalized software, net 3,600
Patents, net 2,741,300
Other assets 4,800
-----------------
Total Assets $ 9,074,400
=================
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 196,200
Accrued expenses 222,900
Accrued wages 448,100
Deferred revenue 1,475,000
-----------------
Total Current Liabilities 2,342,200
-----------------
Long Term Liabilities:
Deferred revenue 1,833,100
-----------------
Total Liabilities 4,175,300
-----------------
Commitments and contingencies (Note 9) -
Shareholders' Equity
Preferred stock, $0.01 par value, 5,000,000 shares authorized, no
shares issued and outstanding -
Common stock, $0.0001 par value, 195,000,000 shares authorized,
47,576,401 shares issued and outstanding 4,800
Additional paid-in capital 59,399,000
Accumulated deficit (54,504,700)
-----------------
Total Shareholders' Equity 4,899,100
-----------------
Total Liabilities and Shareholders' Equity $ 9,074,400
=================
See accompanying notes to consolidated financial statements
25
GraphOn Corporation
Consolidated Statements of Operations
For the Year Ended December 31,
-----------------------------------
Revenue 2007 2006
------- ---------------- ----------------
Product licenses $ 3,325,100 $ 3,513,000
Intellectual property license 6,250,000 -
Service fees 1,794,400 1,588,300
Other 116,100 69,300
---------------- ----------------
Total Revenue 11,485,600 5,170,600
---------------- ----------------
Cost of revenue
Service costs 475,600 431,000
Product costs 28,300 103,000
Contingent legal fees 2,119,100 -
---------------- ----------------
Total Cost of Revenue 2,623,000 534,000
---------------- ----------------
Gross Profit 8,862,600 4,636,600
---------------- ----------------
Operating Expenses
Selling and marketing 1,819,900 1,650,600
General and administrative 4,703,000 3,975,900
Research and development 2,162,700 2,093,700
---------------- ----------------
Total Operating Expenses 8,685,600 7,720,200
---------------- ----------------
Income (Loss) from Operations 177,000 (3,083,600)
---------------- ----------------
Other Income (Expense)
Interest and other income 62,700 57,000
Interest and other expense (4,100) (4,200)
---------------- ----------------
Total other income 58,600 52,800
---------------- ----------------
Income (Loss) Before Provision for Income Tax 235,600 (3,030,800)
Provision for income taxes 42,100 4,300
---------------- ----------------
Net Income (Loss) $ 193,500 $ (3,035,100)
================ ================
Earnings (Loss) per Common Share - Basic $ 0.00 $ (0.07)
Earnings (Loss) per Common Share - Diluted $ 0.00 $ (0.07)
Weighted Average Common Shares Outstanding - Basic 46,804,504 46,201,791
Weighted Average Common Shares Outstanding - Diluted 46,804,504 46,201,791
See accompanying notes to consolidated financial statements
GraphOn Corporation
Consolidated Statements of Cash Flows
For the Year Ended December 31,
-------------------------------
2007 2006
Cash Flows From Operating Activities: ------------- -------------
Net income (loss) $ 193,500 $ (3,035,100)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 958,700 1,014,600
Stock based compensation expense 513,200 470,400
Charges to allowance for doubtful accounts 182,200 -
Proceeds from note receivable - shareholder 260,100 -
Loss on disposal of fixed assets 1,000 -
Proceeds from accrued interest on note receivable shareholder 21,200 -
Interest accrued on note receivable shareholder (9,100) (9,600)
Changes in operating assets and liabilities:
Accounts receivable (388,400) 82,900
Prepaid expenses and other current assets 22,700 (21,600)
Accounts payable (36,300) 110,500
Accrued expenses 53,700 7,100
Accrued wages 56,500 (93,100)
Deferred revenue 500,500 1,015,600
------------- -------------
Net Cash Provided By (Used In) Operating Activities: 2,329,500 (458,300)
------------- -------------
Cash Flows Provided By (Used In) Investing Activities:
Capital expenditures (73,800) (85,800)
Other assets (100) 2,600
------------- -------------
Net Cash Used In Investing Activities: (73,900) (83,200)
------------- -------------
Cash Flows Provided By (Used In) Financing Activities:
Proceeds from Employee Stock Purchase Plan 7,100 8,500
Proceeds from exercise of employee stock options 61,000 -
Costs of private placement of preferred stock and warrants - (58,000)
------------- -------------
Net Cash Provided By (Used In) Financing Activities: 68,100 (49,500)
------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents 2,323,700 (591,000)
Cash and Cash Equivalents, beginning of period 2,937,100 3,528,100
------------- -------------
Cash and Cash Equivalents, end of period $ 5,260,800 $ 2,937,100
============= =============
See accompanying notes to consolidated financial statements
28
GraphOn Corporation
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies.
The Company. GraphOn Corporation (the "Company") was founded in May 1996 and is
incorporated in the state of Delaware. The Company's headquarters are currently
in Santa Cruz, California. The Company develops, markets, sells and supports
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), corporate enterprises, governmental and
educational institutions, and others, primarily in the United States, Asia and
Europe.
The Company acquired Network Engineering Solutions, Inc. (NES) in January 2005
and acquired the rights to 11 patents, which are primarily method patents that
describe software and network architectures to accomplish certain tasks, as well
as other intellectual property rights. The Company initiated litigation during
2006, 2007 and March 2008 against certain companies that it believed violated
one or more of the patents. In December 2007, the Company entered into a $6.25
million settlement and licensing agreement with one of the companies (Note 12).
Basis of Presentation and Use of Estimates. The consolidated financial
statements include the accounts of the Company and its subsidiaries
(collectively, the "Company"), significant intercompany accounts and
transactions are eliminated upon consolidation. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. These estimates
include the amount of stock-based compensation expense, the allowance for
doubtful accounts, the estimated lives of intangible assets, depreciation of
fixed assets and accruals for liabilities. Actual results could differ
materially from those estimates.
Cash and Cash Equivalents. The Company considers all highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents.
Property and Equipment. Property and equipment are stated at cost. Depreciation
is calculated using the straight-line method over the estimated useful lives of
the respective assets, generally three to seven years. Amortization of leasehold
improvements is calculated using the straight-line method over the lesser of the
lease term or useful lives of the respective assets, generally seven years.
Shipping and Handling. Shipping and handling costs are included in cost of
revenue for all periods presented.
Purchased Technology. Purchased technology is amortized on a
straight-line basis over the expected life of the related technology or
five years, whichever is less.
Patents. The patents acquired in the Network Engineering Software acquisition
are being amortized over their estimated remaining economic lives, currently
estimated to be approximately 3 years, as of December 31, 2007. Costs associated
with filing, documenting or writing patents are expensed as incurred. Contingent
legal fees paid in connection with a patent lawsuit, or settlements thereof, are
charged to cost of good 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.
Capitalized Software Costs. Under the criteria set forth in SFAS No. 86,
"Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise
Marketed," development costs incurred in the research and development of new
software products are expensed as incurred until technological feasibility, in
the form of a working model, has been established, at which time such costs are
capitalized until the product is available for general release to customers.
Capitalized costs are amortized to cost of sales based on either estimated
current and future revenue for each product or straight-line amortization over
the shorter of three years or the remaining estimated life of the product,
whichever produces the higher expense for the period.
Revenue. 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 ("SDKs")
and product training services.
Generally, software license revenues are recognized when:
29
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, or customer training. The Company
limits 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.
If sufficient VSOE of fair value 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 is recognized from maintenance contracts ratably over the related
contract period, which generally ranges from one to five years.
Segment information. During the year ended December 31, 2007, the Company
determined that it operated its business in two segments, software and
intellectual property, in accordance with SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company reached this
decision and segmented management of its intellectual property away from its
software operations as pursuit of its patent enforcement endeavors (see Note 12)
required increasing amounts of available resources.
Allowance for Doubtful Accounts. The allowance for doubtful accounts is based on
assessments 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 historical experience, the
allowance for doubtful accounts is increased.
Income Taxes. Under SFAS No. 109, "Accounting for Income Taxes," deferred income
taxes are recognized for the tax consequences of temporary differences between
the financial statement and income tax bases of assets, liabilities and
carryforwards using enacted tax rates. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized. Realization is dependent upon future pre-tax earnings, the reversal of
temporary differences between book and tax income, and the expected tax rates in
effect in future periods.
Fair Value of Financial Instruments. The fair value of the Company's cash, cash
equivalents, accounts receivable, accounts payable and other current liabilities
approximate their carrying amounts due to the relative short maturities of these
items.
Long-Lived Assets. Long-lived assets, which consist primarily of patents assets,
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, the Company determines fair value
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.
Loss Contingencies. The Company is subject to the possibility of various loss
contingencies arising in the ordinary course of business. The Company considers
the likelihood of the loss or impairment of an asset or the incurrence of a
liability as well as its ability to reasonably estimate the amount of loss in
determining loss contingencies. An estimated loss contingency is accrued when it
is probable that a liability has been incurred or an asset has been impaired and
30
the amount of the loss can be reasonably estimated. The Company regularly
evaluates current information available to it to determine whether such accruals
should be adjusted.
Stock-Based Incentive Programs. Effective 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 ("FAS No.
123R") using the modified prospective transition method. Under that method,
compensation cost recognized in the year ended December 31, 2006 included (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 FAS No. 123 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 FAS No.
123R.
Results for prior periods were not restated.
Valuation and Expense Information under FAS No. 123R
The Company recorded stock-based compensation expense of $513,200 and $470,400
in the years ended December 31, 2007 and 2006, respectively. As required by FAS
No. 123R, 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 years ended December 31, 2007 and 2006 by income statement
classification:
Year Ended December 31,
--------------------------
Income statement classification 2007 2006
------------------------------- ----------- -----------
Cost of revenue $ 13,300 $ 17,500
Selling and marketing expense 32,100 35,100
General and administrative expense 366,300 337,100
Research and development expense 101,500 80,700
----------- -----------
$ 513,200 $ 470,400
=========== ===========
The Company estimated the fair value of each stock-based award granted during
the years ended December 31, 2007 and 2006 on the date of grant using a binomial
model, with the assumptions set forth in the following table:
The Company also recognized compensation costs for common shares purchased under
its Employee Stock Purchase Plan ("ESPP") during the years ended December 31,
2007 and 2006 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 year. 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. The Company used the average historical volatility of its
daily closing price for each 7.5 year period ended on the end of each quarterly
reporting period during 2007 and 2006 as the basis of its calculation for
stock-based compensation expense.
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 awards was based on historical award holder exercise patterns and
considered the market performance of the Company's common stock and other items.
The expected term of the ESPP shares was six months, which is the length of time
between the ESPP grant and purchase dates.
The estimated 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.
31
For grants made during the year ended December 31, 2007, the weighted average
fair value of ESPP shares was $0.14.
As of December 31, 2007, there were 6,569,286 options outstanding with a
weighted average exercise price of $0.46 per share, a weighted average remaining
contractual term of 6.7 years and an aggregate intrinsic value of $545,000. Of
the options outstanding as of December 31, 2007, 5,784,921 were vested,
1,675,025 were estimated to vest in future periods and 109,160 were estimated to
be forfeited or expire.
Generally, all options are exercisable immediately upon grant and they vest
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 December 31, 2007, there was approximately $168,100 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.
Earnings Per Share of Common Stock. SFAS No. 128, "Earnings Per Share," provides
for the calculation of basic and diluted earnings per share. Basic earnings per
share includes no dilution and is computed by dividing income attributable to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities by adding other common stock equivalents, including common stock
options, warrants and redeemable convertible preferred stock, in the weighted
average number of common shares outstanding for a period, if dilutive.
Potentially dilutive securities are excluded from the computation if their
effect is antidilutive. For the years ended December 31, 2007 and 2006,
17,936,986 and 20,325,817 shares of common stock equivalents were excluded from
the computation of diluted earnings per share since their effect would be
antidilutive, respectively.
Comprehensive Loss. SFAS No. 130, "Reporting Comprehensive Income," establishes
standards for reporting comprehensive income and its components in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income, as defined, includes all changes in equity
(net assets) during the period from non-owner sources. Examples of items to be
included in comprehensive income, which are excluded from net income, include
foreign currency translation adjustments and unrealized gain/loss of
available-for-sale securities. The individual components of comprehensive income
(loss) are reflected in the consolidated statement of operations. For the years
ended December 31, 2007 and 2006, there were no changes in equity (net assets)
from non-owner sources.
New Accounting Pronouncements. In December 2007, the Financial Accounting
Standards Board (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 is 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 Company does not
expect SFAS 159 to 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 generally accepted accounting principles 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 Company does not expect SFAS 157 to have a material impact
on results of operations, cash flows or financial position.
32
Effective January 1, 2007, we adopted FASB Interpretation No. 48, "Accounting
for Uncertainties in Income Taxes - An Interpretation of FASB Statement No. 109"
("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of uncertain tax
positions taken or expected to be taken in a company's income tax return, and
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
As a result of the implementation of FIN 48, the Company recognized no change in
the liability for unrecognized tax benefits related to tax positions taken in
prior years, and no corresponding change in retained deficit. Additionally, the
Company recognized no material adjustment in the liability for unrecognized
income tax benefits as of the January 1, 2007 adoption date and December 31,
2007. Also, the Company had no amounts of unrecognized tax benefits that, if
recognized, would affect its effective tax rate for January 1, 2007 and December
31, 2007.
The Company's policy for deducting interest and penalties is to treat interest
as interest expense and penalties as taxes. As of December 31, 2007, no amount
was accrued for the payment of interest and penalties related to the
unrecognized tax benefits as of the adoption date of FIN 48.
The Company files federal consolidated income tax returns and income tax returns
in various state jurisdictions. The Company's 2003 through 2006 federal tax
years and state tax years from 2002 through 2006, inclusive, remain subject to
income tax examinations by the respective tax jurisdictions. Net operating loss
carryforwards generated in 1991 through 2006, and from 2000 through 2006, for
federal and state tax purposes, respectively, remain open to examination by the
respective tax jurisdictions.
2. Patents.
Patents as of December 31, 2007 consisted of the following:
Patent amortization expense for the year ended December 31, 2007 aggregated
$889,100. Estimated aggregate annual amortization expense for the patents for
future years ended December 31 is as follows:
During 2007, $719,500 of fully amortized capitalized software development costs
was written off.
33
5. Accrued Expenses.
Accrued expenses as of December 31, 2007 consisted of the following:
Professional fees $ 124,500
Income taxes payable 50,600
Other 47,800
-----------
$ 222,900
===========
6. Stockholders' Equity.
Common Stock. During 2007 the Company issued 51,629 shares of common stock to
employees in connection with the Employee Stock Purchase Plan, resulting in cash
proceeds of $7,100.
During 2007, the Company issued 505,000 shares of common stock to employees in
connection with the exercise of employee stock options, resulting in cash
proceeds of $61,000.
During 2007, the Company issued 200,000 performance-based restricted shares of
common stock to a non-executive employee, upon that employee's satisfaction of
certain performance-based criteria.
Stock Purchase Warrants. As of December 31, 2007, the following common stock
warrants were issued and outstanding:
1996 Stock Option Plan. In May 1996 the Company's 1996 Stock Option Plan (the
"96 Plan") was adopted by the board and approved by the stockholders. The 96
Plan is restricted to employees, including officers, and to non-employee
directors. As of December 31, 2006, the 96 Plan has expired and no future
options may be granted from this plan.
As of December 31, 2007, options to purchase 54,625 shares of common stock were
outstanding.
1998 Stock Option/Stock Issuance Plan. In June 1998 the Company's 1998 Stock
Option/Stock Issuance Plan (the "98 Plan") was adopted by the board and approved
by the stockholders. Pursuant to the terms of the 98 Plan, options or stock may
be granted and issued, respectively, to officers and other employees,
non-employee board members and independent consultants who render services to
the Company. As of December 31, 2007, the Company is authorized to issue up to
4,455,400 options or stock in accordance with the terms of the 98 Plan, as
amended.
Under the 98 Plan the exercise price of options granted is to be not less than
85% of the fair market value of the Company's common stock on the date of the
grant. The purchase price of stock issued under the 98 Plan shall also not be
less than 85% of the fair market value of the Company's stock on the date of
issuance or as a bonus for past services rendered to the Company. As of December
31, 2007, options to purchase 3,203,661 shares of common stock were outstanding,
823,904 options had been exercised, 248,157 shares of common stock had been
issued directly under the 98 Plan, an aggregate 40,558 unvested options and
common stock previously issued had been repurchased and 220,236 shares remained
available for grant/issuance. The Company did not issue any common shares under
the 98 Plan in either 2007 or 2006, and does not anticipate issuing any common
shares in 2008 under the 98 Plan.
Supplemental Stock Option Plan. In May 2000, the board approved an additional
stock option plan (the "Supplemental Plan"). Pursuant to the terms of the
Supplemental Plan, options are restricted to employees who are neither officers
nor directors at the grant date. As of December 31, 2007, the Company is
authorized to issue up to 400,000 shares in accordance with the terms of the
Supplemental Plan.
Under the Supplemental Plan the exercise price of options granted is to be not
less than 85% of the fair market value of the Company's common stock on the date
of the grant or, in the case when the grant is to a holder of more than 10% of
the Company's common stock, at least 110% of the fair market value of the
Company's common stock on the date of the grant. As of December 31, 2007,
34
options to purchase 366,000 shares of common stock were outstanding and 34,000
remained available for issuance under the Supplemental Plan.
NES Stock Option Plan. In January 2005, the board approved an additional stock
option plan (the "NES Plan"). Pursuant to the terms of the NES Plan, options are
restricted to a named employee who was neither an officer nor director at the
grant date. The Company is authorized to issue up to 1,000,000 shares in
accordance with the terms of the NES Plan.
Under the NES Plan the exercise price of options granted is to be equal to the
fair market value of the Company's common stock on the date of the grant. As of
December 31, 2007, options to purchase 1,000,000 shares of common stock were
outstanding and none remained available for issuance under the NES Plan.
GG Stock Plan. In February 2005, the board approved an additional stock option
plan (the "GG Plan"). Pursuant to the terms of the GG Plan, options are
restricted to a named employee who was neither an officer nor director at the
grant date. The Company is authorized to issue up to 250,000 shares in
accordance with the terms of the GG Plan.
Under the GG Plan the exercise price of options granted is to be equal to the
fair market value of the Company's common stock on the date of the grant. As of
December 31, 2007, options to purchase 250,000 shares of common stock were
outstanding and none remained available for issuance under the GG Plan.
2005 Equity Incentive Plan. In December 2005, the Company's 2005 Equity
Incentive Plan (the "05 Plan") was adopted by the board and approved by the
stockholders. Pursuant to the terms of the 05 Plan, options or performance
vested stock may be granted to officers and other employees, non-employee board
members and independent consultants and advisors who render services to the
Company. The Company is authorized to issue up to 3,500,000 options or
performance vested stock in accordance with the terms of the 05 Plan.
In the case of a performance vested stock award, the entire number of shares
subject to such award would be issued at the time of the grant and subject to
vesting provisions based on time or other conditions specified by the Board or
an authorized committee of the Board. For awards based on time, should the
grantee's service to the Company end before full vesting occurred, all unvested
shares would be forfeited and returned to the Company. In the case of awards
granted with vesting provisions based on specific performance conditions, if
those conditions are not met, then all shares would be forfeited and returned to
the Company. Until forfeited, all shares issued under a performance vested stock
award would be considered outstanding for dividend, voting and other purposes.
Under the 05 Plan the exercise price of non-qualified stock options granted is
to be no less than 100% of the fair market value of the Company's common stock
on the date the option is granted. The exercise price of incentive stock options
granted is to be no less than 100% of the fair market value of the Company's
common stock on the date the option is granted provided, however, that if the
recipient of the incentive stock option owns greater than 10% of the voting
power of all shares of the Company's capital stock then the exercise price will
be no less than 110% of the fair market value of the Company's common stock on
the date the option is granted. The purchase price of the performance-vested
stock issued under the 05 Plan shall also not be less than 100% of the fair
market value of the Company's common stock on the date the performance-vested
stock is granted. As of December 31, 2007, options to purchase 1,695,000 shares
of common stock were outstanding, awards of 1,000,000 shares of restricted
common stock had been granted, 5,000 options had been exercised and 800,000
remained available for issuance.
Employee Stock Purchase Plan. In February 2000, the Employee Stock Purchase Plan
(the "ESPP") was adopted by the board and approved by the stockholders in June
2000. The ESPP provides for the purchase of shares of the Company's common stock
by eligible employees, including officers, at semi-annual intervals through
payroll deductions. No participant may purchase more than $25,000 worth of
common stock under the ESPP in one calendar year or more than 2,000 shares on
any purchase date. Purchase rights may not be granted to an employee who
immediately after the grant would own or hold options or other rights to
purchase stock and cumulatively possess 5% or more of the total combined voting
power or value of common stock of the Company.
Pursuant to the terms of the ESPP, shares of common stock are offered through a
series of successive offering periods, each with a maximum duration of six
months beginning on the first business day of February and August each year. The
purchase price of the common stock purchased under the ESPP is equal to 85% of
the lower of the fair market value of such shares on the start date of an
offering period or the fair market value of such shares on the last day of such
offering period. As of December 31, 2007, the ESPP is authorized to offer for
sale to participating employees 400,000 shares of common stock, of which,
327,899 shares have been purchased and 72,101 are available for future purchase.
35
A summary of the status of the Company's stock option plans as of December 31,
2007 and 2006, and changes during the years then ended is presented in the
following table:
2007 2006
------------------------------ ------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Outstanding Shares Price Shares Price
-------------------------------------- ------------- ------------- ------------- -------------
Beginning 6,876,613 $ 0.45 5,716,268 $ 0.53
Granted 850,000 $ 0.17 1,385,000 $ 0.21
Exercised (505,000) $ 0.12 - -
Forfeited or expired (652,327) $ 0.26 (224,655) $ 0.37
------------- -------------
Ending 6,569,286 $ 0.46 6,876,613 $ 0.45
============= =============
Exercisable at year-end 6,569,286 $ 0.46 6,876,613 $ 0.45
============= =============
Weighted average fair value of options
granted during the period $ 0.15 $ 0.18
The following table summarizes information about stock options outstanding as of
December 31, 2007:
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted Weighted
Number Weighted Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Price at 12/31/07 Contractual Life Price at 12/31/07 Price
---------------- ----------- ---------------- ---------- ------------- ----------
$ 0.01 - 0.21 2,112,500 7.79 Yrs. $ 0.18 2,112,500 $ 0.18
$ 0.22 - 0.41 1,414,904 5.25 Yrs. $ 0.35 1,414,904 $ 0.35
$ 0.42 - 0.56 2,782,500 6.99 Yrs. $ 0.48 2,782,500 $ 0.48
$ 0.57 - 7.31 259,382 2.55 Yrs. $ 3.23 259,382 $ 3.23
----------- -------------
6,569,286 6.70 Yrs. $ 0.46 6,569,286 $ 0.46
=========== =============
7. Income Taxes.
The components of the provision for income taxes consisted of the following:
For the Year Ended
December 31,
-------------------------
Current 2007 2006
------- ----------- ----------
Federal $ (10,300) $ -
State 36,100 -
Foreign 16,300 4,300
----------- ----------
42,100 4,300
----------- ----------
Deferred
--------
Federal - -
State - -
Foreign - -
----------- ----------
- -
----------- ----------
Total $ 42,100 $ 4,300
=========== ==========
The following summarizes the differences between income tax expense and the
amount computed applying the federal income tax rate of 34%:
36
Year Ended December 31,
------------------------------
2007 2006
------------- -------------
Federal income tax at statutory rate $ 80,100 $ (1,027,900)
State income taxes, net of federal benefit 36,100 -
Foreign taxes 16,300 4,300
Temporary differences 727,800 871,900
Federal net operating loss applied (771,300) -
Stock-based compensation expense (26,100) 152,500
Compensation expense - non-qualified
stock options (17,000) -
Meals & entertainment (50%) 6,500 -
Accrual reversal (10,300) 3,500
------------- -------------
Provision for income tax $ 42,100 $ 4,300
============= =============
Deferred income taxes and benefits result from temporary timing differences in
the recognition of certain expense and income items for tax and financial
reporting purposes, as follows:
December 31,
--------------------------------
2007 2006
-------------- --------------
Net operating loss carryforwards $ 14,105,000 $ 15,053,000
Tax credit carryforwards 1,059,000 918,000
Capitalized software (1,000) (2,000)
Depreciation and amortization 1,230,000 910,000
Compensation expense - non-qualified
stock options 235,000 -
Deferred revenue and maintenance
service contracts 1,318,000 1,118,000
Reserves and other 148,000 71,000
-------------- --------------
Total deferred tax asset 18,094,000 18,068,000
Deferred tax liability - patent
amortization (1,097,000) (1,452,000)
-------------- --------------
Net deferred tax asset 16,997,000 16,616,000
Valuation allowance (16,997,000) (16,616,000)
-------------- --------------
Net deferred tax asset $ - $ -
============== ==============
For financial reporting purposes, with the exception of the year ended December
31, 2007, the Company has incurred a loss in each year since inception. Based on
the available objective evidence, management believes it is more likely than not
that the net deferred tax assets will not be fully realizable. Accordingly, the
Company has provided a full valuation allowance against its net deferred tax
assets at December 31, 2007 and 2006. The net change in valuation allowance was
$381,000 and $1,163,000 for the years ended December 31, 2007 and 2006,
respectively.
At December 31, 2007, the Company had approximately $39 million of federal net
operating loss carryforwards and approximately $12 million of California state
net operating loss carryforwards available to reduce future taxable income. The
federal loss carry forward will begin to expire in 2018 and the California state
loss carry forward will begin to expire in 2010. During the year ended December
31, 2007, the Company utilized $2,268,700 and $1,289,000 of its federal and
California net operating losses, respectively.
8. Concentration of Credit Risk.
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist principally of cash and cash equivalents, trade receivables
and notes receivable. The Company places cash and cash equivalents with high
quality financial institutions and, by policy, limits the amount of credit
exposure to any one financial institution. As of December 31, 2007, the Company
had approximately $5,135,500 of cash and cash equivalents with financial
institutions, in excess of FDIC insurance limits.
For the year ended December 31, 2007, the three customers the Company considered
its most significant, namely; Alcatel-Lucent, FrontRange and Ericsson,
respectively, accounted for approximately 21.3%, 8.1% and 5.0%, respectively, of
total sales. These three customers' December 31, 2007 year-end accounts
receivable balances represented approximately 43.2%, 2.6%, and 8.9% of reported
37
net accounts receivable and included a significant sale made to the Company's
largest customer during the last few days of December 2007.
For the year ended December 31, 2006, the three customers the Company considered
its most significant for the year then ended, namely; KitASP, Alcatel-Lucent and
FrontRange, respectively, accounted for approximately 20.1%, 16.2% and 9.3%,
respectively, of total sales. These three customers' December 31, 2006 year-end
accounts receivable balances represented approximately 48.5%, 0.0%, and 7.0% of
reported net accounts receivable and included a significant sale made to the
Company's largest customer during the last few days of December 2006.
The Company performs credit evaluations of customers' financial condition
whenever necessary, and generally does not require cash collateral or other
security to support customer receivables.
9. Commitments and Contingencies.
Operating Leases. The Company currently occupies approximately 1,850 square feet
of office space in Santa Cruz, California. The office space is rented pursuant
to a three-year operating lease, which will expire in July 2011. Rent on the
Santa Cruz facility will average approximately $3,800 per month over the term of
the lease, which is inclusive of a pro rata share of utilities, facilities
maintenance and other costs.
During September 2006, the Company renewed the lease for its office space in
Concord, New Hampshire, for a three-year term, which is cancelable upon 180-days
written notice. Additionally, the Company increased the space it is renting by
approximately 2,030 square feet, to 5,560 square feet, from 3,530 square feet.
Rent on the Concord facility will approximate $8,400 per month throughout the
duration of the lease renewal.
The Company currently occupies approximately 150 square feet of office space in
Irvine, California, under a lease that expires in March 2008. Under the terms of
the lease, monthly rental payments are approximately $1,100. During February
2008, we renewed this lease for an additional year, until March 2009.
In August 2006 the Company entered into a two-year lease for approximately 1,370
square feet of office space in Tel Aviv, Israel. Monthly rent on this office is
approximately $2,800, which rate is subject to fluctuation, depending on
exchange rates. The Company has an option to extend this lease for one
additional year.
Future minimum lease payments, which may fluctuate depending on movements in
exchange rates, under all leases in effect as of December 31, 2007, assuming the
Company will occupy the respective lease's facilities throughout the remainder
of each lease, are as follows:
Rent expense aggregated approximately $195,700 and $154,100 for the years ended
December 31, 2007 and 2006, respectively.
Contingencies. Under its Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws and certain agreements with officers and directors,
the Company has agreed to indemnify its officers and directors for certain
events or occurrences arising as a result of the officer or director's serving
in such capacity. Generally, the term of the indemnification period is for the
officer's or director's lifetime. The maximum potential amount of future
payments the Company could be required to make under these indemnification
agreements is limited as the Company currently has a directors and officers
liability insurance policy that limits its exposure and enables it to recover a
portion of any future amounts paid. The Company believes the estimated fair
value of these indemnification agreements is minimal and has no liabilities
recorded for these agreements as of December 31, 2007.
The Company enters into indemnification provisions under (i) its agreements with
other companies in its ordinary course of business, including contractors and
customers and (ii) its agreements with investors. Under these provisions, the
Company generally indemnifies and holds harmless the indemnified party for
losses suffered or incurred by the indemnified party as a result of the
Company's activities or, in some cases, as a result of the indemnified party's
activities under the agreement. These indemnification provisions often include
indemnifications relating to representations made by the Company with regard to
intellectual property rights, and often survive termination of the underlying
agreement. The maximum potential amount of future payments the Company could be
required to make under these indemnification provisions is unlimited. The
Company has not incurred material costs to defend lawsuits or settle claims
38
related to these indemnification agreements. As a result, the Company believes
the estimated fair value of these agreements is minimal. Accordingly, the
Company has no liabilities recorded for these agreements as of December 31,
2007.
The Company's software license agreements also generally include a performance
guarantee that the Company's software products will substantially operate as
described in the applicable program documentation for a period of 90 days after
delivery. The Company also generally warrants that services that the Company
performs will be provided in a manner consistent with reasonably applicable
industry standards. To date, the Company has not incurred any material costs
associated with these warranties.
10. Employee 401(k) Plan.
In December 1998, the Company adopted a 401(k) Plan (the Plan) to provide
retirement benefits for employees. As allowed under Section 401(k) of the
Internal Revenue Code, the Plan provides tax-deferred salary deductions for
eligible employees. Employees may contribute up to 15% of their annual
compensation to the Plan, limited to a maximum annual amount as set periodically
by the Internal Revenue Service. In addition, the Company may make
discretionary/matching contributions. During 2007 and 2006, the Company
contributed a total of approximately $39,600 and $45,900, to the Plan,
respectively.
11. Supplemental Disclosure of Cash Flow Information.
The following is supplemental disclosure for the statements of cash flows.
On November 23, 2005, the Company initiated a proceeding against AutoTrader.com
in United States District Court in the Eastern District of Texas, alleging that
Autotrader.com was infringing two of the Company's patents, namely Nos.
6,324,538 and 6,850,940 (the "'538" and "'940" patents, respectively), which
protect the Company's unique method of maintaining an automated and network
accessible database, on its AutoTrader.com website. The Company was seeking
preliminary and permanent injunctive relief along with unspecified damages and
fees. On December 19, 2007, the Company entered into a $6.25 million settlement
and licensing agreement with AutoTrader.com which ended all legal disputes with
AutoTrader.com, and granted to AutoTrader.com, its parent company Cox
Enterprises, Inc. and all of their affiliates an irrevocable, perpetual,
world-wide, non-exclusive license to all of the Company's patents and patent
applications, including the `538 and `940 patents.
On August 28, 2007, the Company 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 the
Company's 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 the
Company's fundamental network security and firewall technologies. The Company
seeks 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. During the
period between December 18, 2007 and March 18, 2008, the Company and Juniper
filed further replies and responses addressing the issues raised in the
Company's original complaint and Juniper's Answer and Counterclaims.
On March 10, 2008, the Company 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 the Company's patents, namely; U.S. Patent Nos.
6,324,538 (the `538 patent), 6,850,940 (the `940 patent), 7,028,034 (the `034)
patent) and 7,269,591 (the `591 patent) which protect the Company's unique
method of maintaining an automated and network-accessible database. The suit
alleges that the named companies infringe these patents on each of their Web
sites. The suit seeks permanent injunctive relief along with unspecified
damages.
13. 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 upon internal
accounting methods. The Company's financial reporting systems present various
14. Subsequent Event.
On January 8, 2008, the Company's Board of Directors authorized a stock buy back
program to repurchase up to $1,000,000 of the Company's outstanding common
stock. Under terms of the program, the Company is not obligated to repurchase
any specific number of shares and the program may be suspended or termianted at
any time at management's discretion. As of March 18, 2008 no shares had been
repurchased under the program.
39
data for management to operate the business prepared in methods consistent with
accounting principles generally accepted in the United States. 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 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. For the year ended December 31, 2007, the Company
determined that it operated its business in two segments, versus one segment for
prior years. The Company's two segments are software and intellectual property.
Information for the year ended December 31, 2006 has been presented for
comparative purposes.
Segment revenue was as follows:
Year Ended December 31 2007 2006
----------------------- --------------- --------------
Software $ 5,235,600 $ 5,170,600
Intellectual Property 6,250,000 -
--------------- --------------
Consolidated Total $ 11,485,600 $ 5,170,600
=============== ==============
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.
40
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
ITEM 8A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that we file under the
Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed,
summarized and reported within the time periods specified in the Security and
Exchange Commission's rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow for timely decisions regarding
required disclosures. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can only provide reasonable assurance of
achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible 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 the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) 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 December 31, 2007.
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
December 31, 2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rules 13a-15(f) under the Exchange Act as a process designed by, or
under the supervision of our Chief Executive Officer and Chief Financial Officer
and effected by our board of directors, management and other personnel to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States and includes
those policies and procedures that:
o pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect
the transactions and dispositions of our assets; and
o provide reasonable assurance that transactions
are recorded as necessary to permit preparation
of financial statements in accordance with
accounting principles generally accepted in the
United States, and our receipts and expenditures
are being made only in accordance with
authorizations of our management and directors; and
o provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material impact on the financial
statements.
Because of inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our evaluation of internal control over financial reporting includes using the
COSO framework, an integrated framework for the evaluation of internal control
issued by the Committee of Sponsoring Organizations of the Treadway Commission,
to identify the risks and control objectives related to the evaluation of our
control environment.
Based on our evaluation under the framework described above, our management has
concluded that our internal control over financial reporting was effective as of
December 31, 2007.
41
This annual report does not include an attestation report of our registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation requirements by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management's report in
this annual report.
ITEM 8B. OTHER INFORMATION
Not Applicable.
42
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND
CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Set forth below is information concerning each of our directors and
executive officers as of March 18, 2008.
Name Age Position
--------------- ------ ----------------------------------
Robert Dilworth 66 Chairman of the Board of Directors
and Chief Executive Officer
William Swain 68 Chief Financial Officer
and Secretary
August P. Klein 71 Director
Michael Volker 59 Director
Gordon Watson 72 Director
Robert Dilworth has served as one of our directors since July 1998 and was
appointed Chairman in December 1999. In January 2002, Mr. Dilworth was appointed
Interim Chief Executive Officer upon the termination, by mutual agreement, of
our former Chief Executive Officer, Walter Keller. In September 2006, Mr.
Dilworth was appointed our full-time Chief Executive Officer. From 1987 to 1998,
Mr. Dilworth served as the Chief Executive Officer and Chairman of the Board of
Metricom, Inc., a leading provider of wireless data communication and network
solutions. Prior to joining Metricom, from 1985 to 1988, Mr. Dilworth served as
President of Zenith Data Systems Corporation, a microcomputer manufacturer.
Earlier positions included Chief Executive Officer and President of Morrow
Designs, Chief Executive Officer of Ultramagnetics, Group Marketing and Sales
Director of Varian Associates Instruments Group, Director of Minicomputer
Systems at Sperry Univac and Vice President of Finance and Administration at
Varian Data Machines. Mr. Dilworth is currently a director of eOn Communications
and Amber Communications. Mr. Dilworth previously served as director of Mobility
Electronics, Get2Chip.com, Inc., Sky Pipeline and Yummy Interactive.
William Swain has served as our Chief Financial Officer and Secretary since
March 2000. Mr. Swain was a consultant from August 1998 until February 2000,
working with entrepreneurs in the technology industry in connection with the
start-up and financing of new business opportunities. Mr. Swain was Chief
Financial Officer and Secretary of Metricom Inc., from January 1988 until June
1997, during which time he was instrumental in private financings as well as
Metricom's initial public offering and subsequent public financing activities.
He continued as Senior Vice President of Administration with Metricom from June
1997 until July 1998. Prior to joining Metricom, Mr. Swain held top financial
positions with leading companies in the computer industry, including Morrow
Designs, Varian Associates and Univac. Mr. Swain holds a Bachelors degree in
Business Administration from California State University of Los Angeles and is a
Certified Public Accountant in the State of California.
August P. Klein has served as one of our directors since August 1998. In 1995
Mr. Klein founded JSK Corporation and is currently a member of its board of
directors. From 1989 to 1993, Mr. Klein was founder and Chief Executive Officer
of Uniquest, Inc., an object-oriented application software company. From 1984 to
1988, Mr. Klein served as Chief Executive Officer of Masscomp, Inc., a developer
of high performance real time mission critical systems and UNIX-based
applications. Mr. Klein has served as Group Vice President, Serial Printers at
Data Products Corporation and President and Chief Executive Officer at Integral
Data Systems, a manufacturer of personal computer printers. Mr. Klein spent 25
years with IBM Corporation, rising to a senior executive position as General
Manager of the Retail/Distribution Business Unit. Mr. Klein is a director of
QuickSite Corporation and has served as a trustee of the Computer Museum in
Boston, Massachusetts since 1988. Mr. Klein holds a B.S. in Mathematics from St.
Vincent College.
Michael Volker has served as one of our directors since July 2001. Since 1996
Mr. Volker has been Director of Simon Fraser University's Industry Liaison
Office. He is also Chief Executive Officer of WUTIF Capital, an "angel" fund
that invests in technology startup companies. From 1996 to 2001, Mr. Volker was
Chairman of the Vancouver Enterprise Forum, a non-profit organization dedicated
to the development of British Columbia's technology enterprises. From 1987 to
1996, Mr. Volker was Chief Executive Officer and Chairman of the Board of
Directors of RDM Corporation, a publicly-listed company. RDM is a developer of
specialized hardware and software products for both Internet electronic commerce
and paper payment processing. From 1988 to 1992, Mr. Volker was Executive
Director of BC Advanced Systems Institute, a hi-tech research institute. Since
1982, Mr. Volker has been active in various early stage businesses as a founder,
investor, director and officer. Mr. Volker, a registered professional engineer
in the Province of British Columbia, holds a Bachelor's and Master's degree from
the University of Waterloo. Mr. Volker is also a director of Visiphor
Corporation and Plutonic Power Corporation.
Gordon Watson has served as one of our directors since April 2002. In 1997 Mr.
Watson founded Watson Consulting, LLC, a consulting company for early stage
technology companies, and has served as its President since its inception. From
1996 to 1997, Mr. Watson served as Western Regional Director, Lotus Consulting
of Lotus Development Corporation. From 1988 to 1996, Mr. Watson held various
43
positions with Platinum Technology, Incorporated, most recently serving as Vice
President Business Development, Distributed Solutions. Earlier positions include
Senior Vice President of Sales for Local Data, Incorporated, President, Troy
Division, Data Card Corporation, and Vice President and General Manager,
Minicomputer Division, Computer Automation, Incorporated. Mr. Watson also held
various executive and director level positions with TRW, Incorporated, Varian
Data Machines, and Computer Usage Company. Mr. Watson holds a Bachelors of
Science degree in electrical engineering from the University of California at
Los Angeles and has taught at the University of California at Irvine. Mr. Watson
is also a director of PATH Reliability, SoftwarePROSe, Inc. and Pound Hill
Software.
Our Board of Directors has determined that each of our non-employee directors
(August Klein, Michael Volker and Gordon Watson), who collectively constitute a
majority of the Board, meets the general independence criteria set forth in the
Nasdaq Marketplace Rules.
Our Board of Directors has an audit committee consisting of three directors. The
current members of the audit committee are August P. Klein (committee chairman),
Michael Volker and Gordon Watson. The board has determined that each member of
the audit committee meets the Nasdaq Marketplace Rules' definition of
"independent" for audit committee purposes. Our Board of Directors has
determined that Mr. Klein meets the SEC's definition of an audit committee
financial expert.
Our Board of Directors has adopted a Code of Ethics applicable to all of our
employees, including our chief executive officer, chief financial officer and
controller. This code of ethics was filed with the SEC on March 30, 2004 as an
exhibit to our annual report on Form 10-K for the year ended December 31, 2003.
All executive officers serve at the discretion of the Board of Directors.
Compliance With Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and
directors, as well as those persons who own more than 10% of our common stock,
to file reports of ownership and changes in ownership with the SEC. These
persons are required by SEC rule to furnish us with copies of all Section 16(a)
forms they file.
Based solely on our review of the copies of such forms, or written
representations from certain reporting persons that no such forms were required,
we believe that during the year ended December 31, 2007, all filing requirements
applicable to our officers, directors and greater than 10% owners of our common
stock were complied with.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth information for the fiscal years ended December
31, 2007 and 2006, respectively, concerning compensation we paid to our Chief
Executive Officer and our other executive officers whose total compensation
exceeded $100,000 for the year ended December 31, 2007.
Summary Compensation Table
--------------------------
Name Option Awards All Other
Principal Position Year Salary (1) Compensation Total
-------------------------- ----------- -------------- --------------- ---------------- ---------------
Robert Dilworth 2007 $ 296,852 $ 36,734 - $ 333,586
Chief Executive Officer 2006 $ 259,034 $ 33,743 - $ 292,777
-------------------------- ----------- -------------- --------------- ---------------- ---------------
William Swain 2007 $ 149,569 $ 28,085 $ 2,000 (2) $ 179,654
Chief Financial Officer 2006 $ 141,750 $ 25,155 $ 2,000 (2) $ 168,905
(1) The amounts listed in the Option Awards column reflect the dollar amount
recognized for financial statement reporting purposes for the respective
fiscal year in accordance with Statement of Financial Accounting Standards
No. 123R, "Share-Based Payment," ("FAS No. 123R"), and include amounts from
awards granted in and prior to 2007 and 2006, respectively. Prior to our
adoption of FAS No. 123R, on January 1, 2006, we used the intrinsic-value
method, as prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and interpretations thereof
(collectively "APB 25"). We estimated the fair value of stock options at
their grant date by using the Black-Scholes option pricing model with the
following weighted average assumptions for grants made prior to 2006 that are
included in the Summary Compensation Table: dividend yield, 0; risk free
interest of 1.5% to 2.5%; expected volatility of 60%; and an expected life of
5 years. The assumptions used in the valuations of the stock options awarded
in 2007 and 2006, subsequent to our adoption of FAS No. 123R, are set forth
in Note 1 to our consolidated financial statements, appearing elsewhere in
this Annual Report on Form 10-KSB.
(2) Company contribution to the 401(k) Plan.
44
Mr. Dilworth began as Chief Executive Officer (Interim) during January 2002 and
became full-time Chief Executive Officer during September 2006. Mr. Dilworth
elected during his term as interim Chief Executive Officer, to forgo the cash
compensation we pay all directors for their attendance at board and committee
meetings as well as the quarterly retainer.
The recognized stock-based compensation expense listed as Option Awards for Mr.
Dilworth in the above Summary Compensation Table for the year ended December 31,
2007 was derived from option awards made on November 11, 2004, January 27, 2005,
January 26, 2006 and January 15, 2007 in the amount of 40,000, 200,000, 125,000
and 125,000 options, respectively, at exercise prices of $0.34, $0.43, $0.21 and
$0.17 per share, respectively.
The recognized stock-based compensation expense listed as Option Awards for Mr.
Dilworth in the above Summary Compensation Table for the year ended December 31,
2006 was derived from option awards made on May 5, 2003, November 11, 2004,
January 27, 2005 and January 26, 2006 in the amount of 40,000, 40,000, 200,000
and 125,000 options, respectively, at exercise prices of $0.18, $0.34, $0.43 and
$0.21 per share, respectively.
The options granted to Mr. Dilworth on November 11, 2004, which aggregated
$2,330 and $14,025 of stock-based compensation expense during the years ended
December 31, 2007 and 2006, respectively, were granted to Mr. Dilworth in his
capacity as Chairman of the Board of Directors. All other options granted, and
stock-based compensation expense recognized for Mr. Dilworth during the years
ended December 31, 2007 and 2006, resulted from his activities as our Chief
Executive Officer.
The recognized stock-based compensation expense listed as Options Awards for Mr.
Swain in the above Summary Compensation Table for the year ended December 31,
2007 was derived from option awards made on January 27, 2005, January 26, 2006
and January 15, 2007 in the amount of 160,000, 75,000 and 75,000 options,
respectively, at exercise prices of $0.43, $0.21 and $0.17 per share,
respectively.
The recognized stock-based compensation expense listed as Options Awards for Mr.
Swain in the above Summary Compensation Table for the year ended December 31,
2006 was derived from option awards made on May 5, 2003, January 27, 2005 and
January 26, 2006 in the amount of 40,000, 160,000 and 75,000 options,
respectively, at exercise prices of $0.18, $0.43 and $0.21 per share,
respectively.
All such options granted to Mr. Dilworth and Mr. Swain were immediately
exercisable upon their respective grant date and vest in thirty-three equal
monthly installments, beginning in the fourth month after their respective grant
date. Should either Mr. Dilworth's or Mr. Swain's service cease prior to full
vesting of the options, we have the right to repurchase any shares issued upon
exercise of options not vested.
Pursuant to his employment letter agreement, Mr. Swain would be entitled to
three-months' severance of his then base salary in the event of a merger or
acquisition which lead to a change in the nature, reduction or elimination of
his duties, a reduction in his level of compensation, relocation of the
corporate office by more than 50 miles from its then current location or his
termination.
(2) All such options were immediately exercisable upon grant and vest in
thirty-three equal monthly installments, beginning in the fourth month
after their respective grant date. For Mr. Dilworth, the options
identified in this footnote were, or will be, fully vested on the
following dates: March 5, 2005, May 4, 2006, January 26, 2008, January 25,
2009 and January 15, 2010, respectively. For Mr. Swain, the options
identified in this footnote were, or will be, fully vested on the
following dates: May 4, 2006, January 26, 2008, January 25, 2009and
January 15, 2010, respectively. If Mr. Dilworth's or Mr. Swain's
employment ceases prior to full vesting of the options, we have the right
to repurchase any shares issued upon exercise of options not vested.
(3) Mr. Dilworth and Mr. Swain voluntarily surrendered, on May 14, 2004,
260,000 and 380,000 out-of-the-money options, respectively, in conjunction
with participation in a voluntary stock option exchange program. New
option grants equal to the number cancelled were made on November 15,
2004. All such options were fully vested as of November 14, 2005. On
November 15, 2004, Mr. Dilworth was granted 40,000 options in his capacity
as a director. These options became fully vested on November 14, 2007.
Compensation of Directors
During the years ended December 31, 2007 and 2006, our non-employee directors
were eligible to be compensated at the rate of $1,000 for attendance at each
meeting of our board, $500 if their attendance was via telephone, $500 for
attendance at each meeting of a board committee, and a $1,500 quarterly
retainer. Additionally, non-employee directors are granted stock options
periodically, typically on a yearly basis.
Director Compensation
--------------------------------------------------------------------------------------------
Fees Earned
or Paid Option All Other
Name Year in Cash Awards (1) Compensation Total
------------------ ------ ---------------- ---------- ------------ ----------
August Klein 2007 $ 16,500 $ 31,306 $ - $ 47,806
2006 10,500 34,973 7,000 (2) 52,473
--------------------------------------------------------------------------------------------
Michael Volker 2007 15,500 30,662 - 46,162
2006 9,000 33,236 - 42,236
--------------------------------------------------------------------------------------------
Gordon Watson 2007 15,500 30,146 - 45,646
2006 10,000 31,847 - 41,847
--------------------------------------------------------------------------------------------
(1) The amounts listed in the Option Awards column reflect the dollar
amount recognized for financial statement reporting purposes for the
fiscal years ended December 31, 2007 and 2006, in accordance with FAS No.
123R, and include amounts from awards granted in and prior to 2007 and
2006, respectively. We estimated the fair value of stock options at their
grant date by using the Black-Scholes option pricing model with the
following weighted average assumptions for grants made prior to 2006 that
are included in the Summary Compensation Table: dividend yield, 0; risk
free interest of 1.5% to 2.5%; expected volatility of 60%; and an expected
life of 5 years. The assumptions used in the valuations of the stock
options awarded in 2007 and 2006, subsequent to our adoption of FAS No.
123R, appear in Note 1 to our consolidated financial statements, which
appear elsewhere in this Form 10-KSB.
(2) Payment for consulting fees provided to our company
The recognized stock-based compensation expense listed as Option Awards for all
three non-employee directors in the above table for the year ended December 31,
2007 was derived from option awards made on May 14, 2004, January 27, 2005,
January 26, 2006 and January 15, 2007 at exercise prices of $0.56, $0.43, $0.21
and $0.17 per share respectively. On such dates, Mr. Klein was granted 62,500,
160,000, 75,000 and 75,000 options, respectively; Mr. Volker was granted 50,000,
160,000, 75,000 and 75,000 options, respectively; and Mr. Watson was granted
40,000, 160,000, 75,000 and 75,000 options, respectively. All such options
granted to our non-employee directors were immediately exercisable upon their
respective grant date and vest in thirty-three equal monthly installments,
beginning in the fourth month after their respective grant date.
The recognized stock-based compensation expense listed as Option Awards for all
three non-employee directors in the above table for the year ended December 31,
2006 was derived from option awards made on May 5, 2003, May 14, 2004, January
27, 2005 and January 26, 2006 at exercise prices of $0.18, $0.56, $0.43 and
$0.21 per share respectively. On such dates, Mr. Klein was granted 40,000,
46
62,500, 160,000 and 75,000 options, respectively, Mr. Volker was granted 40,000,
50,000, 160,000 and 75,000 options, respectively, and Mr. Watson was granted
40,000, 40,000, 160,000 and 75,000 options, respectively. All such options
granted to our non-employee directors were immediately exercisable upon their
respective grant date and vest in thirty-three equal monthly installments,
beginning in the fourth month after their respective grant date.
Should any non-employee director's service cease prior to full vesting of the
options, we have the right to repurchase any shares issued upon exercise of
options not vested.
Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 2007, the Compensation Committee was
comprised of Gordon Watson and August Klein, each of whom is a non-employee
director. August Klein is the committee chairman.
47
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information, as of March 18, 2008, with
respect to the beneficial ownership of shares of our common stock held by: (i)
each director; (ii) each person known by us to beneficially own 5% or more of
our common stock; (iii) each executive officer named in the summary compensation
table; and (iv) all directors and executive officers as a group. Unless
otherwise indicated, the address for each stockholder is c/o GraphOn
Corporation, 5400 Soquel Avenue, Suite A2, Santa Cruz, California 95062.
Number of Shares
of Common Stock Percent of
Name and Address of Beneficial Owner Beneficially Owned (1)(2) Class (%)
----------------------------------------- --------------------------- ----------
Robert Dilworth (3) 1,068,820 2.2
William Swain (4) 834,000 1.7
August P. Klein (5) 670,760 1.4
Michael Volker (6) 563,200 1.2
Gordon Watson (7) 505,000 1.0
AIGH Investment Partners, LLC (8) 9,120,417 18.0
6006 Berkeley Avenue
Baltimore, MD 21209
Ralph Wesinger (9) 4,230,207 8.7
Kennedy Capital Management, Inc. (10) 2,688,350 5.6
10829 Olive Boulevard
St. Louis, MO 63141
Paul Packer (11) 5,077,425 10.3
60 Broad Street, 38th Floor
New York, NY 10004
All current executive officers
and directors as a group (5 persons)(12) 3,641,780 7.2
(1) As used in this table, beneficial ownership means the sole or shared
power to vote, or direct the voting of, a security, or the sole or
shared power to invest or dispose, or direct the investment or
disposition, of a security. Except as otherwise indicated, based on
information provided by the named individuals, all persons named herein
have sole voting power and investment power with respect to their
respective shares of our common stock, except to the extent that
authority is shared by spouses under applicable law, and record and
beneficial ownership with respect to their respective shares of our
common stock. With respect to each stockholder, any shares issuable
upon exercise of options and warrants held by such stockholder that are
currently exercisable or will become exercisable within 60 days of
March 18, 2008 are deemed outstanding for computing the percentage of
the person holding such options, but are not deemed outstanding for
computing the percentage of any other person.
(2) Percentage ownership of our common stock is based on 47,596,401 shares
of common stock outstanding as of March 18, 2008.
(3) Includes 1,015,000 shares of common stock issuable upon the exercise of
outstanding options.
(4) Includes 805,000 shares of common stock issuable upon the exercise of
outstanding options.
(5) Includes 520,000 shares of common stock issuable upon the exercise of
outstanding options.
(6) Includes 485,000 shares of common stock issuable upon the exercise of
outstanding options.
(7) Includes 505,000 shares of common stock issuable upon the exercise of
outstanding options.
(8) Based on information contained in a Schedule 13G/A filed by AIGH
Investment Partners, LLC on March 3, 2008. Includes 3,040,139 shares of
common stock issuable upon the exercise of outstanding warrants. Orin
Hirschman is the managing member of AIGH Investment Partners, LLC.
(9) Based on information provided to us by Mr. Wesinger. Includes 1,000,000
shares of common stock issuable upon exercise of outstanding options.
(10) Based on information contained in a Schedule 13G filed by Kennedy
Capital Management, Inc., an investment advisor, on February 13, 2008.
Kennedy Capital Management has the sole power to vote or direct the
vote of 2,535,900 shares and the sole power to dispose or direct the
disposition of 2,688,350 shares..
(11) Based on information contained in a Schedule 13G/A filed by Paul Packer
on February 11, 2008 and information made available to us. Includes
810,013 shares held by Mr. Packer, 638,176 shares held by Globis
Overseas Fund, Ltd. and 1,781,453 shares held by Globis Capital
Partners, LP. Also includes 405,004 shares of common stock issuable
48
upon the exercise of outstanding warrants held by Mr. Packer, 324,084
shares of common stock issuable upon the exercise of outstanding
warrants held by Globis Overseas and 1,118,695 shares of common stock
issuable upon the exercise of outstanding warrants held by Globis
Capital. Mr. Packer has sole voting and dispositive power with respect
to 1,215,017 shares held or issuable upon exercise of outstanding
warrants held by Mr. Packer and Mr. Packer shares voting and
dispositive power with respect to an aggregate 2,473,535 shares held or
issuable upon exercise of outstanding warrants held by Globis Overseas
and Globis Capital.
(12) Includes 3,330,000 shares of common stock issuable upon the exercise of
outstanding options.
Equity Compensation Plan Information. The following table sets forth
information related to all of our equity compensation plans as of December
31, 2007:
Number of Securities to be
Issued Upon Exercise of Weighted Average Exercise Number of Securities
Outstanding Options, Warrants Price of Outstanding Options, Remaining Available for
Plan Category and Rights Warrants and Rights Future Issuance
---------------------------------------- ----------------------------- ----------------------------- -----------------------
Equity compensation plans approved
by security holders:
1996 Stock Option Plan 54,625 $ 0.80 -
1998 Stock Option/Stock Issuance Plan 3,203,661 $ 0.59 220,236
2005 Equity Incentive Plan 1,695,000 $ 0.19 800,000
Employee Stock Purchase Plan (1) NA NA 72,101
Equity compensation plans not approved
by security holders:
Stock option plans (2) 1,616,000 $ 0.47 34,000
----------------------------- ----------------------
Total - all plans 6,569,286 $ 0.46 1,126,337
============================= ======================
(1) Under terms of the employee stock purchase plan, employees who participate
in the plan are eligible to purchase shares of common stock. As of
December 31, 2007, 327,899 shares had been purchased through the plan, at
an average cost of $0.61 per share, and 72,101 shares are available for
future purchase.
(2) (a) In May 2000 our board of directors approved a supplemental stock
option plan (the "supplemental plan"). Participation in the supplemental
plan is limited to those employees who are, at the time of the option
grant, neither officers nor directors. The supplemental plan is authorized
to issue options for up to 400,000 shares of common stock. The exercise
price per share is subject to the following provisions:
o The exercise price per share shall not be less than 85% of the fair
market value per share of common stock on the option grant date.
o If the person to whom the option is granted is a 10% shareholder,
then the exercise price per share shall not be less than 110% of the
fair market value per share of common stock on the option grant
date.
All options granted are immediately exercisable by the optionee. The
options vest, ratably, over a 33-month period, however no options vest
until after three months from the date of the option grant. The exercise
price is immediately due upon exercise of the option. Shares issued upon
exercise of options are subject to our repurchase, which right lapses as
the shares vest. The supplemental plan will terminate no later than April
30, 2010. As of December 31, 2007, options to purchase 366,000 shares were
outstanding under the supplemental plan and options to purchase 34,000
shares remained available for issuance.
(b) On January 27, 2005 our board of directors approved a stock option
plan (the "NES Plan") for a named employee, who at the time of the option
grant was neither an officer nor a director. The NES Plan is authorized to
issue options for up to 1,000,000 shares of common stock. Under the terms
of the NES Plan, the exercise price of all options issued under the NES
Plan would be equal to the fair market value of our common stock on the
date of the grant.
All options granted under the NES Plan are immediately exercisable by the
optionee; however, there is a vesting period for the options. No options
vest until after three months from the date of the option grant.
Commencing in the fourth month, options representing approximately 8.33%
of the shares vest with the remainder vesting ratably over a 32-month
period, commencing in the fifth month. The exercise price is immediately
due upon exercise of the option. Shares issued upon exercise of options
are subject to our repurchase, which right lapses as the shares vest. The
NES Plan will terminate no later than January 31, 2015. As of December 31,
2007, options to purchase 1,000,000 shares of common stock had been issued
under the NES plan and no shares remained available for issuance.
49
(c) On February 14, 2005 our board of directors approved a stock option
plan (the "GG Plan") for a named employee, who at the time of the option
grant was neither an officer nor a director. The GG Plan is authorized to
issue options for up to 250,000 shares of common stock. Under the terms of
the GG Plan, the exercise price of all options issued under the GG Plan
would be equal to the fair market value of our common stock on the date of
the grant.
All options granted under the GG Plan are immediately exercisable by the
optionee; however, there is a vesting period for the options. The options
vest, ratably, over a 33-month period, however no options vest until after
three months from the date of the option grant. The exercise price is
immediately due upon exercise of the option. Shares issued upon exercise
of options are subject to our repurchase, which right lapses as the shares
vest. The GG Plan shall terminate no later than February 15, 2015. As of
December 31, 2007, options to purchase 250,000 shares of common stock had
been issued under the GG Plan and no shares remained available for
issuance.
For additional information concerning our equity compensation plans, see Note 6
to our consolidated financial statements appearing elsewhere in this Annual
Report on Form 10-KSB.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information set forth in Item 9 of this Annual Report on Form 10-KSB
concerning director independence is incorporated herein by reference.
ITEM 13. EXHIBITS
Exhibit
Number Description of Exhibit
-----------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of Registrant, as
amended (1)
3.2 Amended and Restated Bylaws of Registrant (2)
4.1 Form of certificate evidencing shares of common stock of Registrant
(3)
4.2 Form of Warrant issued by Registrant on January 29, 2004 (4)
4.3 Form of Warrant issued by Registrant on February 2, 2005 (5)
4.4 Investors Rights Agreement, dated January 29, 2004, by and among
Registrant and the investors named therein (4)
4.5 Investors Rights Agreement, dated February 2, 2005, by and among
Registrant and the investors named therein (5)
10.1 1996 Stock Option Plan of Registrant (3)
10.2 1998 Stock Option/Stock Issuance Plan of Registrant (6)
10.3 Supplemental Stock Option Agreement, dated as of June 23, 2000 (6)
10.4 Employee Stock Purchase Plan of Registrant (6)
10.5 Lease Agreement between Registrant and Central United Life
Insurance, dated as of October 24, 2003 (4)
10.6 Amendment to Lease Agreement between Registrant and Central United
Life Insurance, dated as of September 15, 2006 (1)
10.7 Holder Agreement, dated January 31, 2005, by and between Registrant
and the holders named therein (5)
10.8 2005 Equity Incentive Plan (7)
10.9 Stock Option Agreement, dated February 1, 2005 by and between
Registrant and Ralph Wesinger (8)
10.10 Stock Option Agreement, dated January 29, 2005 by and between
Registrant and Gary Green (8)
10.11 Employment Agreement, dated February 11, 2000, by and between
Registrant and William Swain (9)
14.1 Code of Ethics (4)
16.1 Letter from BDO Seidman, LLP, dated February 10, 2005 regarding change
in certifying accountant (10)
21.1 Subsidiaries of Registrant
23.1 Consent of Macias Gini & O'Connell LLP
31.1 Rule 13a-14(a)/15d-14(a) Certifications
32.1 Section 1350 Certifications
(1) Filed on April 2, 2007 as an exhibit to Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 2006, and
incorporated herein by reference.
(2) Filed on June 4, 1999 as an exhibit to Amendment No. 1 to the
Registrant's Registration Statement on Form S-4 (File No.333-76333),
and incorporated herein by reference
(3) Filed as an exhibit to the Registrant's Registration Statement on
Form S-1 (File No. 333-11165), and incorporated herein by reference
(4) Filed on March 30, 2004 as an exhibit to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003, and
incorporated herein by reference
50
(5) Filed on February 4, 2005 as an exhibit to the Registrant's Current
Report on Form 8-K, dated January 31, 2005, and incorporated herein
by reference
(6) Filed on June 23, 2000 as an exhibit to the Registrant's
Registration Statement on Form S-8 (File No. 333-40174) and
incorporated herein by reference
(7) Filed on November 25, 2005 as an exhibit to the Registrant's
definitive Proxy Statement for the Registrant's 2005 Annual Meeting,
and incorporated herein by reference
(8) Filed on April 17, 2006 as an exhibit to the Registrant's Annual
Report on Form 10-KSB for the year ended December 31, 2005, and
incorporated herein by reference
(9) Filed on February 6, 2007 as an exhibit to Post-Effective Amendment
No. 4 to the Registrant's Registration Statement to Form S-1 on Form
SB-2 (File No. 333-124791), and incorporated herein by reference
(10) Filed on February 14, 2005 as an exhibit to the Registrant's Current
Report on Form 8-K, dated February 9, 2005, and incorporated herein
by reference
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees for professional services provided by Macias Gini & O'Connell LLP for the
years ended December 31, 2007 and 2006 were as follows:
Audit fees include fees associated with our annual audit, the reviews of our
quarterly reports on Form 10-Q, and assistance with and review of documents
filed with the Securities and Exchange Commission (the "SEC"). Audit-related
fees include consultations regarding revenue recognition rules, and new
accounting pronouncements, particularly FIN 48 (2007) and SFAS 123R (2006), and
interpretations thereof, as they related to the financial reporting of certain
transactions. Tax fees included tax compliance and tax consultations.
The audit committee has adopted a policy that requires advance approval of all
audit, audit-related, tax services and other services performed by our
independent auditor. The policy provides for pre-approval by the audit committee
of specifically defined audit and non-audit services. Unless the specific
service has been previously pre-approved with respect to that year, the audit
committee must approve the permitted service before the independent auditor is
engaged to perform it.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GRAPHON CORPORATION
Date: March 31, 2008 By: /s/ William Swain
-----------------
William Swain
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title
/s/ Robert Dilworth Chairman of the Board and
------------------- Chief Executive Officer
Robert Dilworth (Principal Executive Officer)
March 31, 2008
/s/ William Swain Chief Financial Officer and Secretary
----------------- (Principal Financial Officer and
William Swain Principal Accounting Officer)
March 31, 2008
/s/ August P. Klein Director
--------------------
August P. Klein
March 31, 2008
/s/ Michael Volker Director
-------------------
Michael Volker
March 31, 2008
/s/ Gordon Watson Director
------------------
Gordon Watson
March 31, 2008
Exhibit 21.1 - Subsidiaries of Small Business Issuer
-----------------------------------------------------------------
Subsidiary Name State of Name Under Which
Incorporation or Business is
Jurisdiction Conducted
-----------------------------------------------------------------
GraphOn NES Sub LLC California GraphOn Corporation
-----------------------------------------------------------------
GraphOn Research Labs Israel GraphOn Research
Limited Labs Limited
-----------------------------------------------------------------
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
GraphOn Corporation
Santa Cruz, California
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-145284, 333-119402, 333-107336, 333-40174 and
333-88255) of GraphOn Corporation of our report dated March 31, 2008, relating
to the consolidated financial statements, which appear in this Form 10-KSB.
/s/ Macias Gini & O'Connell LLP
-------------------------------
Macias Gini & O'Connell LLP
Sacramento, California
March 31, 2008
Exhibit 31.1
I, Robert Dilworth, certify that:
1. I have reviewed this annual report on Form 10-KSB 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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles.
(c) 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
(d) 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.
1
Date: March 31, 2008
/s/ Robert Dilworth
-------------------
Robert Dilworth
Chief Executive Officer
Chairman of the Board
I, William Swain, certify that:
1. I have reviewed this annual report on Form 10-KSB 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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles.
(c) 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
(d) 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):
2
(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: March 31, 2008
/s/ William Swain
-----------------
William Swain
Chief Financial Officer
Exhibit 32.1
(a) Certification of Annual 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 Annual Report of GraphOn Corporation (the
"Company") on Form 10-KSB for the period ended December 31, 2007 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 results of operations of the Company.
/s/ Robert Dilworth
-------------------
Robert Dilworth
Chief Executive Officer
March 31, 2008
(b) Certification of Annual 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 Annual Report of GraphOn Corporation (the
"Company") on Form 10-KSB for the period ended December 31, 2007 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 results of operations of the Company.
/s/ William Swain
------------------------
William Swain
Chief Financial Officer
March 31, 2008
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