GRAPHON CORP/DE - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Overview We are developers of remote application access and Web-enabling software for multiple computer operating systems, including Windows, UNIX and several Linux-based variants. Our immediate focus is on developing application access solutions for use and/or resale by independent software vendors (ISVs), corporate enterprises, governmental and educational institutions, and others who wish to take advantage of cross-platform remote access and Web-enabled access to their existing software applications, as well as those who are deploying secure, private cloud environments. We have also made significant investments in intellectual property. Our operations are conducted and managed in two business segments - "Software" and "Intellectual Property." Application access software is sometimes referred to, or categorized, as application publishing, thin-client computing, or server-based computing. It is a software model wherein traditional desktop software applications are relocated to run entirely on a server, or host computer. This centralized deployment and management of applications reduces the complexity and total costs associated with enterprise computing. Our software architecture provides application developers with the ability to relocate their desktop applications to a host computer from where they can be quickly accessed by a wide range of computer and display devices over a variety of connections. Applications can be Web-enabled without the need to modify the original Windows, UNIX or Linux application software. Secure private cloud environments can be implemented where the applications and data remain centralized behind a secure firewall and are accessed from remote locations and devices, including mobile devices.

A private cloud refers to a system that is contained entirely within a private network, such as within an enterprise, a department within an enterprise, or hosted on dedicated rented machines. This differs from a public cloud, which refers to a system that is generally externally sited from a particular enterprise and whose resources are accessible over the Internet to anyone willing to purchase such services.

Recent Developments On September 25, 2012, we announced hopTo, a new brand name that will serve as the launch platform for a series of new mobile-to-PC marketplace product offerings. Additionally, we announced the establishment of hopTo Inc., a new, wholly-owned subsidiary through which hopTo products will be marketed. Our plans call for a closed beta release of the first hopTo product by the end of 2012, followed by a full public beta release during the first half of 2013.

During September 2012, we reached settlement agreements that effectively ended all of our then on-going patent litigation activities. For further information regarding these agreements and the costs associated therewith, see Note 12 of Notes to Unaudited Condensed Consolidated Financial Statements.

On August 1, 2012, we announced the release of GO-Global 4.5 for Windows, which provided a wide range of new features and functionality, including: integration of GO-Global Gateway (previously available as a separate product called GO-Global Cloud server) with enhanced application-based load balancing, active directory support, a user sandbox, smart card support, a client keyboard input method editor and simplified installation, among others. We believe that this version will provide enhanced enterprise-class functionality to our end users.

Product Development Initiatives We believe there is a need for providing a significantly better user-experience when running legacy platforms and applications on modern mobile devices. An increasingly important component of our product development effort is targeted at new products to deliver legacy applications from legacy platforms to modern mobile platforms such as Google's Android and Apple's iOS. In particular, we are developing products that provide to legacy applications running on mobile platforms a level of usability, quality of experience and user-interface comparable to that of the extremely popular new mobile applications designed specifically for mobile devices.

We believe other attempted solutions to the challenge of using legacy applications and platforms on the relatively small touchscreen devices that now dominate the mobile market are fundamentally unsatisfactory and are generally frustrating to users. In order for legacy applications to be usable and widely popular on mobile devices we believe significant change is needed in several basic areas of technology, including changes needed to account for the very different context in which mobile devices are used.

While significant technical and commercial challenges remain before we expect to be ready to introduce a new product, we believe GO-Global 4.5 for Windows, into which we have fully intergrated GO-Global Gateway (previously availabe as a separate product called GO-Global Cloud server), newly developed technologies and our proprietary and patented intellectual properties position us to advance in what we believe is an exciting and economically attractive business opportunity.

17-------------------------------------------------------------------------------- Table of Contents Our Intellectual Property We believe that intellectual property (IP) is a business tool that potentially maximizes our competitive advantages and product differentiation, grows revenue opportunities, encourages collaboration with key business partners, and protects our long-term growth opportunities. Strategic IP development is therefore a critical component of our overall business strategy. It is a business function that consistently interacts with our research and development, product development, and marketing initiatives to generate further value from those operations.

On October 11, 2011, we engaged ipCapital Group, Inc., an affiliate of John Cronin, who is one of our directors, to assist us in the execution of our strategic decision to significantly strengthen, grow and commercially exploit our intellectual property assets.

Our engagement agreement with ipCapital affords us the right to request ipCapital to perform a number of diverse services, employing its proprietary processes and methodologies, to facilitate our ability to identify and extract from our current intellectual property base new inventions, potential patent applications, and marketing and licensing opportunities. Between November 4, 2011 and January 20, 2012 we entered into three separate addendums to our agreement with ipCapital to provide us with additional services related to identifying and extracting additional new inventions, and drafting new invention disclosures, among other opportunities.

We will decide in our sole discretion how many of these services, whose cost to us will range from $5,000 to $60,000 per service, we request. Should we request ipCapital to perform all of these services, the total cost to us of all the services so provided would, in the aggregate, be $540,000. Since October 11, 2011, and through September 30, 2012, we had requested ipCapital to perform four diverse services at a cumulative-to-date cost of $317,300, of which $280,000 has been paid. The unpaid balance of $37,300 was reported in accounts payable as of September 30, 2012.

In addition to the fees we agreed to pay ipCapital for its services, we issued ipCapital a five-year warrant to purchase up to 400,000 shares of our common stock at an initial price of $0.26 per share. The warrant will vest for 200,000 of these shares in three equal annual installments, with the first installment becoming fully vested on October 11, 2012. The remaining 200,000 shares will fully vest upon the completion to our satisfaction of all services that we have requested ipCapital perform on our behalf under the engagement agreement, prior to the signing of the amendments. We believe that these fees, together with the issuance of the warrant, constitute no greater compensation than we would be required to pay an unaffiliated person for substantially similar services.

Pursuant to our agreement with ipCapital, several ipScan® and Invention on Demand® sessions (i.e., meetings and discussions between our employees and ipCapital designed to extract patentable inventions) were conducted between September 2011 and March 2012. During these sessions, numerous invention ideas were generated, captured and documented pursuant to ipCapital's processes. As a result of these sessions, as of November 9, 2012, 84 new patent applications have been filed, of which 77 pertain to our GraphOn technology and 7 pertain to our NES patent portfolio, as discussed below. We expect to file more applications throughout 2012.

Our Software Products Our primary product offerings can be categorized into product families as follows: · GO-Global for Windows: Allows access to Windows-based applications from remote locations and a variety of connections, including the Internet and dial-up connections. The Windows applications run on a central computer server along with GO-Global Windows Host software. This allows the applications to be accessed and run remotely via GO-Global Client software or a Web browser, over many types of data connections, regardless of the bandwidth or operating system. Web-enabling is achieved without modifying the underlying application's code or requiring costly add-ons.

Included in GO-Global for Windows is GO-Global Gateway (previously available as a separate product called GO-Global Cloud server) that can optionally be deployed in larger environments, including private cloud implementations.

GO-Global Gateway provides a high-availability, secure gateway to multiple GO-Global for Windows Hosts. Features include application load balancing and clustering, Microsoft Application Directory support, and centralized management tools, allowing enterprise customers to scale larger and more flexible deployments.

· GO-Global for UNIX: Allows access to UNIX and Linux-based applications from remote locations and a variety of connections, including the Internet and dial-up connections. The UNIX/Linux applications run on a central computer server along with the GO-Global for UNIX Host software. This allows the applications to be accessed and run remotely via GO-Global Client software or a Web browser without having to modify the application's code or requiring costly add-ons.

18-------------------------------------------------------------------------------- Table of Contents · GO-Global Client: We offer a range of GO-Global Client software that allows remote application access from a wide variety of local, remote and mobile platforms, including Windows, Linux, UNIX, Apple OS X and iOS, and Android. We plan to continue to develop GO-Global Client software for new portable and mobile devices. We released new GO-Global Client products for the iPad and Android tablets in June 2011 and February 2012, respectively.

Critical Accounting Policies We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as "critical" because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimates.

Actual results may differ from these estimates. For a summary of our critical accounting policies, please refer to our 2011 10-K Report and Note 2 to our Notes to Unaudited Condensed Consolidated Financial Statements.

Results of Operations for the Three and Nine-month Periods Ended September 30, 2012 and 2011.

The following operating results should be read in conjunction with our critical accounting policies.

Revenue Revenue for the three-month periods ended September 30, 2012 and 2011 was: Three Months Ended September 30, 2012 Over (Under) 2011 Revenue 2012 2011 Dollars Percent Software Licenses Windows $ 775,600 $ 685,200 $ 90,400 13.2 % UNIX/Linux 234,200 243,300 (9,100 ) -3.7 % 1,009,800 928,500 81,300 8.8 % Software Service Fees Windows 469,200 436,100 33,100 7.6 % UNIX/Linux 232,700 265,000 (32,300 ) -12.2 % 701,900 701,100 800 0.1 % Other 22,400 87,900 (65,500 ) -74.5 % Total Revenue $ 1,734,100 $ 1,717,500 $ 16,600 1.0 % Revenue for the nine-month periods ended September 30, 2012 and 2011 was: Nine Months Ended September 30, 2012 Over (Under) 2011 Revenue 2012 2011 Dollars Percent Software Licenses Windows $ 2,046,200 $ 1,817,400 $ 228,800 12.6 % UNIX/Linux 724,300 831,700 (107,400 ) -12.9 % 2,770,500 2,649,100 121,400 4.6 % Software Service Fees Windows 1,338,800 1,205,800 133,000 11.0 % UNIX/Linux 705,000 811,300 (106,300 ) -13.1 % 2,043,900 2,017,100 26,800 1.3 % Other 101,300 152,500 (51,200 ) -33.6 % Total Revenue $ 4,915,700 $ 4,818,700 $ 96,900 2.0 % Software Revenue Our software revenue, historically, has been primarily derived from product licensing fees and service fees from maintenance contracts. The majority of this revenue has been earned, and continues to be earned, from a limited number of significant customers, most of whom are resellers. An increasing number of our resellers (a "stocking reseller") purchase software licenses that they hold in inventory until they are resold to the ultimate end user. We defer recognition of revenue from these sales (on our Condensed Consolidated Balance Sheet under the caption "Deferred Revenue") until the stocking reseller sells the underlying software licenses to the ultimate end user. Consequently, if any of our significant stocking resellers materially change the rate at which they resell our software licenses to the ultimate end user, our software licenses revenue could be materially impacted.

19-------------------------------------------------------------------------------- Table of Contents When a software license is sold directly to an end user by us, or by one of our resellers who does not stock licenses into inventory, revenue is recognized immediately upon shipment, assuming all other criteria for revenue recognition are met. Consequently, if any significant end user customer substantially changes its order level, or fails to order during the reporting period, whether the order is placed directly with us or through one of our non-stocking resellers, our software licenses revenue could be materially impacted.

Almost all stocking resellers maintain inventories of our Windows products; few stocking resellers maintain inventories of our UNIX products.

Software Licenses The increase in Windows software licenses revenue for the three-month period ended September 30, 1012 was primarily due to the recognition of $23,700, associated with a transaction we entered into with an end user customer during 2011 that had been previously deferred as all criteria necessary for revenue recognition had not been met. During the second quarter of 2012 all criteria necessary for revenue recognition were met and we began recognizing revenue from this transaction on a ratable basis over the expected maintenance period. During the second quarter of 2012 we entered into an additional one-time transaction with the end user customer discussed in the preceding sentence for which all criteria necessary for revenue recognition was met, but we lacked VSOE and began recognizing revenue on a ratable basis over the expected maintenance period. As a result of this transaction, we recognized $101,500 of Windows software licenses revenue for the three-month period ended September 30, 2012. There was no revenue recognized from the 2011 transaction in the three-month period ended September 30, 2011. The total revenue increase in the three-month period was partially offset by lower aggregate revenue derived from our resellers.

The increase in Windows software licenses revenue for the nine-month period ended September 30, 2012 was primarily due to the recognition of $223,400 associated with the 2011 transaction discussed above. There was no revenue recognized from the 2011 transaction in the nine-month period ended September 30, 2011. There was also an increase in revenue in the nine-month period ended September 30, 2012 of $203,000 pertaining to the transaction entered into in the second quarter of 2012 discussed above. The increase for the nine-month period was partially offset by lower aggregate revenue derived from our resellers. We expect to recognize an additional $12,300 from the 2011 transaction and $203,000 from the 2012 transaction over their respective remaining maintenance periods (six months).

Outside of this one end user customer, we experienced aggregate decreases in revenue of $34,800, or 5.1%, and $197,600, or 10.9%, from all other Windows customers for the three and nine-month periods ended September 30, 2012, as compared with the same periods of the prior year, respectively.

Software licenses revenue from our UNIX/Linux products decreased during the three and nine-month periods ended September 30, 2012, as compared with the same periods of the prior year, primarily due to lower revenue from a large telecommunications customer and lower revenue from our resellers and end users.

We expect aggregate software licenses revenue in 2012 to approximate 2011 levels. We expect to increase our investment in our GO-Global product line, as well as in new product development, and to invest more in sales and marketing efforts. We expect that these initiatives will help us grow our software licenses revenue in 2013 over 2012 levels.

Software Service Fees The increase in software service fees revenue attributable to our Windows products during the three and nine-month periods ended September 30, 2012, as compared to the same periods of the prior year, was the result of the continued growth of the number of Windows maintenance contracts purchased by our end-user customers. Since most of our end-user customers who typically purchase maintenance contracts for their software licenses historically have renewed them upon expiration, to the extent we continue to license an increasing number of our products, we anticipate that revenue recognized from the sale of software service contracts will increase in relative proportion to the increase in our sales of such new software licenses.

The decrease in service fees revenue attributable to our UNIX products for the three and nine-month periods ended September 30, 2012, as compared with the same periods of the prior year, was primarily the result of the low level of our UNIX product sales throughout the prior year and through the first nine months of the current year and a decrease in maintenance contract renewals. We believe that these decreases reflect the continued economic malaise and the competitive challenges facing the telecommunications industry, particularly in Europe. The majority of this decrease was attributable to our European telecommunications customers.

We expect that software service fees for 2012 will be higher than those for 2011, primarily resulting from increased sales of servicing contracts for our Windows products. This is because we expect product sales, and maintenance contracts, to increase as we increase our investments in both our current products and new product development. We expect to invest more in sales and marketing efforts in 2013, as compared with 2012.

20-------------------------------------------------------------------------------- Table of Contents Other The decrease in other revenue for the three and nine-month periods ended September 30, 2012, as compared with the same period of the prior year was primarily due to a decrease in professional services revenue and private labeling fees. We typically recognize private labeling fees revenue only when such services are requested by a new stocking reseller; they sign a contract with us, simultaneously place their first stocking order and ultimately, when they sell through their entire first stocking order, we recognize the private labeling fees revenue. Private labeling fees do not comprise a material portion of our revenue streams, and they can vary from period to period.

Costs of Revenue Software Costs of Revenue Software costs of revenue are comprised primarily of software service costs, which represent the costs of customer service, and software product costs, which are primarily comprised of the amortization of capitalized software development costs, and costs associated with licenses for third party software included in our product offerings. We incur no shipping or packaging costs as all of our deliveries are made via electronic means over the Internet.

Under accounting principles generally accepted in the United States (GAAP), development costs for new product development, after technological feasibility is established, are recorded as "capitalized software" on our Condensed Consolidated Balance Sheet. Such capitalized costs are subsequently amortized as cost of revenue (software product costs) over the shorter of three years or the remaining estimated life of the products. During the three and nine-month periods ended September 30, 2011, we capitalized $8,800 and $209,900, respectively, of software development costs. We did not capitalize any software development costs during either the three or nine-month period ended September 30, 2012.

Amortization of capitalized software development costs was $41,500 and $40,300 during the three-month periods ended September 30, 2012 and 2011, respectively, and $124,600 and $102,300 during the nine-month periods ended September 30, 2012 and 2011, respectively.

Software cost of revenue was 9.3% and 5.9% of total revenue for the three months ended September 30, 2012 and 2011, respectively, and 8.8% and 7.9% of total revenue for the nine months ended September 30, 2012 and 2011, respectively.

Software cost of revenue for the three-month periods ended September 30, 2012 and 2011 was as follows: 2012 Over (Under) 2011 Description 2012 2011 Dollars Percent Software service costs $ 97,500 $ 33,200 $ 64,300 193.7 % Software product costs 63,200 68,300 (5,100 ) 7.5 % $ 160,700 $ 101,500 $ 59,200 58.3 % Software cost of revenue for the nine-month periods ended September 30, 2012 and 2011 was as follows: 2012 Over (Under) 2011 Description 2012 2011 Dollars PercentSoftware service costs $ 233,000 $ 222,100 $ 10,900 4.9 % Software product costs 198,600 157,400 41,200 26.2 % $ 431,600 $ 379,500 $ 52,100 13.7 % Software service costs increased during the three and nine-month periods ended September 30, 2012, as compared with the same periods of the prior year, primarily as a result of more time being spent on to customer service issues as a result of the introduction of Go-Global 4.5 in August 2012. We have historically experienced increased customer service requests from our customers upon the release of a new product or significant product upgrade. We expect software service costs to remain higher during the remainder of 2012, as compared with the similar period of the prior year, as a result of these factors.

21-------------------------------------------------------------------------------- Table of Contents Software service costs include non-cash stock-based compensation. Such costs were, in the aggregate, approximately $6,700 and $300 for the three-month periods ended September 30, 2012 and 2011, respectively, and $17,100 and $2,300 for the nine-month periods ended September 30, 2012 and 2011, respectively. The increases in non-cash stock-based compensation costs resulted from expenses associated with options issued in October 2011 to employees and directors (a) at the discretion of our board on October 5, 2011, and (b) under the terms of our stock option exchange program that closed on October 12, 2011.

Upon the release of Go-Global Windows Host 4 in the second quarter of 2011, we began amortizing the capitalized software development costs. The increase in software product costs for the three and nine-month periods ended September 30, 2012, as compared with the same periods of the prior year, was primarily as a result of recognizing amortization of capitalized software development costs and increased costs associated with certain licenses for third party software included in GO-Global Windows Host 4.

We expect that software costs of revenue for 2012 will exceed 2011 levels due to increased customer service costs, increased amortization of capitalized software development costs and increased costs resulting from licensing third party software.

Selling and Marketing Expenses Selling and marketing expenses primarily consist of employee costs (inclusive of non-cash stock-based compensation expense), outside services, and travel and entertainment expense.

Selling and marketing expenses for the three-month period ended September 30, 2012 increased by $25,200, or 4.4%, to $602,100, from $576,900 for the same period of 2011, which represented approximately 34.7% and 33.6% of revenue during these periods, respectively. For the nine-month period ended September 30, 2012, selling and marketing expenses increased by $135,100, or 8.2%, to $1,781,400, from $1,646,300 for the same period of 2011, which represented approximately 36.2% and 34.2% of revenue during these periods, respectively.

The increase in selling and marketing expenses during both the three and nine-month periods ended September 30, 2012, as compared with the same periods of the prior year was mainly due to increased travel costs, and increased non-cash stock-based compensation costs.

Selling and marketing employee costs included non-cash stock-based compensation costs aggregating approximately $33,200 and ($6,200) for the three-month periods ended September 30, 2012 and 2011, respectively, and $84,800 and $2,700 for the nine-month periods ended September 30, 2012 and 2011, respectively. The increase in these costs resulted from such expense associated with options issued in October 2011 to employees and directors (a) at the discretion of our board on October 5, 2011, and (b) under the terms of our stock option exchange program that closed on October 12, 2011.

We currently expect our full-year 2012 sales and marketing expense to increase over 2011 levels primarily due to higher non-cash stock-based compensation and travel costs. We expect to continue to support our products, particularly our newest products with various sales and marketing initiatives throughout the remainder of the year.

General and Administrative Expenses General and administrative expenses primarily consist of employee costs (inclusive of non-cash stock-based compensation expense), depreciation and amortization, legal, accounting, other professional 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 decreased by $111,200 or 14.1%, to $677,500, for the three-month period ended September 30, 2012, from $788,700 for the same period of 2011, which represented approximately 39.1% and 45.9% of revenue during these periods, respectively. For the nine-month period ended September 30, 2012, general and administrative expense increased by $1,129,800, or 55.6%, to $3,162,300 from $2,032,500 for the same period of 2011, which represented approximately 64.3% and 42.2% of revenue during these periods, respectively.

The decrease in general and administrative expense in the three-month period ended September 30, 2012 was primarily due to having three fewer employees.

The increase in general and administrative costs for the nine-month period ended September 30, 2012, as compared with the same period of the prior year was primarily due to one-time costs, which aggregated $721,800, associated with the separation agreement we entered into with our former Chief Executive Officer, Robert Dilworth, in April 2012. See Notes 5 and 12 to Notes to Unaudited Condensed Consolidated Financial Statements for details. The increase was also attributed to other costs we incurred in connection with the separation agreement included one-time legal fees of approximately $227,000.

22-------------------------------------------------------------------------------- Table of Contents Included in general and administrative employee costs was non-cash stock-based compensation expense, net of such costs incurred in connection with the separation agreement we entered into with our former Chief Executive Officer, which totaled $71,000 and $28,700 for the three-month periods ended September 30, 2012 and 2011, respectively, and $167,200 and $46,300 for the nine-month periods ended September 30, 2012 and 2011, respectively. The increases in non-cash stock-based compensation costs resulted from such expense associated with options issued in October 2011 to employees and directors (a) at the discretion of our board on October 5, 2011, (b) under the terms of our stock option exchange program that closed on October 12, 2011, and (c) restricted stock awards issued during the three-month period ended September 30, 2012 to our executive officers and two other employees. See Note 7 of Notes to Unaudited Consolidated Financial Statements for further information regarding the stock based compensation.

We expect that general and administrative expense for 2012 will exceed 2011 levels, primarily as a result of the one-time costs incurred in connection with the separation agreement we entered into with our former Chief Executive Officer, Robert Dilworth and the legal fees incurred related thereto, and the stock-based compensation expense associated with the restricted stock awards granted during the three-month period ended September 30, 2012. See Note 5 of Notes to Unaudited Condensed Consolidated Financial Statements for further information regarding the Dilworth separation agreement.

Research and Development Expenses Research and development expenses consist primarily of employee costs (inclusive of non-cash stock-based compensation expense), payments to contract programmers, travel and entertainment for all our engineers, and all rent for our leased engineering facilities.

Research and development expenses increased by $320,100, or 50.9%, to $948,600, for the three-month period ended September 30, 2012, from $628,500 for the same period of 2011, which represented approximately 54.7% and 36.6% of revenue for these periods, respectively. For the nine-month period ended September 30, 2012, research and development expenses increased by $1,259,400, or 73.8%, to $2,966,500 from $1,707,100 for the same period of 2011, which represented 60.3% and 35.4% of revenue during these periods, respectively.

The majority of the increase in research and development expense for both the three and nine-month periods ended September 30, 2012, as compared with the same periods of the prior year, was related to the staffing of our new products development team in Campbell, California. Such costs were primarily comprised of employee costs associated with five new employees hired as the first members of the new products development team, recruiting fees, rent, and supplies.

Included in research and development employee costs was non-cash stock-based compensation expense totaling $82,600 and $14,000 for the three-month periods ended September 30, 2012 and 2011, respectively, and $252,400 and $20,100 for the nine-month periods ended September 30, 2012 and 2011, respectively. The increases in non-cash stock-based compensation costs resulted from such expense associated with options issued in October 2011 to employees and directors (a) at the discretion of our board on October 5, 2011, and (b) under the terms of our stock option exchange program that closed on October 12, 2011. Also included in the increases was the non-cash stock-based compensation expense resulting from options issued to five new employees hired during 2012.

During the three and nine-month periods ended September 30, 2011 we capitalized $8,800 and $210,000 of software development costs associated with the development of GO-Global Cloud for Windows, which, had they not met the criteria for capitalization, would have otherwise been expensed. We did not capitalize any software development costs during either the three or nine-month periods ended September 30, 2012 as no such research and development costs met the criteria for capitalization.

We expect 2012 research and development expenses to be significantly higher than those for 2011. The main driver of the increased costs will be the costs associated with our new products development team, which will be primarily comprised of employee costs, recruitment fees, rent, equipment and supplies for the team.

23-------------------------------------------------------------------------------- Table of Contents Other Expense - Change in Fair Value of Warrants Liability During the three and nine-month periods ended September 30, 2012, we reported non-cash expense related to the change in fair value of our Warrants Liability of $3,025,700 and $2,417,800, respectively. During each of the three and nine-month periods ended September 30, 2011, we reported non-cash expense related to the change in the fair value of our Warrants Liability of $826,500.

Such changes in all periods in 2012 and 2011 resulted from increases in the market value of our common stock during such periods as no warrants were exercised during any of these periods. For further information regarding our Warrants Liability, see Note 4 to the Notes to Unaudited Condensed Consolidated Financial Statements.

Net Loss From Continuing Operations As a result of the foregoing items, we reported net losses from continuing operations of $3,679,500 and $1,205,300 for the three-month periods ended September 30, 2012 and 2011, respectively, and $5,841,500 and $1,774,400 for the nine-month periods ended September 30, 2012 and 2011, respectively.

Net Loss from Discontinued Operations, Net of Taxes During September 2012, we reached settlement and licensing agreements that effectively ended all of our then on-going intellectual property litigation. Having been approached by the respective counter-parties to each of our lawsuits, and in consultation with our board of directors, we determined that it was in our best long-term strategic interests to settle each lawsuit in order to move forward and shift our focus to our software products, including our new product initiatives. As a result of such determination, we paid $311,000 in aggregate settlement fees during the three-month period ended September 30, 2012. We do not intend to pursue intellectual property litigation as an integral part of our strategy to fund our future operations. Accordingly for all periods presented the results of operations and cash flows related to our former intellectual property segment has been segregated and reported as "Discontinued Operations". See Note 17 to our Notes to Unaudited Condensed Consolidated Financial Statements.

As a result of this decision, we reported net losses from discontinued operations of $347,100 and $0 for the three-month periods ended September 30, 2012 and 2011, respectively and $468,400 and $106,800 for the nine-month periods ended September 30, 2012 and 2011, respectively.

Liquidity and Capital Resources We are aggressively looking at ways to improve our revenue stream through the development, marketing and sale of new products. Due to our expected investments in new products, which will primarily be comprised of the costs associated with our new products development team, our intellectual property strategy, and the future cash payments related to the Dilworth separation agreement, we expect our cash flow from operations to decrease. Based on our cash on hand as of September 30, 2012, and the anticipation of increased revenue, we believe that we will have sufficient resources to support our operational plans for the next twelve months. We may seek financing in debt or equity markets to supplement our revenue stream to invest in development of our products. However, financing opportunities may not be available on reasonable terms or at all.

During the remainder of 2012 and throughout 2013 we expect to prioritize the investment of our resources into the development of new products, with such development to be led by our new products development team, which is based in our new office in Campbell, California. Further, we expect that certain of these investments will ultimately be capitalized as software development costs. We also expect to continue to invest resources into the development of our intellectual property portfolio, with ipCapital Group's consulting work for us being central to such efforts.

During the nine-month periods ended September 30, 2012 and 2011, our reported net losses of $6,309,900 and $1,881,200, respectively, included six significant non-cash items: depreciation and amortization of $191,700 and $183,700, respectively, which were primarily related to amortization of capitalized software development costs and depreciation of fixed assets, stock-based compensation expense of $759,000 and $71,400, respectively, $2,417,800 and $826,500 charged to other expense related to the change in fair value recorded for the Warrants Liability, $336,800 and $0 charged to general and administrative expense related to the change in severance liability, $52,700 and $0 charged to general and administrative expense related to the accretion of compensation expense derived from warrants issued to ipCapital Group as part of the compensation for their services, and changes in deferred rent credit of $32,000 and $0. Of the $759,000 of stock-based compensation expense we recognized during the nine-month period ended September 30, 2012 there was a one-time charge of $237,500 related to the options modified and issued as part of the separation agreement we entered into with Robert Dilworth, our former Chief Executive Officer. See Note 5 to Notes to Unaudited Condensed Consolidated Financial Statements for further details.

During the nine-month periods ended September 30, 2012 and 2011, we incurred operating cash outflows of $432,800 and $103,000 in our former intellectual property segment, whose operations we discontinued as of September 30, 2012. During September 30, 2012, we disbursed in aggregate settlement fees of $311,000 that effectively ended all of our then on-going intellectual property litigation (see Notes 12 and 17 to Notes to Unaudited Condensed Consolidated Financial Statements). The balance of the amounts disbursed during the nine-month periods ended September 30, 2012 and 2011 were the general legal fees associated with the operation of the discontinued intellectual property segment.

24-------------------------------------------------------------------------------- Table of Contents During the nine-month period ended September 30, 2011, we capitalized $208,200 of cash expended in the development of GO-Global Cloud for Windows. We expect to continue making investments in our products during the remainder of 2012 and into 2013, with a focus on new product development. We expect that certain of these investments will ultimately be capitalized as software development costs.

During the nine-month periods ended September 30, 2012 and 2011, we invested approximately $269,800 and $19,000 of cash, respectively, into fixed assets.

Such expenditures made during the nine-month period ended September 30, 2012 were primarily incurred in connection with the opening of our office in Campbell, California and equipping our new products development team located therein.

Our financing activities for the nine-month period ended September 30, 2012, were comprised of restricted cash received from employees to be disbursed for the payment of income tax resulting from the respective employees' decision to make 83(b) elections in regards to stock we awarded to them and proceeds received from the exercise of employee stock options. Our financing activities for the nine-month period ended September 30, 2011 were mainly comprised of the net proceeds raised in a private placement of our stock.

Cash As of September 30, 2012, our cash balance was $4,874,400, as compared with $7,237,500 as of December 31, 2011, a decrease of $2,363,100, or 32.7%. The decrease primarily resulted from the cash costs, which were primarily comprised of legal fees associated with the separation agreement we entered into with Robert Dilworth, our former Chief executive Officer, the expense associated with settling the patent litigation activities, and the costs incurred in opening our office in Campbell, California, including the costs of the new employees hired into such office.

Accounts Receivable, net At September 30, 2012 and December 31, 2011, we reported accounts receivable, net, of $779,900 and $732,100, respectively. Such amounts were reported net of the allowance for doubtful accounts, which allowances totaled $30,200 and $25,000 at September 30, 2012 and December 31, 2011, respectively. The increase in accounts receivable, net, was mainly due to higher sales to a large telecommunications customer during the third quarter, which were not paid as of September 30, 2012. Generally, we collect the significant majority of our quarter-end accounts receivable during the subsequent quarter; accordingly, increases or decreases in accounts receivable from one period to the next tends to be indicative of the trend in our sales from one period to the next. From time to time, we could have individually significant accounts receivable balances due us from one or more of our significant customers. If the financial condition of any of these significant customers should deteriorate, our operating results could be materially affected.

Stock Repurchase Program As of September 30, 2012, we had purchased 1,424,000 shares of our common stock for $217,400 under terms of our Board-approved stock repurchase program, which was established on January 8, 2008. Under this program, the Board approved up to $1,000,000 to be used in repurchasing our stock; however, we are not obligated to repurchase any specific number of shares and the program may be suspended or terminated at our discretion. During each of the three and nine-month periods ended September 30, 2012 and 2011, no repurchases were made. As of September 30, 2012, $782,600 remains available for stock purchases under this program.

Working Capital As of September 30, 2012, we had current assets of $5,972,800 and current liabilities of $4,404,100, which netted to working capital of $1,568,700.

Included in current liabilities was the current portion of deferred revenue of $3,062,000.

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