** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark One)**                                                                                                                                                                                                                                          |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                    |
| **ý**                                                                                                                                                                                                                                              |   | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934** |
|                                                                                                                                                                                                                                                    |
| **For  the quarterly period ended September 30, 2003**                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                    |
| **or**                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                    |
| **o**                                                                                                                                                                                                                                                   |   | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934** |
|                                                                                                                                                                                                                                                    |
| **For  the transition period from                     to                   ** |
|                                                                                                                                                                                                                                                    |
| **Commission file number: 000-27871**                                                                                                                                                                                                                   |

 
| **GRIC  COMMUNICATIONS, INC.**                             |
|-----------------------------------------------------------------|
| (Exact Name of Registrant as Specified in Its Charter)          |
|                                                            |
| **Delaware**                                                    |   | **77-0368092** |
| (State or Other Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |   |
| **1421 McCarthy Blvd.,  Milpitas, California**                  |   | **95035** |
| (Address of Principal Executive Offices)                        |   | (Zip Code) |
|                                                            |   |   |
| **408-955-1920**                                                |
| (Registrant’s Telephone Number, Including Area Code)       |

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days.

 

Yes  ý    No  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).

 

Yes  o    No  ý

 

Thenumber of shares of the registrant’s common stock outstanding as ofOctober 31, 2003 was 26,856,130 shares.

 

 

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**GRIC COMMUNICATIONS, INC.**

**INDEX**
| **PART I  FINANCIAL INFORMATION** |
|-----------------------------------|
|                              |   |
| Item 1.                           | Financial Statements: |
|                              | Condensed Consolidated Balance Sheets as of  September 30, 2003 and  December 31, 2002 |
|                              | Condensed Consolidated Statements of  Operations for the Three and Nine Months Ended  September 30, 2003 and 2002 |
|                              | Condensed Consolidated Statements of Cash  Flows for the Nine Months Ended  September 30, 2003 and 2002 |
|                              | Notes to Condensed Consolidated Financial  Statements |
| Item 2.                           | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
| Item 3.                           | Quantitative and Qualitative Disclosures  About Market Risk |
| Item 4.                           | Controls and Procedures |
|                              |   |
| **PART II  OTHER INFORMATION**    |
|                              |
| Item 1.                           | Legal Proceedings |
| Item 2.                           | Changes in Securities and Use of Proceeds |
| Item 3.                           | Defaults Upon Senior Securities |
| Item 4.                           | Submission of Matters to a Vote of Security  Holders |
| Item 5.                           | Other Information |
| Item 6.                           | Exhibits and Reports on Form 8-K |
| SIGNATURE                         |

 

2

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**PART I. FINANCIAL INFORMATION**

 

**ITEM1. FINANCIAL STATEMENTS**

 

**GRIC COMMUNICATIONS, INC.**

**Condensed Consolidated Balance Sheets**

**(in thousands, except per share amounts)**

 
|                                                                                                                                                                                                                                                  |   | **Sept  30,  2003** |   | **Dec  31,  2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|--------------------|--------|
|                                                                                                                                                                                                                                                  |   | **(unaudited)**     |   |               |   |
| **ASSETS**                                                                                                                                                                                                                                            |   |                |   |               |   |
| ***Current  assets:***                                                                                                                                                                                                                                |   |                |   |               |   |
| Cash and cash equivalents                                                                                                                                                                                                                             |   | $                   | 3,994  |               | $      | 7,314 |   |
| Short-term investments                                                                                                                                                                                                                                |   | 19,360              |   | 15,765             |   |
| Accounts receivable, net of allowances of  $209 and $249 at September 30, 2003 and December 31, 2002,  respectively                                                                                                                    |   | 5,397               |   | 3,978              |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                             |   | 1,889               |   | 1,108              |   |
| Total current assets                                                                                                                                                                                                                                  |   | 30,640              |   | 28,165             |   |
| Property and equipment, net                                                                                                                                                                                                                           |   | 1,473               |   | 1,778              |   |
| Other assets                                                                                                                                                                                                                                          |   | 439                 |   | 667                |   |
| Total assets                                                                                                                                                                                                                                          |   | $                   | 32,552 |               | $      | 30,610 |   |
|                                                                                                                                                                                                                                                  |   |                |   |               |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                        |   |                |   |               |   |
| ***Current  liabilities:***                                                                                                                                                                                                                           |   |                |   |               |   |
| Accounts payable                                                                                                                                                                                                                                      |   | $                   | 5,083  |               | $      | 4,331 |   |
| Accrued compensation and benefits                                                                                                                                                                                                                     |   | 932                 |   | 596                |   |
| Deferred revenue                                                                                                                                                                                                                                      |   | 472                 |   | 276                |   |
| Other current liabilities                                                                                                                                                                                                                             |   | 351                 |   | 343                |   |
| Total current liabilities                                                                                                                                                                                                                             |   | 6,838               |   | 5,546              |   |
| Long-term liabilities                                                                                                                                                                                                                                 |   | —              |   | 88                 |   |
| Commitments and contingencies                                                                                                                                                                                                                         |   |                |   |               |   |
| Stockholders’ equity:                                                                                                                                                                                                                            |   |                |   |               |   |
| Series A redeemable convertible preferred  stock, $0.001 par value: 12,801 shares authorized, 4,119 and 9,036 shares  issued and outstanding at September 30, 2003 and  December 31, 2002, respectively                                |   | 5,357               |   | 11,752             |   |
| Preferred stock, 5,000 shares authorized at  September 30, 2003 and December 31, 2002: no shares issued and  outstanding                                                                                                                    |   | —              |   | —             |   |
| Common stock, $0.001 par value; 50,000  shares authorized at September 30, 2003 and December 31, 2002:  26,323 and 20,337 shares issued and outstanding at  September 30, 2003 and December 31, 2002, respectively |   | 26                  |   | 20                 |   |
| Additional paid-in capital                                                                                                                                                                                                                            |   | 149,710             |   | 141,829            |   |
| Deferred stock-based compensation                                                                                                                                                                                                                     |   | —              |   | (65                | )      |
| Accumulated deficit                                                                                                                                                                                                                                   |   | (129,379            | )      | (128,560           | )      |
| Total stockholders’ equity                                                                                                                                                                                                                       |   | 25,714              |   | 24,976             |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                       |   | $                   | 32,552 |               | $      | 30,610 |   |

 

See accompanying notes

 

3

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**GRICCOMMUNICATIONS, INC.**

**Condensed Consolidated Statements ofOperations**

**(in thousands, except per share amounts)****(unaudited)**

 
|                                                             |   | **Three Months Ended  September 30,** |   | **Nine Months Ended****September 30,** |   |
|------------------------------------------------------------------|--------|--------------------------------------------|--------|---------------------------------------------|--------|
|                                                             |   | **2003**                                   |   | **2002**                                    |   | **2003** |   | **2002** |   |
| Revenues                                                         |   | $                                          | 10,694 |                                        | $      | 9,515 |   | $ | 30,043 |   | $ | 25,078 |   |
| Costs and expenses:                                              |   |                                       |   |                                        |   |   |   |   |   |
| Cost of revenues                                                 |   | 4,172                                      |   | 4,277                                       |   | 12,979 |   | 11,318 |   |
| Network and operations                                           |   | 980                                        |   | 1,159                                       |   | 2,751 |   | 3,378 |   |
| Research and development                                         |   | 634                                        |   | 658                                         |   | 1,833 |   | 2,226 |   |
| Sales and marketing                                              |   | 3,828                                      |   | 2,810                                       |   | 9,837 |   | 9,266 |   |
| General and administrative                                       |   | 947                                        |   | 1,262                                       |   | 3,572 |   | 3,893 |   |
| Amortization of stock-based compensation (1)                     |   | 4                                          |   | 41                                          |   | 65 |   | 127 |   |
| Restructuring (benefit) charge                                   |   | —                                     |   | (313                                        | )      | (79 | ) | 369 |   |
| Total costs and expenses                                         |   | 10,565                                     |   | 9,894                                       |   | 30,958 |   | 30,577 |   |
| Operating income (loss)                                          |   | 129                                        |   | (379                                        | )      | (915 | ) | (5,499 | ) |
| Interest income and other, net                                   |   | 58                                         |   | 89                                          |   | 124 |   | 222 |   |
| Interest expense                                                 |   | —                                     |   | (9                                          | )      | — |   | (40 | ) |
| Income (loss) before income taxes                                |   | 187                                        |   | (299                                        | )      | (791 | ) | (5,317 | ) |
| Provision for income taxes                                       |   | 9                                          |   | 16                                          |   | 28 |   | 32 |   |
| Net income (loss)                                                |   | 178                                        |   | (315                                        | )      | (819 | ) | (5,349 | ) |
| Deemed beneficial conversion dividend on Series APreferred Stock |   | —                                     |   | —                                      |   | — |   | (11,781 | ) |
| Net income (loss) attributable to common  stockholders           |   | $                                          | 178    |                                        | $      | (315 | ) | $ | (819 | ) | $ | (17,130 | ) |
|                                                             |   |                                       |   |                                        |   |   |   |   |   |
| Basic net income (loss) per share                                |   | $                                          | 0.01   |                                        | $      | (0.02 | ) | $ | (0.04 | ) | $ | (0.85 | ) |
| Shares used to compute basic net income (loss) per  share        |   | 24,006                                     |   | 20,135                                      |   | 21,997 |   | 20,051 |   |
|                                                             |   |                                       |   |                                        |   |   |   |   |   |
| Diluted net income (loss) per share                              |   | $                                          | 0.01   |                                        | $      | (0.02 | ) | $ | (0.04 | ) | $ | (0.85 | ) |
| Shares used to compute diluted net income (loss)  per share      |   | 31,810                                     |   | 20,135                                      |   | 21,997 |   | 20,051 |   |

 

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(1) Amortization of stock-basedcompensation consists of:

 
| Network and operations                          |   | $      | — |   | $      | 1  |   | $   | 3      |   | $ | 4   |   |
|-------------------------------------------------|--------|--------|--------|--------|--------|----|--------|-----|--------|--------|---|-----|--------|
| Research and development                        |   | 1      |   | 2      |   | 4  |   | 8   |   |
| Sales and marketing                             |   | — |   | 1      |   | 1  |   | 2   |   |
| General and administrative                      |   | 3      |   | 37     |   | 57 |   | 113 |   |
| Total amortization of stock-based  compensation |   | $      | 4      |   | $      | 41 |   | $   | 65     |   | $ | 127 |   |

 

See accompanying notes

 

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**GRICCOMMUNICATIONS, INC.****CondensedConsolidated Statements of Cash Flows****(in thousands)(unaudited)**

 
|                                                                             |   | **Nine Months Ended**        |   |
|----------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                             |   | **September 30,  2003** |   | **September 30,  2002** |   |
| ***Cash flows from  operating activities:***                                     |   |                         |   |   |   |
| Net loss                                                                         |   | $                            | (819   | ) | $ | (5,349 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities:     |   |                         |   |   |   |
| Depreciation and amortization of property and  equipment                         |   | 599                          |   | 2,008 |   |
| Amortization of stock-based compensation                                         |   | 65                           |   | 244 |   |
| Gain on sales of assets                                                          |   | (116                         | )      | (347 | ) |
| Accounts receivable allowances                                                   |   | (5                           | )      | 150 |   |
| Noncash portion of restructuring benefit                                         |   | (79                          | )      | (407 | ) |
| Noncash warrant expenses-preferred stock                                         |   | —                       |   | 1 |   |
| Net changes in assets and liabilities:                                           |   |                         |   |   |   |
| Accounts receivable                                                              |   | (1,414                       | )      | (1,568 | ) |
| Prepaid expenses and other current assets                                        |   | (781                         | )      | (254 | ) |
| Other assets                                                                     |   | 178                          |   | (13 | ) |
| Accounts payable                                                                 |   | 915                          |   | 1,092 |   |
| Accrued compensation and benefits                                                |   | 336                          |   | (1,067 | ) |
| Deferred revenue                                                                 |   | 196                          |   | 181 |   |
| Other current liabilities                                                        |   | 8                            |   | (16 | ) |
| Other long-term liabilities                                                      |   | (88                          | )      | (5 | ) |
| Net cash used in operating activities                                            |   | (1,005                       | )      | (5,350 | ) |
| ***Cash flows from  investing activities:***                                     |   |                         |   |   |   |
| Available-for-sale investments:                                                  |   |                         |   |   |   |
| Purchases                                                                        |   | (9,250                       | )      | (20,502 | ) |
| Maturities                                                                       |   | 5,656                        |   | 10,798 |   |
| Proceeds from sales of assets                                                    |   | 117                          |   | 372 |   |
| Capital expenditures                                                             |   | (330                         | )      | (154 | ) |
| Net cash used in investing activities                                            |   | (3,807                       | )      | (9,486 | ) |
| ***Cash flows from  financing activities:***                                     |   |                         |   |   |   |
| Payments of capital lease obligations                                            |   | —                       |   | (414 | ) |
| Proceeds from sales of common stock, net                                         |   | 1,167                        |   | 231 |   |
| Proceeds from exercise of Series A preferred stock  warrants                     |   | 325                          |   | — |   |
| Proceeds from sales of treasury stock                                            |   | —                       |   | 99 |   |
| Proceeds from issuance of preferred stock, net of  issuance costs                |   | —                       |   | 14,252 |   |
| Net cash provided by financing activities                                        |   | 1,492                        |   | 14,168 |   |
|                                                                             |   |                         |   |   |   |
| Net decrease in cash and cash equivalents                                        |   | (3,320                       | )      | (668 | ) |
| Cash and cash equivalents at beginning of the  period                            |   | 7,314                        |   | 4,021 |   |
| Cash and cash equivalents at end of the period                                   |   | $                            | 3,994  |   | $ | 3,353 |   |
|                                                                             |   |                         |   |   |   |
| ***Supplemental  disclosures of cash flow information:***                        |   |                         |   |   |   |
| Income taxes paid                                                                |   | $                            | 28     |   | $ | 7 |   |
| Interest paid                                                                    |   | $                            | — |   | $ | 37 |   |
|                                                                             |   |                         |   |   |   |
| ***Supplemental  disclosures of noncash financing activities:***                 |   |                         |   |   |   |
| Conversion of Series A redeemable convertible  preferred stock into common stock |   | $                            | 6,395  |   | $ | — |   |

 

See accompanying notes

 

5

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**GRIC COMMUNICATIONS, INC.**

 

**Notes to CondensedConsolidated Financial Statements****(unaudited)**

 

**1.****                  ****Basis of Presentation**

 

Thefinancial information at September 30, 2003 and for the three and ninemonths ended September 30, 2003 and 2002 is unaudited, but includes alladjustments (consisting of normal recurring adjustments and restructuringadjustments) that GRIC Communications, Inc. (the “Company”) considersnecessary for a fair presentation of the financial information set forthherein, in accordance with accounting principles generally accepted in theUnited States for interim financial information and with the instructions toForm 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for annual financial statements. The results for the threeand nine months ended September 30, 2003 are not necessarily indicative ofthe results that may be expected for future periods.

 

Thebalance sheet at December 31, 2002 has been derived from the auditedfinancial statements at that date but does not include all of the informationand footnotes required by accounting principles generally accepted in theUnited States for complete financial statements.

 

Thefollowing information should be read in conjunction with the consolidatedfinancial statements and notes thereto included in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2002.

 

**2.****                  ****Summary of SignificantAccounting Policies**

 

*Revenue Recognition and RelatedAllowances. *TheCompany derives revenues primarily from remote Internet access servicesprovided to customers through its virtual network. These services are generallybilled on a per-minute basis for usage or at a flat rate per month per userbased on negotiated rates. The Company has some customers with minimumcommitment arrangements. To a lesser extent, the Company derives revenues fromlicenses of its authentication software, related maintenance and supportservices, which are recognized ratably over the contractual services period orterm of services, and other optional services related to its GRIC MobileOfficeoffering, which are recognized at the time of delivery.

 

Revenues are recognized when a binding agreement or purchase order fromthe customer has been received, the services have been delivered, the fee orprice was fixed or determinable, the collection of the receivable wasreasonably assured and no significant post-delivery obligations remained.

 

The Company records estimated allowances against revenues in the sameperiod the revenues are recorded. These estimates are based upon historicalanalysis of the Company’s credit memo data and other known factors for pricingand transaction volume disputes that arise in the normal course of business. Todate, allowances pertaining to the disputes with customers have not beensignificant.

 

From time to time, the Company’s customers, including significantcustomers, may seek protection under bankruptcy laws. When this occurs, theCompany determines its ongoing exposure to risk that a pre-filing accountreceivable will prove to be uncollectable, and establishes appropriateallowances for that contingency as necessary. In addition, for each continuingcustomer in bankruptcy the Company evaluates the creditworthiness of thecustomer and determines whether revenue should be recognized on an accrualbasis or as cash payments are received. When revenue is recorded on an accrualbasis, the Company bases its judgment on the creditworthiness of thedebtor-in-possession, their payment experience and whether the collectabilityof receivables is reasonably assured, all in addition to other revenuerecognition criteria having been met.

 

*Allowance for Doubtful Accounts.*The Company maintains allowances for doubtfulaccounts for estimated losses from its customers’ inability to make requiredpayments. In order to estimate the appropriate level of this allowance, theCompany analyzes historical bad debts, customer concentrations, currentcustomer credit-worthiness, current economic trends and changes in its customerpayment patterns. If the financial condition of its customers were todeteriorate and to impair their ability to make payments, additional allowancesmight be required in future periods.

 

*Long-Lived Assets*.  Aspart of the Company’s review of its property and equipment during the threemonths ended June 30, 2003, certain matters were identified related toprior financial reporting periods that required the recording of a netreduction in operating expenses.  TheCompany quantified the amounts associated with certain property and equipmentfor which excess depreciation charges had been recorded against certainproperty and equipment in prior periods. The Company also identified certain leasehold improvements that wereabandoned in previous periods but remained on its financial

 

6

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statements.   Accordingly,during the three months ended June 30, 2003 and the nine months endedSeptember 30, 2003, the Company recorded a net reduction to operatingexpenses of $217,000 resulting from reduced accumulated depreciation anddepreciation expense by approximately $302,000, partially offset by animpairment charge to property and equipment of approximately $85,000 that wasapplied against the restructuring benefit. The Company does not believe these amounts are material to the periodsin which they should have been recorded, nor does it expect that the adjustmentwill be material to its consolidated operating results for the year endingDecember 31, 2003.  However, ifthese adjustments are ultimately deemed to be material to the Company’sconsolidated operating results for the year ending December 31, 2003, theCompany will need to restate prior financial reporting periods including thethree months ended June 30, 2003 and the nine months endedSeptember 30, 2003.  The impactwould increase the net loss for the three months ended June 30, 2003 andthe nine months ended September 30, 2003 by $217,000 ($0.01 per share) anddecrease net loss for the year ended December 31, 2002 by $217,000 ($0.01per share), as well as decrease accumulated deficit and increase net propertyand equipment by $217,000.

 

*Net Loss Per Share. *Net loss per common share and dilutednet loss per share are presented in conformity with the Financial AccountingStandards Board’s Statement of Financial Accounting Standards No. 128, *“Earnings Per Share”* (“SFAS No. 128”)for all years presented.

 

In accordancewith SFAS No. 128, basic and diluted net loss per share has been computedusing the weighted-average number of shares of common stock outstanding duringthe period. Potentially dilutive securities have been excluded from thecomputation of basic and diluted net loss per share, as their effect isantidilutive.  Dilutive securities havebeen included in the computation of diluted net income per share for theapplicable periods.

 

Weighted-averageoptions outstanding to purchase approximately 191,000 shares of common stockfor the three months ended September 30, 2002 and approximately 2.4million and 539,000 shares of common stock for the nine months endedSeptember 30, 2003 and 2002, respectively, were not included in thecomputation of diluted net loss per share because the effect would beantidilutive.  However, theweighted-average options have been included for the three months endedSeptember 30, 2003 in diluted net income per share. Such securities thathave been included in the computation of diluted net income per share werebased upon using the treasury stock method.

 

Series Aredeemable convertible preferred stock (“Series A Preferred Stock”), which hasnot been converted to common stock, of approximately 9.0 million shares for thethree and nine months ended September 30, 2002 and approximately 4.1million for the nine months ended September 30, 2003 has not been includedin the computation of diluted net loss per share because the effect would beantidilutive.  However, the Series APreferred Stock has been included for the three months ended September 30,2003 in diluted net income per share.

 

Series Apreferred stock warrants, which has not been converted to common stock, ofapproximately 2.2 million shares for the three and nine months endedSeptember 30, 2002 and approximately 2.0 million for the nine months endedSeptember 30, 2003 has not been included in the computation of diluted netloss per share because the effect would be antidilutive.  However, the Series A Preferred Stock hasbeen included for the three months ended September 30, 2003 in diluted netincome per share.

 

*Reclassifications. *Amounts for revenues and cost ofrevenues**in the previous quarterhave been reclassified to conform to the current presentation.

 

*Recent Accounting Pronouncements. *In June 2002,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 146 (“SFAS 146”*), “Accounting for Costs Associated with Exit or Disposal Activities.”*SFAS 146nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3,*“Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring)”*(“EITF 94-3”). The principledifference between SFAS 146 and EITF 94-3 relates to its requirement forrecognition of a liability for a cost associated with an exit or disposalactivity. This statement requires that a liability for a cost associated withan exit or disposal activity be recognized when the liability is incurred.Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3 wasrecognized at the date of an entity’s commitment to an exit plan. Thisstatement also establishes that fair value is the objective for initialmeasurement of the liability. SFAS 146 is effective for exit or disposalactivities that are initiated after December 31, 2002. There was no impacton the Company’s consolidated financial position or results of operations fromthe adoption of SFAS 146 as the Company did not have any new exit or disposalactivities during the nine months ended September 30, 2003.

 

In November 2002, the FASB issued FASB Interpretation No. 45(“FIN 45”), *“Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.”* FIN 45 requires that a liability berecorded in the guarantor’s balance sheet upon issuance of a guarantee. Inaddition, FIN 45 requires disclosures about the guarantees that an entity hasissued, including a roll forward of the entity’s product warranty liabilities.The disclosure provisions of FIN 45 are effective for financial statements ofinterim or annual periods ending after December 15, 2002.

 

7

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The Company has adopted the disclosure provisions and accountingrequirements of FIN 45. The adoption of the disclosure provisions andaccounting requirements of FIN 45 did not have a material impact on itsconsolidated financial position or results of operations.

 

In December 2002, the FASB issued Statement of FinancialAccounting Standards No. 148 (“SFAS 148”), *“Accounting for Stock-Based Compensation—Transition and Disclosure—anAmendment of FASB Statement No. 123.”* SFAS 148 amendsSFAS 123 to provide alternative methods of transition for a voluntarychange to the fair value method of accounting for stock-based employeecompensation. In addition, SFAS 148 amends the disclosure requirements ofSFAS 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-basedcompensation and the effect of the method used on reported results. Thetransition and annual disclosure requirements of SFAS 148 are effectivefor fiscal years ending after December 15, 2002. The interim financialstatement disclosure requirements of SFAS 148 are effective for interimperiods beginning after December 15, 2002. The transition provisions donot currently have an impact on the Company’s consolidated financial positionand results of operations as the Company has not elected to adopt the fairvalue method of accounting for stock-based compensation as per SFAS 123.The Company has adopted the annual and interim disclosure requirements ofSFAS 148.

 

In January 2003, theFASB issued Interpretation No. 46 (“FIN 46”), “*Consolidation of Variable Interest Entities.”* FIN 46requires an investor with a majority of the variable interests (primarybeneficiary) in a variable interest entity (VIE) to consolidate the entity andalso requires majority and significant variable interest investors to providecertain disclosures. A VIE is an entity in which the voting equity investors donot have a controlling interest, or the equity investment at risk isinsufficient to finance the entity’s activities without receiving additionalsubordinated financial support from other parties. The provisions of FIN 46were effective immediately for all arrangements entered into with new VIEscreated or acquired after January 31, 2003. FIN 46 was amended as FIN 46-6(“FIN 46-6”), FIN 46 is effective for variable interests in a VIE created oracquired before February 1, 2003 at the end of the first interim or annualperiod ending after December 15, 2003.  FIN 46 requires certain disclosures in financial statements issued afterJanuary 31, 2003, if it is reasonably possible that the Company willconsolidate or disclose information about VIEs when FIN 46 becomeseffective.   The Company has notinvested in any VIEs created after January 31, 2003.  The Company has adopted theprovisions of FIN 46 and as of September 30, 2003, there were no entitiesidentified that would require consolidation.

 

InMarch 2003, the EITF reached a consensus on Issue No. 00-21 (“EITF00-21”), “*Revenue Arrangements with MultipleElements*,” which addresses certain aspects of accounting forarrangements that include multiple products or services.  Specifically, this issue addresses: (1) howto determine whether an arrangement that contains multiple products or servicescontains more than one unit of accounting, and (2) how the arrangementconsideration should be measured and allocated.  Accordingly, the adoption of EITF 00-21 may impact the timing ofrevenue recognition as well as allocation between products and services.  EITF 00-21 is applicable for transactionsentered into in fiscal periods beginning after June 15, 2003.  The Company has adopted the guidanceprovided by EITF 00-21and it did not have a material impact on its consolidated financial position orresults of operations.

 

In May 2003, the FASB issued Statement of Financial AccountingStandards No. 150 (“SFAS 150”)*,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity.” *Thisstatement establishes standards for classifying and measuring as liabilitiescertain financial instruments that embody obligations of the issuer and havecharacteristics of both liabilities and equity.  The provisions of SFAS 150 must be applied immediately toinstruments entered into or modified after May 31, 2003 and to all otherinstruments that exist as of the beginning of the first interim financialreporting period beginning after June 15, 2003.  The Company has adopted each of the provisions of SFAS 150 and itdid not have a material impact on its consolidated financial position orresults of operations.

 

**3.****                  ****Stock-Based Compensation**

 

As permitted under FASB Statement No. 123 (“SFAS No. 123”), *“Accounting for Stock-Based Compensation,”*the Company has elected to continue to follow APB No. 25 and relatedinterpretations in accounting for its stock-based awards to employees. UnderAPB No. 25, the Company generally recognizes no compensation expense withrespect to such awards.

 

Pro forma information regarding net income (loss) and earnings (loss)per share is required by SFAS No. 148 and SFAS No. 123 and has beendetermined as if the Company had accounted for awards to employees under thefair value method of SFAS No. 123. The fair value of stock options underthe Company’s 1999 Equity Incentive Plan and stock purchase rights under theCompany’s 1999 Employee Stock Purchase Plan was estimated as of the grant dateusing the Black-Scholes option-pricing model.

 

The fair value of stock options granted during the three months endedSeptember 30, 2003 and 2002 were estimated at the date of grant assumingno expected dividends and the following weighted average assumptions.

 

8

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##### ***Stock Options***

 
|                            |   | **Three  Months Ended September 30,** |   | **Nine  Months Ended September 30,** |   |
|---------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                            |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
|                            |   |                                       |   |                                      |   |   |   |   |   |
| Expected life (years)           |   | 2.80                                       |   | 1.31                                      |   | 2.15 |   | 2.36 |   |
| Expected stock price volatility |   | 1.35                                       |   | 0.87                                      |   | 1.76 |   | 0.95 |   |
| Risk-free interest rate         |   | 2.67                                       | %      | 3.35                                      | %      | 2.95 | % | 3.57 | % |

 

***Stock Purchase***

 
|                            |   | **Three  Months Ended September 30,** |   | **Nine  Months Ended September 30,** |   |
|---------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                            |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
|                            |   |                                       |   |                                      |   |   |   |   |   |
| Expected life (years)           |   | 0.45                                       |   | 0.42                                      |   | 0.55 |   | 0.49 |   |
| Expected stock price volatility |   | 0.86                                       |   | 0.82                                      |   | 1.07 |   | 0.84 |   |
| Risk-free interest rate         |   | 2.52                                       | %      | 2.98                                      | %      | 2.59 | % | 3.13 | % |

 

For purposes of pro forma disclosures, the estimated fair value ofstock-based awards is amortized against pro forma net income over thestock-based awards’ vesting period for options and over the offering period forstock purchases under the Company’s 1999 Employee Stock Purchase Plan.

 

The Company’s pro forma information is as follows:

 
|                                                               |   | **Three  Months Ended September 30,**   |   | **Nine  Months Ended September 30,** |   |
|--------------------------------------------------------------------|--------|----------------------------------------------|--------|-------------------------------------------|--------|
|                                                               |   | **2003**                                     |   | **2002**                                  |   | **2003** |   | **2002** |   |
|                                                               |   | **(in thousands, except per share amounts)** |   |
| Net income (loss) attributable to common  stockholders as reported |   | $                                            | 178    |                                      | $      | (315 | ) | $ | (819 | ) | $ | (17,130 | ) |
| Add: Amortization of stock compensation  measured under APB 25     |   | 4                                            |   | 41                                        |   | 65 |   | 127 |   |
| Less: Stock-based compensation expense  measured under FAS 123     |   | (1,363                                       | )      | (1,216                                    | )      | (3,564 | ) | (3,390 | ) |
| Pro forma net loss                                                 |   | $                                            | (1,181 | )                                         | $      | (1,490 | ) | $ | (4,318 | ) | $ | (20,393 | ) |
|                                                               |   |                                         |   |                                      |   |   |   |   |   |
| Basic net income (loss) per share                                  |   |                                         |   |                                      |   |   |   |   |   |
| As reported                                                        |   | $                                            | 0.01   |                                      | $      | (0.02 | ) | $ | (0.04 | ) | $ | (0.85 | ) |
| Pro forma                                                          |   | $                                            | (0.05  | )                                         | $      | (0.07 | ) | $ | (0.20 | ) | $ | (1.02 | ) |
| Diluted net income (loss) per share                                |   |                                         |   |                                      |   |   |   |   |   |
| As reported                                                        |   | $                                            | 0.01   |                                      | $      | (0.02 | ) | $ | (0.04 | ) | $ | (0.85 | ) |
| Pro forma                                                          |   | $                                            | (0.05  | )                                         | $      | (0.07 | ) | $ | (0.20 | ) | $ | (1.02 | ) |

 

Calculated under SFAS No. 123, the weighted-average fair values ofthe employee stock options granted during the three months endedSeptember 30, 2003 and 2002 were $3.90 and $0.53 per share, respectively.

 

**4.****                  ****Intangible Assets**

 

The Company entered into an agreement with awireless service provider during 2001 for the exchange of services, whichresulted in a prepayment for future wireless services and the obligation by theCompany to provide future Internet roaming services. The assessed value ofthese wireless services had been included in prepaid expenses and other currentassets and in other assets in the amounts of $200,000 and $400,000,respectively. During September 2003, because these assets had not yet beenutilized, the Company and the provider amended the underlying agreement tomodify the scope of their business relationship and extend the term of theagreement until September 2006. As a result of this amended agreement, theCompany entered into a nonmonetary transaction for the exchange of prepaid wirelessservices for prepaid roaming services and wireless cards.  Because this nonmonetary transaction did notrepresent a culmination of an earnings process, no revenues or expenses havebeen, or will be recorded by the Company pursuant to this transaction.  In addition, there was no indicated loss onthis exchange of services.

 

9

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**5.****                  ****Commitments andContingencies**

 

#### *Lease Commitments. *The Company leases all of its facilities under operatingleases that expire at various dates through 2008. As of September 30,2003, the Company had $2.4 million in future operating lease commitments.

 

*Purchase Commitments. *The Company hasentered into certain non-cancelable purchase commitments from suppliers whoprovide network access, software and related services that are utilized by theCompany in order to deliver its GRIC MobileOffice solution. As ofSeptember 30, 2003 the Company had $230,000 in future purchase commitmentsthat expire at various dates through 2004.

 

*Legal Matters. *TheCompany is subject to various legal proceedings and claims arising in theordinary course of business. The Company’s management does not expect that theresults in any of these legal proceedings will have a material adverse effecton the Company’s consolidated financial condition, results of operations orcash flows.

 

In July and August 2001, the Company and certain of itsofficers were named as defendants in five purported securities class actionlawsuits filed in the United States District Court, Southern District of NewYork, captioned as In re GRIC Communications, Inc. Initial Public OfferingSecurities Litigation, No. 01 Civ 6771 (SAS), and consolidated with more thanthree hundred substantially identical proceedings as In re Initial Public OfferingSecurities Litigation, Master File No. 21 MC 92 (SAS). The Consolidated AmendedClass Action Complaint for Violation of the Federal Securities Laws(“Consolidated Complaint”) was filed on or about April 19, 2002, andalleges claims against certain of the Company’s officers and against CIBC WorldMarkets Corp., Prudential Securities Incorporated, DB Alex. Brown, as successorto Deutsche Bank, and U.S. Bancorp Piper Jaffray Inc., underwriters of theCompany’s December 14, 1999 initial public offering (“underwriterdefendants”), under Sections 11 and 15 of the Securities Act of 1933, asamended, and under Section 10(b) and 20(a) of the Securities Exchange Actof 1934, as amended.

 

Citing several press articles, the Consolidated Complaint alleges thatthe underwriter defendants used improper methods in allocating shares ininitial public offerings, and claim the underwriter defendants entered intoimproper commission agreements regarding aftermarket trading in the Company’scommon stock purportedly issued pursuant to the registration statement for theinitial public offering. The Consolidated Complaint also alleges marketmanipulation claims against the underwriter defendants based on the activitiesof their respective analysts, who were allegedly compromised by conflicts ofinterest. The plaintiffs in the Consolidated Complaint seek damages as measuredunder Section 11 and Section 10(b) of the Securities Act of 1933,pre-judgment and post-judgment interest, and reasonable attorneys’ and expertwitnesses’ fees and other costs; no specific amount is claimed in theplaintiffs’ prayer in the Consolidated Complaint. By Order of the Court, noresponsive pleading is yet due, although motions to dismiss on global issuesaffecting all of the issuers have been filed.

 

In October 2002, certain of the Company’s officers and directorswho had been named as defendants in the In re Initial Public OfferingSecurities Litigation were dismissed without prejudice upon order of thepresiding judge. In February 2003, the presiding judge dismissed theSection 10(b) claims against the Company and its named officers anddirectors with prejudice.

 

For several months, the Company has participated in settlementnegotiations with a committee of Issuers’ litigation counsel, plaintiffs’ executivecommittee and representatives of various insurance companies (the“Insurers”).  The Company’s Insurerswere actively involved in the settlement negotiations, and strongly supported asettlement proposal presented to the Company for consideration in earlyJune 2003.  The settlement proposedby the plaintiffs would be paid for by the Insurers and would dispose of allremaining claims against the Company.

 

After careful consideration, the Company has decided to approve thesettlement proposal in July 2003. Although the Company believes that plaintiffs’ claims are without merit,it has decided to accept the settlement proposal (which does not admitwrongdoing) to avoid the cost and distraction of continued litigation.  Because the settlement will be fundedentirely by its Insurers, the Company does not believe that the settlement willhave any effect on the Company’s consolidated financial condition, results oroperations or cash flows.

 

The settlement will be presented to the Court for approval in the comingmonths.  There can be no guarantee thatthe settlement will be judicially approved.

 

###### ***Indemnifications. ***The Company from time to time enters intotypes of contracts that contingently require the Company to indemnify partiesagainst third party claims. These contracts primarily relate to: (i) realestate leases, under which the Company may be required to indemnify propertyowners for environmental and other liabilities, and other claims arising fromthe Company’s use of the applicable premises; and (ii) agreements with theCompany’s officers, directors and employees, under which the Company may berequired to indemnify such persons for liabilities arising out of their

###### *** ***

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employment relationship.

 

The terms of such obligations vary. Generally, a maximum obligation isnot explicitly stated. Because the obligated amounts of these types ofagreements often are not explicitly stated, the overall maximum amount of theobligations cannot be reasonably estimated. Historically, the Company has notbeen obligated to make any payments for these obligations, and no liabilitieshave been recorded for these obligations on its balance sheet atSeptember 30, 2003.

 

**6.****                  ****Restructuring Events**

 

In June 2002, the Company undertook a strategic restructuring tostreamline its operations in order to help reduce operating expenses.  In January 2001, the Company undertooka strategic restructuring and decided to cease providing its Internet telephonysettlement services, based on an analysis of the operating expenses required tosupport these services and the low gross margins associated with them, and onthe Company’s expectation that continued Internet telephony operations wouldrequire additional cash infusions to the business.  As of September 30, 2003, there were no remaining accrualsfrom any of the Company’s strategic restructuring events.

 

The total restructuring benefit of $313,000 for the three months endedSeptember 30, 2002 reflects the reversal of the June 2002 restructuring-relatedemployee severance costs of $191,000, the June 2002 lease and otherobligations of $68,000 and the January 2001 lease and facility obligationsof $54,000, all as a result of final paid settlements that were less thanpreviously estimated obligations.  Noadjustments were made during the three months ended September 30, 2003.

 

The total restructuring benefit of $79,000 for the nine months endedSeptember 30, 2003 reflects the reversal of the June 2002restructuring-related employee severance costs of $164,000 net of an $85,000asset impairment charge for certain leasehold improvements that were abandonedin previous periods.

 

The total restructuring charge of $369,000 for the nine months endedSeptember 30, 2002 reflects a charge to operations of approximately $1.2million related to the June 2002 restructuring, which was partially offsetby noncash benefits of $259,000 from the elimination of the June 2002restructuring accruals, due to final paid settlements that were less thanpreviously estimated obligations.  Inaddition, the restructuring charge was partially offset by an unexpected gainof approximately $335,000 on Internet telephony assets that were previouslywritten-off during the restructuring in January 2001 and by noncashbenefits of $213,000 from the elimination of the January 2001restructuring accruals, due to final paid settlements that were less thanpreviously estimated obligations.

 

**7.****                  ****Segment Information**

 

TheCompany operates solely in one segment, providing a global network for corporateenterprises with mobile and remote workforces and for the Company’s serviceprovider resellers and value-added resellers.

 

Thefollowing is a summary of revenue by geographical area for the periodspresented:

 
|                                    |   | **Three months ended September 30,** |   | **Nine months ended September 30,** |   |
|-----------------------------------------|--------|-------------------------------------------|--------|------------------------------------------|--------|
|                                    |   | **2003**                                  |   | **2002**                                 |   | **2003** |   | **2002** |   |
|                                    |   | **(in thousands)**                        |   | **(in thousands)**                       |   |
| Revenue by external customers:          |   |                                      |   |                                     |   |   |   |   |   |
| United States, Canada and Latin America |   | $                                         | 5,917  |                                     | $      | 5,257 |   | $ | 16,396 |   | $ | 12,716 |   |
| Japan/Korea                             |   | 2,828                                     |   | 2,531                                    |   | 8,049 |   | 7,072 |   |
| Asia Pacific                            |   | 882                                       |   | 855                                      |   | 2,531 |   | 2,549 |   |
| Europe, Middle East and Africa          |   | 1,067                                     |   | 872                                      |   | 3,067 |   | 2,741 |   |
|                                    |   | $                                         | 10,694 |                                     | $      | 9,515 |   | $ | 30,043 |   | $ | 25,078 |   |

 

The following is a summaryof long-lived assets by geographical area for the periods presented:

 
|               |   | **September 30,  2003** |   | **December 31,  2002** |   |
|--------------------|--------|------------------------------|--------|-----------------------------|--------|
|               |   | **(in thousands)**           |   |
| Long-lived assets: |   |                         |   |                        |   |
| United States      |   | $                            | 1,372  |                        | $      | 1,554 |   |
| Rest of World      |   | 101                          |   | 224                         |   |
|               |   | $                            | 1,473  |                        | $      | 1,778 |   |

 

11

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Revenue by external customer is based on the customer’s billinglocations. Long-lived assets are those assets used in each geographiclocation.  For the three months endedSeptember 30, 2003, two customers each accounted for 10% or more of theCompany’s total consolidated revenues.

 

**8.****                                      Stockholder’sEquity**

 

*Series A Redeemable Convertible PreferredStock.*  Duringthe three and nine months ended September 30, 2003, 4.3 million and 4.9million shares of Series A Preferred Stock were converted into common stock,respectively.  No shares were convertedinto common stock during the three and nine months ended September 30,2002.

 

*Series A Preferred Stock Warrants. *During the threeand nine months ended September 30, 2003, warrants to purchase approximately151,000 and 193,000 shares of Series A Preferred Stock were exercised and theseshares were simultaneously converted into shares of common stock.  No Series A Preferred Stock warrants wereexercised and no shares of Series A Preferred Stock were converted into sharesof common stock during the three and nine months ended September 30, 2002.

 

*Stock Repurchase Program.*InSeptember 2001, the Board of Directors approved a program to expend up to$2.0 million to repurchase shares of the Company’s common stock in openmarket transactions. The Company purchased 110,000 shares for approximately$99,000 during 2001. The Company repurchased no additional shares during 2002or during the three and nine months ended September 30, 2003.  The Company’s management currently does nothave plans to repurchase any shares in the near future.

 

**9.****                                      AxcelerantAcquisition**

 

OnAugust 12, 2003, the Company entered into a definitive agreement toacquire Axcelerant, Inc. (“Axcelerant”), a privately held Delaware corporationthat provides managed broadband VPN services. Under the terms of the agreement, Axcelerant stockholders will receiveCompany common stock and options representing approximately 9.8 million shares,or 22% of the combined company on a common equivalents basis (including Companypreferred stock on an as-if converted basis), in a stock-for-stock merger.  The transaction is subject to approval bythe stockholders of the Company and Axcelerant and customary closingconditions.  A Registration Statement onForm S-4 was filed by the Company with the Securities and Exchange Commissionon September 22, 2003 and declared effective on October 24,2003.  A record date was set forOctober 21, 2003 for the special meetings of stockholders of GRIC and Axcelerant,which are to be held on November 25, 2003.

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

*The following discussion should be read inconjunction with the selected consolidated financial information and theconsolidated financial statements and notes appearing elsewhere in thisForm 10-Q. The following discussion contains forward-looking statements,such as statements of expected revenues and expenses that involve risks anduncertainties. We assume no obligation to update any such forward-lookingstatements. Our actual results could differ materially from those anticipatedin these forward-looking statements as a result of many factors, includingthose detailed from time to time in our filings with the Securities andExchange Commission and those discussed in this report, particularly in thisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and under “Factors That May Affect Future Results.”*

 

*Unless expressly stated or the contentotherwise requires, the terms “we”, “our”, “us”, “the Company” and “GRIC” referto GRIC Communications, Inc. and its subsidiaries as a whole.*

 

**Overview**

 

We provide remote Internet access, managed security services — bothvirtual private network and remote end-point security — and mobile broadbandservices for customers requiring mobile office communications capabilitiesworldwide.  Our services solution,called the GRIC Mobile Office, enables people who are working away from theoffice to remain productively and securely connected to their home network asif they were working in their office. Our solution is used by corporate enterprises with mobile employees andremote workforces on a global basis.

 

We provide services over a heterogeneous virtual network known as theGRIC TierOne Network. As of September 30, 2003, the GRIC TierOne Networkincluded more than 35,000 wired and wireless access points in over 150countries.  We created this network byforming contractual relationships with over 300 Internet service providers andtelecommunication companies.  Theseproviders, to whom we refer as the GRIC TierOne Network members, are able toshare their communications networks. Our customers benefit from the resulting network, which can deliver asecure mobile Internet

 

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access solution cost-effectively. GRIC TierOne Network members benefitbecause we manage this shared network and provide settlement services as aclearinghouse. To serve as a clearinghouse, we have established commontechnical, service and payment standards to settle charges that our customersincur when their end users access the network facilities of GRIC TierOneNetwork members in order to initiate Internet-based communications, such asInternet roaming. We intend to continue evolving our service offering tointroduce new Internet-based mobile office communications services that may beadopted, deployed and managed on a global scale across the GRIC TierOneNetwork.

 

We have incurred substantial losses since our inception as a result ofexpenses associated with building the GRIC TierOne Network and related networkinfrastructure and with developing our software products. Although we wereprofitable for our combined activities during the three months endedSeptember 30, 2003, we had an accumulated deficit of approximately$129.4 million as of September 30, 2003. See “Factors ThatMay Affect Future Results—We have a history of net losses and may incurfuture losses.”

 

Our business model has evolved in the course of our development and webelieve that period-to-period comparisons of our operating results should notbe relied upon as indicative of future performance. Our future prospects mustbe considered in light of the risks, expenses and difficulties frequentlyencountered by companies in the early stages of development, particularlycompanies in new and rapidly evolving markets. See “Factors ThatMay Affect Future Results—We have limited experience in our business,which makes it more difficult for us to execute our business plan and for youto evaluate us.”

 

On August 12, 2003, we entered into a definitive agreement toacquire Axcelerant, Inc. (“Axcelerant”), a privately-held Delaware corporationthat provides managed broadband VPN services. Under the terms of the agreement, Axcelerant stockholders will receivecommon stock and options from us representing approximately 9.8 million shares,or 22% of the combined company on a common equivalents basis (including ourpreferred stock on an as-if converted basis), in a stock-for-stock merger.  The transaction is subject to approval bythe stockholders of the Company and Axcelerant and customary closingconditions.  A Registration Statement onForm S-4 was filed by us with the Securities and Exchange Commission onSeptember 22, 2003 and declared effective on October 24, 2003.  A record date was set on October 21,2003 for the special meetings of stockholders of GRIC and Axcelerant, which areto be held on November 25, 2003. We cannot assure you that the proposed merger will be completed duringthe fourth calendar quarter of 2003, or at all.  See “Risks Related to the Merger.”

 

**Critical Accounting Policies and Estimates**

 

The methods, estimates and judgments we use in applying our mostcritical accounting policies have a significant impact on the results we reportin our consolidated financial statements. We evaluate our estimates andjudgments on an on-going basis. We base our estimates on historical experienceand on assumptions that we believe to be reasonable under the circumstanceswhen made. Our experience and assumptions form the basis for our judgmentsabout the carrying value of assets and liabilities and reported amounts ofrevenues and expenses that are not readily apparent from other sources. Actualresults may vary from what we anticipate, and different assumptions orestimates about the future could change our reported results. We believe thefollowing accounting policies are the most critical to us, because they areimportant to the portrayal of our financial statements and they require ourmost difficult, subjective or complex judgments in the preparation of ourconsolidated financial statements.

 

*Revenue Recognition and Related Allowances.*  We derive revenues primarily from remoteInternet access services we provide to customers through our virtual network.These services are generally billed on a per-minute basis for usage or at aflat rate per month per user based on negotiated rates.  We have some customers with minimumcommitment arrangements.  To a lesserextent, we also derive a portion of our revenues from licenses of ourauthentication software, related maintenance and support services, which arerecognized ratably over the contractual services period or term of service, andother optional services related to our GRIC MobileOffice offering, which arerecognized at the time of delivery. These other revenues amounted to five percent or less of total revenuesover the last three years.  Revenues arerecognized when a binding agreement or purchase order from the customer hasbeen received, the services have been delivered, the fee or price was fixed ordeterminable, the collection of the receivable was reasonably assured and nosignificant post-delivery obligations remained.

 

We record estimated allowances against revenues in the same period therevenues are recorded. These estimates are based upon historical analysis ofour credit memo data and other known factors for pricing and transaction volumedisputes that arise in the normal course of business. To date, allowancespertaining to disputes with customers have not been significant. If thehistorical data we use to calculate these estimates does not accurately reflectamounts associated with future disputes, our actual revenues could be higher orlower than what we have recognized.

 

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From time totime our customers, including significant customers, may seek protection underbankruptcy laws. When this occurs, our management determines our risk that anaccount receivable will prove to be uncollectible, and establishes appropriatereserves for that contingency as necessary. In addition, for each continuingcustomer in bankruptcy management evaluates the creditworthiness of thecustomer and determines whether revenue should be recognized on an accrualbasis or when cash payments are received. When we record revenue on an accrualbasis, management has based their judgment on the creditworthiness of thedebtor-in-possession, their payment experience and whether the collectabilityof receivables is reasonably assured, in addition to other revenue recognitioncriteria having been met.

 

*Allowance for Doubtful Accounts.*  We maintain allowances for doubtful accountsfor estimated losses from our customers’ inability to make payments they oweus. In order to estimate the appropriate level of this allowance, we analyzehistorical bad debts, customer concentrations, current customercredit-worthiness, current economic trends and changes in our customer paymentpatterns. If the financial condition of our customers were to deteriorate andto impair their ability to make payments to us, additional allowances might berequired in future periods and consequently may result in deferring revenuegoing forward.

 

*Long-Lived Assets*.  Aspart of our review of our property and equipment during the three months endedJune 30, 2003, certain matters were identified related to prior financialreporting periods that required the recording of a net reduction in operatingexpenses.  We quantified the amountsassociated with certain property and equipment for which excess depreciationcharges had been recorded against certain property and equipment in priorperiods.  We also identified certainleasehold improvements that were abandoned in previous periods but remained on ourfinancial statements.   Accordingly,during the three months ended June 30, 2003 and the nine months endedSeptember 30, 2003, we recorded a net reduction to operating expenses of$217,000 resulting from reduced accumulated depreciation and depreciationexpense of approximately $302,000, partially offset by an impairment charge toproperty and equipment of approximately $85,000 that was applied against therestructuring benefit.  We do notbelieve these amounts are material to the periods in which they should havebeen recorded, nor do we expect that the adjustment will be material to ourconsolidated operating results for the year ending December 31, 2003.  However, if these adjustments are ultimatelydeemed to be material to the consolidated operating results for the year endingDecember 31, 2003, we will need to restate prior financial reportingperiods including the three months ended June 30, 2003 and nine monthsended September 30, 2003.  The impactwould increase the net loss for the three months ended June 30, 2003 andthe nine months ended September 30, 2003 by $217,000 ($0.01 per share) anddecrease net loss for the year ended December 31, 2002 by $217,000 ($0.01per share), as well as decrease accumulated deficit and increase net propertyand equipment by $217,000.

 

*Intangible Assets.*Weentered into an agreement with a wireless service provider during 2001 for theexchange of services, which resulted in a prepayment for future wirelessservices and the obligation to provide future Internet roaming services. Theassessed value of these wireless services had been included in prepaid expensesand other current assets and in other assets in the amounts of $200,000 and$400,000, respectively. During September 2003, because these assets hadnot yet been utilized, we amended the underlying agreement to modify the scopeof our business relationship and extend the term of the agreement untilSeptember 2006.  As a result of this amended agreement, weentered into a nonmonetary transaction for the exchange of prepaid wirelessservices for prepaid roaming services and wireless cards.  Because this nonmonetary transaction did notrepresent a culmination of an earnings process, no revenues or expenses havebeen, or will be recorded pursuant to this transaction.  In addition, there was no indicated loss onthis exchange of services.

 

**Results of Operations**

 

**Three and Nine Month Periods EndedSeptember 30, 2003 Compared to Three and Nine Month Periods EndedSeptember 30, 2002**

 

*Revenues. *Revenues consist of amounts received from ourcustomers for utilizing our remote Internet access services or other servicesfrom our GRIC MobileOffice offering that we provided. Total revenues increasedto $10.7 million in the three months ended September 30, 2003 from $9.5 millionin the three months ended September 30, 2002, representing an increase of12%. Total revenues increased to $30.0 million in the nine months endedSeptember 30, 2003 from $25.1 million in the nine months endedSeptember 30, 2002, representing an increase of 20%. The increase ofapproximately $1.2 million and $5.0 million during the three and nine monthperiods ended September 30, 2003, respectively, was primarily due toincreased amounts obtained for our remote Internet access services by ourexisting customers in the combined regions of the United States, Canada andLatin America and to a lesser degree the expansion of our global customer base.We expect 2003 revenues to grow primarily as a result of increased usage of ourremote Internet access services and, to a lesser extent, reflecting increasedsales of our managed security service offering and our value-added services.

 

*Cost of Revenues.*  Cost of revenues consists of amounts we payto access the Internet in order to provide remote Internet access services toour customers and amounts we pay to third parties to offer other mobilebroadband services.  Cost of revenuesdecreased to $4.2 million in the three months ended September 30,2003 from $4.3 million in the three months

 

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ended September 30, 2002, which represented a decrease of 2%.  The decrease of approximately $105,000during the three-month period ended September 30, 2003 was primarily dueto reductions in amounts owed to providers for access services and otherbroadband services.  Cost of revenuesincreased to $13.0 million in the nine months ended September 30,2003 from $11.3 million in the nine months ended September 30, 2002,which represented an increase of 15%.   The increase of $1.7 million during the nine-month period endedSeptember 30, 2003, reflects corresponding increases in the volume ofremote Internet access and the expansion of our customer base as well as thecost of adding additional products to the GRIC MobileOffice solution offering.  As remote Internet access revenues increasewe expect that the cost of revenues in 2003 will increase in absolute dollarswhen compared to 2002, but decline as a percentage of total revenues.

 

*Network and Operations.*  Network and operations expenses includesalaries and benefits, allocated facility and management information systemsexpenses, depreciation on network equipment, administrative expenses, costs ofco-location of network equipment and leased telecommunication lines and otherrelated costs.  Network and operationsexpenses decreased to $980,000 in the three months ended September 30,2003 from $1.2 million in the three months ending September 30, 2002,representing a decrease of 15%. The decrease of approximately $179,000 reflectsreductions of approximately $95,000 in depreciation expense primarilyassociated with older assets that are still in use, but have reached the end oftheir estimated lives for accounting purposes, a reduction of approximately$58,000 in telecommunications expense based on lower rates from a new providerand reductions of approximately $49,000 in compensation-related expenses thatwere primarily due to lower staffing levels and the elimination of compensationprograms. Network and operations expenses decreased to $2.8 million in the ninemonths ended September 30, 2003 from $3.4 million in the nine monthsending September 30, 2002, representing a decrease of 19%.  The decrease of approximately $627,000reflects reductions of approximately $372,000 in depreciation expense primarilyassociated with older assets that are still in use, but have reached the end oftheir estimated lives for accounting purposes, reductions of approximately$173,000 in compensation-related expenses that were primarily due to lowerstaffing levels and the elimination of compensation programs and a reduction ofapproximately $92,000 in telecommunications expense based on lower rates from anew provider.  We expect the amount ofnetwork and operations expenses in 2003 to be less than total expenses in 2002as we maintain current staffing levels and utilize the existing networkinfrastructure.

 

*Research and Development.*  Research and development expenses consist ofquality assurance, salaries and benefits, allocated facility and managementinformation systems, facilities costs, depreciation costs, outside consultants,administration and other related costs. Research and development expensesdecreased to $634,000 in the three months ended September 30, 2003 from$658,000 in the three months ended September 30, 2002, representing adecrease of 4%.  The decrease ofapproximately $24,000 reflects reductions of approximately $28,000 forthird-party software product subscription not renewed in 2003, reductions ofapproximately $21,000 in depreciation expense primarily associated with olderassets that are still in use, but have reached the end of their estimated livesfor accounting purposes, offset by approximately $36,000 of increasedcompensation related expenses due to adding additional staffing in India.  Research and development expenses decreasedto $1.8 million in the nine months ended September 30, 2003 from $2.2million in the nine months ended September 30, 2002, representing adecrease of 18%.  The decrease ofapproximately $393,000 reflects lower professional fees of approximately$116,000 due to the decreased use of outside services and approximately$102,000 due to reduced depreciation expense primarily associated with olderassets that are still in use, but have reached the end of their estimated livesfor accounting purposes and approximately $87,000 due to property and equipmentadjustments that related to prior periods and reductions of approximately$91,000 in compensation-related expenses primarily due to shifting stafffrom our U.S. headquarters to our development center in India.  We expect research and development expensesto be lower in 2003 as compared to 2002 due to our utilization of existingassets and resources in our development center in India.

 

*Sales and Marketing.*  Sales and marketing expenses consist ofsalaries and benefits, costs for marketing and promotional programs, allocatedfacility and management information systems costs, travel and entertainmentcosts, outside consultant fees, costs associated with domestic and internationalsales offices, administrative expenses and other related costs. Sales andmarketing expenses increased to $3.8 million in the three months endedSeptember 30, 2003 from $2.8 million in the three months endedSeptember 30, 2002, representing an increase of 36%.  The increase of approximately $1.0 millionwas due to an increase in compensation expense of approximately $591,000primarily due to higher compensation-related expenses pertaining to ourincreased sales force and an increase of approximately $463,000 in advertisingand promotion costs to increase GRIC’s brand recognition and increase salesleads.  Sales and marketing expensesincreased to $9.8 million in the nine months ended September 30, 2003 from$9.3 million in the nine months ended September 30, 2002, representing aincrease of 6%.  The increase ofapproximately $571,000 principally reflects increase in compensation expense ofapproximately $459,000 primarily due to higher compensation-related expensespertaining to our increased sales force and an increase of approximately$180,000 in advertising and promotion costs offset by a reduction approximately$105,000 in depreciation expense primarily associated with older assets thatare still in use, but have reached the end of their estimated lives foraccounting purposes.  We expect theoverall amount of sales and marketing expenses to significantly increase duringthe remainder of 2003 and to be greater than total expense in 2002 as we evolveour business strategy to employ not only an indirect sales channel, but also adirect sales channel and to increase our marketing presence by investing inmarketing programs.

 

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*General and Administrative.*  General and administrative expenses consistof salary, benefits and related costs for executive, finance, legal,administrative, human resources, investor relations and management informationsystems functions, general corporate and facility costs and provisions foruncollectable receivables. General and administrative expenses decreased to$947,000 in the three months ended September 30, 2003 from $1.3 million inthe three months ended September 30, 2002, representing a decrease of25%.   The decrease of approximately$315,000 reflects a reduction of approximately $140,000 in depreciation expenseprimarily associated with older assets that are still in use, but have reachedthe end of their estimated lives for accounting purposes, approximately$109,000 in lower facility costs due to continued efforts to streamline ouroperations in 2003 and a one-time worker’s compensation refund for $85,000received during the three months ended September 30, 2003.  General and administrative expensesdecreased to $3.6 million in the nine months ended September 30, 2003 from$3.9 million in the nine months ended September 30, 2002, representing adecrease of 8%.  The decrease ofapproximately $321,000 reflects a decrease of approximately $487,000 indepreciation expense primarily associated with older assets that are still inuse, but have reached the end of their estimated lives for accounting purposesand approximately $303,000 in lower facility costs due to continued efforts tostreamline our operations in 2003, offset by an increase of approximately$408,000 for one-time costs related to payments made in connection with theresignation of our former Chief Executive Officer during the first quarter of2003.  We expect the total amount ofgeneral and administrative expenses to remain consistent for the remainder of2003 and to be only slightly higher than total expenses in 2002.

 

*Amortization of Stock-Based Compensation.*  Some stock options granted throughDecember 14, 1999 were considered compensatory because the deemed fairvalue for accounting purposes was higher than the stock option exercise priceas determined by the board of directors on the date of grant. As a result, werecorded amortization of deferred compensation expense of $4,000 and $41,000 inthe three months ended September 30, 2003 and 2002, respectively, and werecorded amortization of deferred compensation expense of $65,000 and $127,000in the nine months ended September 30, 2003 and 2002, respectively.  As of September 30, 2003, we had nodeferred compensation remaining to be amortized. Deferred compensation isamortized on a straight-line basis over the vesting period of the options.

 

*Restructuring Charge.*  In June 2002, we undertook a strategicrestructuring to streamline our operations in order to help reduce operatingexpenses.  In January 2001, we undertooka strategic restructuring and decided to cease providing our Internet telephonysettlement services, based on an analysis of the operating expenses required tosupport these services and the low gross margins associated with them, and onour expectation that continued Internet telephony operations would requireadditional cash infusions to the business.

 

The total restructuring benefit of $79,000 for the nine months endedSeptember 30, 2003 reflects the reversal of the June 2002restructuring-related employee severance costs of $164,000 net of an $85,000asset impairment charge for certain leasehold improvements that were abandonedin previous periods.  As ofSeptember 30, 2003, there were no remaining accruals from any of ourstrategic restructuring events.

 

The total restructuring charge of $369,000 for the nine months endedSeptember 30, 2002 reflects a charge to operations of approximately $1.2million related to the June 2002 restructuring, which was partially offsetby noncash benefits of $259,000 from the elimination of the June 2002restructuring accrual, due to final paid settlements that were less thanpreviously estimated obligations.  Inaddition, the restructuring charge was partially offset by an unexpected gainof approximately $335,000 on Internet telephony assets that were previouslywritten-off during the restructuring in January 2001 and by noncashbenefits of $123,000 from the elimination of the January 2001restructuring accruals, due to final paid settlements that were less than previouslyestimated obligations.

 

*Interest Income and Other, Net. *Interest income andother, net, primarily consists of interest income on cash balances and onshort-term investments, gain on disposition of assets and sales, use andvalue-added tax. Interest income and other, net, was $58,000 for the threemonths ended September 30, 2003 as compared to $89,000 for the threemonths ended September 30, 2002. The decrease of approximately $31,000 primarily reflects a decrease ininterest income of $35,000 due to lower interest rate yields.  Interest income and other, net, was $124,000for the nine months ended September 30, 2003 as compared to $222,000 forthe nine months ended September 30, 2002. The decrease of approximately $98,000 primarily reflects higher sales,use and value-added tax on equipment for approximately $165,000 and a decreaseof approximately $42,000 due to lower interest rate yields partially offset bya gain on the sale of assets of $103,000.

 

*Interest Expense. *Interest expense consists of interestexpense associated with capital leases and amortization of the fair value ofwarrants issued in connection with our financing activities. There was no interest expense or amortization of the fairvalue of warrants in the three and nine months ended September 30, 2003,as we paid our remaining debt balance from our capital lease obligations andfully amortized our warrants in 2002. Total interest expense was $9,000 and$40,000 for the three and nine months ended September 30, 2002, respectively.

 

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*Income Taxes. *Theprovision for income taxes was $9,000 and $28,000 for the three and nine monthsended for September 30, 2003, respectively, as compared to $16,000 and$32,000 the three and nine months ended for September 30, 2002,respectively. The provision for income taxes consists of foreign taxprovisions.

 

***Liquidity and Capital Resources***

 
|                                                 |   | **September 30,  2003** |   | **September 30,  2002** |   |
|------------------------------------------------------|--------|------------------------------|--------|------------------------------|--------|
|                                                 |   | **(in thousands)**           |   |
| Cash and cash equivalents                            |   | $                            | 3,994  |                         | $      | 3,353 |   |
| Net cash used in operating activities                |   | (1,005                       | )      | (5,350                       | )      |
| Net cash provided by (used in) investing  activities |   | (3,807                       | )      | (9,486                       | )      |
| Net cash provided by (used in) financing  activities |   | 1,492                        |   | 14,168                       |   |
|                                                      |        |                              |        |                              |        |  |  |

 

*Cash and cash equivalents. *Ourprincipal source of liquidity is our cash, cash equivalents and short-terminvestments. As of September 30, 2003, in addition to our cash and cashequivalents balance of approximately $4.0 million we had a short-terminvestment balance of approximately $19.4 million.

 

*Operating activities. *Net cash used inoperating activities was $1.0 million in the nine months endedSeptember 30, 2003, and $5.4 million in the nine months endedSeptember 30, 2002. Net cash used in operating activities in the ninemonths ended September 30, 2003 reflects higher accounts receivablebalances of approximately $1.4 million due to increased revenues and higherprepaid, net operating losses of $819,000 and other current asset balances of$781,000 due primarily to the payment and accrual of costs related to ourintended acquisition of Axcelerant. These amounts were partially offset byhigher accounts payable balances of $915,000, which include obligationspertaining to the merger activities, and depreciation and amortization ofproperty and equipment of $599,000.  Netcash used in operating activities in the nine months ended September 30,2002 reflects net operating losses of $5.3 million, higher accounts receivablebalances of approximately $1.6 million due to increased revenues, lower accruedcompensation and benefit payable balances of $1.1 million principally due tothe elimination of our 2002 bonus plan. These amounts were partially offset by depreciation and amortization ofproperty and equipment of $2.0 million and higher accounts payable balances ofapproximately $1.1 million due primarily to amounts accrued for ourJune 2002 restructuring and amounts owed to our providers that correspondto higher revenues from internet access and mobile broadband services.

 

*Investing activities. *Netcash used in investing activities was $3.8 million in the nine monthsended September 30, 2003 and $9.5 million in the nine months endedSeptember 30, 2002. Net cash used in investing activities in thenine-month periods ended September 30, 2003 and 2002 primarily reflectspurchases of short-term investments.

 

*Financing activities. *Net cashprovided by financing activities was $1.5 million in the nine months endedSeptember 30, 2003 and $14.2 million in the nine months ended September 30,2002. The net cash provided by financing activities in the nine months endedSeptember 30, 2003 was principally due to proceeds received from the sale ofcommon stock through our incentive stock option and employee stock purchaseplans and the exercise of warrants to purchase shares of Series A PreferredStock that were simultaneously converted to shares of common stock. The netcash provided by financing activities in the nine months ended September 30,2002 was primarily the result of proceeds from the issuance of our Series A PreferredStock.

 

*Commitments. *We lease all of our facilities underoperating leases that expire at various dates through 2008. As ofSeptember 30, 2003, we had $2.4 million in future operating leasecommitments. We have entered into certain non-cancelable purchase commitmentsfrom suppliers who provide network access, software and related services thatare utilized by us in order to deliver our GRIC MobileOffice solution.  We have $230,000 in future purchasecommitments that expire at various dates through 2004.

 

*Summary of Liquidity. *AtSeptember 30, 2003, we had an accumulated deficit of $129.4 millionand we incurred a net loss of approximately $819,000 for the nine months endedSeptember 30, 2003, although we were profitable for the three months endedSeptember 30, 2003.

 

Webelieve that our available cash, cash equivalents and short-term investments of$23.4 million at September 30, 2003, and cash expected to begenerated by operations during the next twelve months, will fund plannedoperations for at least the next twelve months.  Our current business model does not require a substantialinvestment in capital equipment. Although a large portion of our property and equipment have reached theend of their useful lives for accounting purposes, we expect spending levelsfor capital assets in the near-term to remain consistent with levels in recentquarters.

 

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We plan to invest in expanding our Internet roaming and relatedservices on a global basis by continuing to build strategic partneringrelationships. This will require us to maintain market acceptance and to growour Internet roaming and related services offerings in order for us to continueour research and development activities and fund planned operating expensegrowth such as increasing our sales force and marketing presence. There can beno assurance that our Internet roaming product offerings will maintain marketacceptance, growth and operating margins.

 

If we areunable to attain our revenue and margin goals, significant reductions inspending and the delay or cancellation of planned activities or moresubstantial restructuring may be necessary to enable us to meet our cashrequirements through at least the next 12 months. These actions could have amaterial adverse effect on our business, results of operations and prospects.Furthermore, we may need to raise additional funds in future periods throughpublic or private financing, or other arrangements, to fund operations andpotential acquisitions, if any. Although we achieved cash flow positive resultsfor our combined activities during this quarter, we may not remain cash flowpositive. If additional financing is needed, it might not be available onreasonable terms or at all. Failure to raise capital when needed couldseriously harm our business and results of operations. If additional funds wereraised through the issuance of equity securities, the percentage of ownershipof our stockholders would be reduced. Furthermore, these equity securities mighthave rights, preferences or privileges senior to our common stock.

 

**RecentAccounting Pronouncements**

 

In June 2002, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards No. 146 (‘‘SFAS 146’’), *“Accounting for Costs Associated with Exit orDisposal Activities.”* SFAS 146 nullifies Emerging Issues Task ForceIssue No. 94-3, *“Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring)”* (“EITF94-3”). The principle difference between SFAS 146 and EITF 94-3 relates to itsrequirement for recognition of a liability for a cost associated with an exitor disposal activity. This statement requires that a liability for a costassociated with an exit or disposal activity be recognized when the liabilityis incurred. Under EITF 94-3, a liability for an exit cost, as defined in EITF94-3, was recognized at the date of an entity’s commitment to an exit plan.This statement also establishes that fair value is the objective for initialmeasurement of the liability. SFAS 146 is effective for exit or disposalactivities that are initiated after December 31, 2002. There was no impacton our consolidated financial position or results of operations from theadoption of SFAS 146, as we did not have any new exit or disposal activitiesduring the three months ended September 30, 2003.

 

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN45”), “*Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers.”* FIN 45 requires that a liability be recorded in theguarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45requires disclosures about the guarantees that an entity has issued, includinga roll forward of the entity’s product warranty liabilities. The disclosureprovisions of FIN 45 are effective for financial statements of interim orannual periods ending after December 15, 2002. We have adopted thedisclosure provisions of FIN 45.  Theadoption of the disclosure provisions and accounting requirements of FIN 45 didnot have a material impact on our consolidated financial position or results ofoperations.

 

In December 2002, the FASB issued Statement of FinancialAccounting Standards No. 148 (“SFAS 148”), *“Accountingfor Stock-Based Compensation—Transition and Disclosure—an Amendment of FASBStatement No. 123.”* SFAS 148 amends SFAS 123 to provide alternativemethods of transition for a voluntary change to the fair value method ofaccounting for stock-based employee compensation. In addition, SFAS 148 amendsthe disclosure requirements of SFAS 123 to require prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based compensation and the effect of the method used on reported results.The transition and annual disclosure requirements of SFAS 148 are effective forfiscal years ending after December 15, 2002. The interim financialstatement disclosure requirements of SFAS 148 are effective for interim periodsbeginning after December 15, 2002. The transition provisions do notcurrently have an impact on our consolidated financial position and results ofoperations, as we have not elected to adopt the fair value based method ofaccounting for stock-based compensation as per SFAS 123. We have adopted theannual and interim disclosure requirements of SFAS 148.

 

In January 2003, theFASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable InterestEntities.” FIN 46 requires an investor with a majority of the variableinterests (primary beneficiary) in a variable interest entity (VIE) toconsolidate the entity and also requires majority and significant variableinterest investors to provide certain disclosures. A VIE is an entity in whichthe voting equity investors do not have a controlling interest, or the equityinvestment at risk is insufficient to finance the entity’s activities withoutreceiving additional subordinated financial support from other parties. Theprovisions of FIN 46 were effective immediately for all arrangements enteredinto with new VIEs created or acquired after January 31, 2003. FIN 46 wasamended as FIN 46-6 (“FIN 46-6”), FIN 46 is effective for variable interests ina VIE created or acquired before February 1, 2003 at the end of the firstinterim or annual period ending after December 15, 2003.   FIN 46 requires certain disclosures infinancial statements issued after January 31, 2003, if it is reasonablypossible to consolidate or disclose information about VIEs when FIN 46 becomeseffective.   We have not invested in anyVIEs created

 

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after January 31, 2003.  We have adopted the provisions of FIN46 and as of September 30, 2003, there were no entities identified thatwould require consolidation.

 

InMarch 2003, the EITF reached a consensus on Issue No. 00-21 (“EITF00-21”), *“Revenue Arrangements with MultipleElements,”* which addresses certain aspects of accounting forarrangements that include multiple products or services.  Specifically, this issue addresses: (1) howto determine whether an arrangement that contains multiple products or servicescontains more than one unit of accounting, and (2) how the arrangementconsideration should be measured and allocated.  Accordingly, the adoption of EITF 00-21 may impact the timing ofrevenue recognition as well as allocation between products and services.  EITF 00-21 is applicable for transactionsentered into in fiscal periods beginning after June 15, 2003.    We adopted the guidance provided by EITF No. 00-21 and it did not have amaterial impact on our consolidated financial position or results ofoperations.

 

In May 2003, the FASB issued Statement of Financial AccountingStandards No. 150 (“SFAS 150”*),“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity.” *Thisstatement establishes standards for classifying and measuring as liabilitiescertain financial instruments that embody obligations of the issuer and havecharacteristics of both liabilities and equity.  The provisions of SFAS 150 must be applied immediately toinstruments entered into or modified after May 31, 2003 and to all otherinstruments that exist as of the beginning of the first interim financialreporting period beginning after June 15, 2003.  We adopted of the provisions of SFAS 150 and it did not have amaterial impact on our consolidated financial position or results ofoperations.

 

 

**Factors ThatMay Affect Future Results**

*In addition to the information in thisQuarterly Report Form 10-Q, the following should be considered inevaluating GRIC and our business.*

 

**If we cannot complete our proposed merger withAxcelerant and effectively integrate the operations of both companies, we willnot realize the potential benefits of the merger.**

 

Theintegration of Axcelerant into our company will be a time consuming andexpensive process and may disrupt our operations if it is not completed in atimely and efficient manner.  If thisintegration effort is not successful, our results of operations could beharmed, employee morale could decline, key employees could leave and customerscould cancel existing orders or choose not to place new ones.  In addition, we may not achieve anticipatedsynergies or other benefits of the merger. Following the merger, we must operate a single organization utilizingcommon information and communication systems, operating procedures, financialcontrols and human resources practices. We may encounter the following difficulties, costs and delays involvedin integrating Axcelerant’s operations into our operations:

 

•                  failure to successfully manage relationships withcustomers and other important relationships;

 

•                  failure of customers to accept new services or tocontinue using the products and services of the combined company;

 

•                  potential difficulties in successfullyintegrating the management teams and employees of GRIC and Axcelerant;

 

•                  managing our growth and managing larger, moregeographically dispersed operations;

 

•                  perceived adverse changes in business focus;

 

•                  the loss of key employees and diversion of theattention of management from other ongoing business concerns;

 

•                  potentialincompatibility of technologies and systems; and

 

•                  potential incompatibility of business cultures.

 

If our operations after themerger do not meet the expectations of our or Axcelerant’s existing customers,then these customers may cease doing business with the company altogether.

 

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**We may not realize anticipated benefits of theacquisition of Axcelerant.**

 

We cannot assure you that we will achieve the benefits that we expectfrom the acquisition of Axcelerant.  Forexample, the combined service offerings after the acquisition may be morecomplex for customers than we anticipate, which could make those services moredifficult to market and sell and ultimately reduce our revenue.  Integrating our operations may be more difficultor take longer than we expect, and cost savings may be smaller than weanticipate, or deferred longer.  We mayencounter unexpected difficulties integrating management personnel andexperience damaging management attrition, which could disrupt our operationsand impose new costs on us.

 

**The market price of our common stock hastraditionally been highly volatile, and if we do not realize anticipatedbenefits of the merger or meet the expectations of analysts, the market priceof our common stock could decline.**

 

In the past,the price of our common stock has experienced large swings up and down.  This volatility might occur in the future,which could contribute to our common stock being worth less after the mergerthan before it.  Volatility can ariseparticularly in response to quarter-to-quarter variations in the actual oranticipated financial results of us or our customers or competitors, andannouncements that we or our competitors make regarding new product and serviceintroductions.  The market price of ourcommon stock can also fluctuate in response to price and volume fluctuations inthe stock market, particularly those that affect the market prices oftechnology stocks.

 

In addition,the market price of our common stock is subject to decline if the integrationof Axcelerant with our company is unsuccessful, or if we do not achieve theexpected benefits of the merger as quickly as anticipated or the costs of oroperational difficulties arising from the merger are greater than anticipated.

 

 

**We haveincurred significant losses to date and expect to continue to incur losses forsome period of time. If we fail to generate sufficient revenue to achieve andsustain positive cash flow or profits, our stock price will decline.**

 

We have incurredsignificant losses to date and we expect to continue to incur losses for someperiod of time. Although we reported net income of $178,000 for the threemonths ended September 30, 2003, we incurred net losses of approximately$819,000 for the nine months ended September 30, 2003, $5.0 million for 2002,$31.6 million for 2001, and $32.4 million for 2000.    As of September 30, 2003, we had anaccumulated deficit of $129.4 million

 

We have experiencednegative cash flows in each year since our inception in 1994, and we expect tocontinue to do so for some time in the future. In addition, we may also incursignificant new costs related to possible acquisitions, the development of newproducts and services, the integration of new technologies or the update of oldtechnologies. Moreover, we might not be able to increase our operatingprofitability on a quarterly or annual basis. To increase profits, we will needto maintain our relationships with existing customers, generate additionalrevenue growth from our existing customers and obtain new customers, whilecontinuing to control our expenses. We expect to continue to invest in networkand operations, research and development and sales and marketing, and we expectto face pressure to adopt new pricing arrangements, including volume discounts,that may lower our gross margins. As a result, our ability to achieve andsustain profitability will depend on our ability to sustain and achievesubstantially higher revenue while maintaining reasonable cost and expenselevels.  If we fail to achieve orsustain profitability, our stock price could decline.

 

**Ourbusiness strategy has shifted over time and remains unproven, so the success ofour strategy cannot be assured.**

 

Our business strategy haschanged over time.  For example, weabandoned our earlier Internet Service Provider business, as well as ourInternet telephony services business. We have pursued our current business – remote access, managed securityand mobile broadband services – for a relatively brief period and in markets thatare rapidly changing.  There can be noassurance that we will succeed in our efforts to make our current businessprofitable, and there can be no assurance that the acquisition of Axcelerantwill make us more likely to succeed.

 

##### **Any strategicacquisitions or investments we engage in could dilute our stockholders and/orresult in the assumption of additional liabilities, loss of sales anddisruption of our business.**

 

We expect that we willconsider future acquisitions of, or investments in, complementary businesses,products or technologies. We may encounter difficulties in identifying andacquiring suitable candidates on reasonable terms.

 

In the event of anyfuture acquisitions, we could:

 

•                  issuestock that would dilute our current stockholders’ percentage ownership;

 

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•                  incurdebt that will give rise to interest charges and may impose materialrestrictions on the manner in which we operate our business;

 

•                  assumeliabilities;

 

•                  incurexpenses related to impairment of goodwill and other intangible assets; or

 

•                  incurlarge write-offs.

 

Any strategicacquisitions or investments that we make in the future will involve many risks,including the following:

 

•                  problemscombining the acquired operations, technologies, products or personnel;

 

•                  unanticipatedcosts;

 

•                  diversionof management time and attention from our existing business;

 

•                  adverseeffects on existing business relationships with our suppliers and customers;

 

•                  risksassociated with entering markets in which we have no or limited priorexperience; and

 

•                  potentialloss of key employees, particularly those of acquired companies.

 

We may not be able tosuccessfully integrate the businesses, products, technologies or personnel thatwe might acquire in the future. We cannot assure you that any strategicinvestments we may make will meet our financial or other investment objectives.Any failure to do so could seriously harm our business, financial condition andresults of operations.

 

**Themarkets that we serve are highly competitive and there is no assurance that wewill be able to achieve or maintain profitability.**

 

We are aware of manycompanies in related markets that address particular aspects of the featuresand functions that our products provide and Axcelerant’s products provide.Currently, we compete directly with iPass and Fiberlink in the market forInternet roaming and related settlement services, and each of iPass andFiberlink has a network that competes with the GRIC TierOne Network. Largecommunications service providers such as AT&T, Equant and WorldCom/UUNETalso have the ability and resources to compete with us in the Internet-basedmobile office communications services market. Axcelerant’s primary competitors include Fiberlink, Megapath, ePresence,TManage and Netifice.  These competitorspresent significant challenges to our business after the merger.  For example, many of our competitors havelonger operating histories, greater name recognition or larger customer bases,which they may leverage in order to obtain more favorable volumediscounts.  In addition, thesecompetitors may be able to undertake more extensive marketing efforts, adoptmore aggressive pricing policies and provide more customer financing than wecan, which could limit our opportunities to obtain new customers or cause us tolose our existing customers.

 

**We may require additional capital for ouroperations, which could have a negative effect on your investment.**

 

If our cash proves to be insufficient to fund our operations, we mayneed to raise additional funds at some point in the future. If we raiseadditional funds by selling equity or convertible debt securities, ourstockholders may experience additional dilution and these new securities mayhave powers, preferences and rights that are senior to those of the rights ofour common stock. For example, as a result of the April 2002 sale of ourSeries A Preferred Stock, the investors in our Series A PreferredStock control a significant portion of our outstanding capital stock, and theowners of the Series A Preferred Stock have rights that are senior tothose of holders of the common stock in the event of a bankruptcy orliquidation, and the issuance of the Series A Preferred Stock hassubstantially diluted the ownership interest of the common stockholders. We cannotpredict whether additional financing will be available on terms favorable tous, or at all. If adequate funds are not available or are not available onacceptable terms, we may be unable to fund our business operations, promote ourbrand identity, take advantage of acquisition opportunities, develop or enhanceservices or respond to competitive pressures. Any inability to do so could havea negative effect on our business, revenues, financial condition and results ofoperations.

 

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**If we fail in our strategy of focusing oursales efforts on larger companies, our revenue and profitability goals willlikely not be achieved.**

 

Historically, a significant portion of our revenues was derived fromsmaller companies in the Internet marketplace, but in recent periods we haveattempted to focus our sales and marketing efforts on larger corporate andenterprise-level customers. This strategy places new demands on our business,such as the longer sales cycles and higher levels of service and support thatlarger accounts generally require. If we fail in this strategy, or if we haveunderestimated the costs of this strategy, we will likely miss our revenue andprofitability goals.

 

**If wefail to enhance our existing products or if new services, products or featureswe introduce do not succeed  in themarketplace, we will not be able to generate new revenues and we will haveincreased costs without the expected returns.**

 

Our target markets arecharacterized by rapid technological advances, changes in end-userrequirements, and frequent new product introductions. Our future success willdepend on our ability to anticipate or adapt to such changes and to offer, on atimely and cost-effective basis, products that meet changing customerdemands.  For example, our growthprospects will be determined, among other things, by our ability, after wecomplete our proposed acquisition of Axcelerant, to grow its branch officeservices offering, which is an offering into a highly competitive market with alarge number of incumbents. We may lack sufficient resources to anticipatetechnological and market trends, manage long development cycles or develop,introduce and market new products and enhancements. In addition, we cannotpredict whether our products and services will meet with market acceptance orbe profitable.

 

**Ourability to compete could be jeopardized if we are unable to protect ourintellectual property.**

 

Our products rely uponintellectual property rights. For example, we have been issued United StatesPatent Number 5,898,780 dated April 27, 1999 for “Method and Apparatus forAuthorizing Remote Internet Access,” and have other U.S. patents pending.  We cannot assure you that patents will issuefrom the pending applications or, if any patents are issued, that they will besufficiently broad to protect our technology adequately.  Axcelerant also has a U.S. patentpending.  We cannot assure you that apatent will issue from the pending application or, if issued, that it will be sufficientlybroad to protect Axcelerant’s technology adequately.  In addition, we and Axcelerant each have a number of trademarksand trademark applications and each company uses copyright and trade secretprotection to protect its software and other original works.  Because the technology and intellectualproperty associated with these products are evolving rapidly, currentintellectual property rights may not adequately protect us after the merger. Inaddition, despite efforts to protect our proprietary rights, unauthorizedparties may attempt to copy or otherwise obtain and use our products ortechnology. Monitoring unauthorized use of technology is difficult, and wecannot assure you that the steps they have taken will prevent unauthorized useof the technology. Moreover, effective patent, trademark, copyright and tradesecret protection may not be available in some countries in which we provide,or may anticipate providing, our products. Furthermore, our competitors mayindependently develop similar technologies that limit the value of ourintellectual property. If competitors were able to use our technology, ourcompetitive edge would be reduced or eliminated.

 

**We maybecome involved in litigation regarding intellectual property rights that couldbe costly, could cause us to lose significant rights, and divert our managementtime and attention.**

 

In the future, we maybecome a party to litigation to protect our intellectual property or to respondto allegations that we infringe others’ intellectual property. Third partiesmay inquire about our interest in licensing their intellectual property, orthey may more generally identify intellectual property that could be the basisof a future infringement claim. If a party accuses us of infringing itsproprietary rights, we would have to defend our company and possibly ourcustomers against the alleged infringement. These lawsuits, regardless of theirsuccess, would likely be time-consuming and expensive to resolve and woulddivert management time and attention.  Anypotential intellectual property litigation could also force us to:

 

•                  stopor delay selling, incorporating or using products that use the challengedintellectual property;

 

•                  obtaina license to sell or use the relevant technology, which license might not beavailable on reasonable terms or at all; and

 

•                  redesignthe products and services that use that technology.

 

If we are forced to take any of these actions, it mayhave a material adverse effect on our business, financial condition and resultsof operations.

 

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**If weare unable to develop and manage our international operations after the merger,our business could be harmed.**

 

We generate most of our revenues from business conductedinternationally, so it is subject to special risks. We expect that we willcontinue to expand our international operations in the future.  The successful management and expansion ofour international operations, including the development of sales and supportchannels, will require significant human and financial resources. Some of therisks that we face as a result of our international operations include:

 

•                  foreigncustomers often take longer to pay for services;

 

•                  businessactivity is often slow in some region or another, negatively impacting overallresults;

 

•                  recruitmentand retention of experienced senior management and staff for internationaloperations is difficult and costly;

 

•                  compliancewith a variety of foreign laws, tariffs and trade barriers is costly and inefficientfor a small company;

 

•                  compliancewith telecommunications and other Internet-related regulations in foreignjurisdictions is expensive and difficult; and

 

•                  generalgeopolitical risks, such as political and economic instability and changes indiplomatic and trade relationships, can have a significant impact on ourbusiness.

 

Any of these factors could harm our existinginternational operations and business or impair our ability to continueexpanding into international markets.

 

**If wefail to attract and retain qualified sales personnel after the merger, ourbusiness might be harmed.**

 

Our success after themerger will depend in large part upon our ability to identify, attract andretain qualified sales individuals. Competition for these individuals is often intense, and we may not beable to hire the type and number of sales personnel it needs. Moreover, evenafter we hire salespersons, they require extensive training in our combinedproducts and services. This training typically covers six to eight weeks offormal in-class and on-the-job instruction. If we are unable to continue to retain our current employees and trainnew sales personnel as rapidly as necessary, we may not be able to increasemarket awareness and sales of our services, which may prevent us fromgenerating revenue and may negatively impact our ability to maintain customerrelationships.

 

**Since we have no assurance thatcustomers will continue to use our services after the merger or that thecompany’s customer base will expand, we will have little ability to predictrevenue growth or operating results.**

 

Our customers aregenerally free to use competing products and services, so we could facesignificant customer losses, at unpredictable times.  We had four customers in 2002 that each accounted for more thanten percent of our stand-alone revenues. In the first half of 2003, Axcelerant had two customers that eachaccounted for more than ten percent of its stand-alone revenues.  Losing any of these customers would mean asignificant revenue shortfall for us on a combined basis after the merger.  These factors make it difficult toanticipate the level of our future revenues from existing customers. Inaddition, our success after the merger depends on our ability to expand ourcustomer base. If we are unable to expand our customer base after the mergerand to increase our average revenues per customer, our business success will beless likely.

 

**Terroristacts and acts of war may seriously harm our business and revenue, costs andexpenses and financial condition.**

 

Terrorist acts or acts ofwar, including military actions in Iraq and other parts of the Middle East andthe geo-political uncertainties in other continents are having an adverseeffect on the U.S. economy and could possibly induce or accelerate the adventof a more severe economic recession. The U.S. government’s political, socialand economic policies and policy changes as a result of these circumstancescould have consequences that we cannot predict, including causing further weaknessesin the economy. In addition, as a multi-national company with headquarters andsignificant operations located in the United States, we may be impacted byactions against the United States. We will be predominantly uninsured forlosses and interruptions caused by terrorist acts and acts of war. Thus, thelong-term impact of these events on our business is uncertain. As a result, ouroperating results and financial condition could be materially and adverselyaffected.

 

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**We depend on our reseller customers to marketInternet-based communications services to their end users, so if our resellercustomers fail to market their services effectively, our revenues may bereduced.**

 

Our business depends in part on the efforts and success of our Internetservice provider and telecommunications service customers in marketingInternet-based communications services to their end users. We have littleability to promote our services, or to promote demand for our resellercustomers’ services generally.  The useof the Internet as a medium for communications services remains unproven.  If our reseller customers fail to markettheir Internet-based communications services effectively, our revenues will bereduced. Similarly, if the market for Internet-based communications servicesfails to grow, or expands more slowly than anticipated, our revenues will belower than expected. The Internet-based services we provide are relatively newand have not achieved widespread market acceptance. Network service providersand communication solutions providers may be reluctant to promote or rely uponour services until they gain greater commercial acceptance, which may neveroccur.

 

**The unpredictability of our quarterly resultsmay cause the trading price of our common stock to decline.**

 

Our quarterly revenues and operating results have varied in the pastand are likely to fluctuate unpredictably in the future for many reasons beyondour control. Any of these factors could cause our stock price to decline. Theprimary factors that affect revenues and operating results, in addition to thefactors discussed elsewhere in this section, include the following:

 

•                                          thevolume of transaction-based revenues;

 

•                                          thetiming of deployment of services by our customers;

 

•                                          competitivepricing pressure;

 

•                                          changesin global travel patterns due to past and potential future terrorist activitiesin the U.S. and the military responses to them in the Middle East, SouthernAsia and elsewhere;

 

•                                          themix of services used by our customers’ end users;

 

•                                          difficultycollecting accounts receivable, particularly from customers based outside theU.S.; and

 

•                                          regulation,domestically and internationally.

 

Our operating expenses are largely determined based on our expectationsabout revenues.  A high percentage ofour expenses are fixed in the short term. As a result, lower than anticipated revenues for any reason could causesubstantial operating losses.

 

**Our customers require a high degree ofreliability in the delivery of our services, and if we cannot meet theirexpectations for any reason, demand for our products and services will suffer.**

 

Our success depends on our ability to assure generally error-freeclearinghouse services, uninterrupted operation of our network and softwareinfrastructure, and a satisfactory experience for our customers’ end users. Inthe past, we have experienced problems due to our inability to detect systemmalfunctions and due to errors in collecting or processing account usage andsettlement data. Due to the high level of performance required for criticalcommunications traffic, any failure to deliver a satisfactory experience to endusers, whether or not caused by our own failures, and any failure to provideaccurate settlement data in connection with acting as a clearinghouse, couldreduce demand for our products and services.

 

**Because much of our business is conductedinternationally, we encounter special difficulties, which may impede ourefforts to remain profitable and harm the trading price of our common stock.**

 

We generate most of our revenues from business conductedinternationally, so we are subject to special risks. It is costly to maintaininternational facilities and operations, promote our brand internationally anddevelop localized systems and support centers. In some regions revenues may notoffset the expense of maintaining operations there. Some of the risks that weface as a result of our international operations include:

 

•                                          foreigncustomers often take longer to pay for services;

 

•                                          businessactivity is often slow in some region or another, negatively impacting overallresults;

 

•                                          foreigncurrency exchange rates fluctuate and can impact our results;

 

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•                                          recruitmentand retention of experienced senior management and staff for our internationaloperations is costly;

 

•                                          compliancewith a variety of foreign laws, tariffs and trade barriers is costly andinefficient for a small company such as ours;

 

•                                          compliancewith telecommunications and other Internet-related regulations in foreignjurisdictions is expensive and difficult; and

 

•                                          generalgeopolitical risks, such as political and economic instability and changes indiplomatic and trade relationships, can have a significant impact on ourbusiness.

 

**If SARS re-emerges, business travelers couldrestrict their travel to and from Asia, which could harm our revenues.**

 

Severe Acute Respiratory Syndrome, which is generally known as SARS, isa highly communicable disease that emerged in Asia earlier this year.  Concerns about the spread of SARS led toquarantines and travel restrictions being imposed on individuals with suspectedsymptoms in some countries, and some companies restricted or banned nonessentialtravel to and from certain parts of Asia. If business travel to Asia or elsewhere were to decline for a sustainedperiod of time due to the re-emergence of SARS-related issues or other healthconcerns, the level of demand for our services is also likely to decline whichcould result in reduced revenues.

 

**The economic downturn could adversely affectour revenue, gross margins and expenses.**

 

Our revenue and gross margins depend in part on the overall demand forinformation technology products and services, particularly in the product andservice segments in which we compete. Softening demand for our products andservices caused by the ongoing economic downturn has resulted in decreasedrevenue growth rates, and may in the future result in decreased revenue,earnings or growth rates and problems with our ability to realize customerreceivables. The global economy has weakened and market conditions continue tobe challenging. As a result, companies are delaying or reducing expenditures,including those for information technology. In addition, if our customersexperience financial difficulties, we could suffer losses associated with theoutstanding portion of accounts receivable. The global economic downturn hascontributed to reported declines in our revenue growth during fiscal 2002 andin the nine months of 2003. Further delays or reductions in informationtechnology spending could have a material adverse effect on demand for ourproducts and services and consequently our results of operations, prospects andstock price.

 

**The concentration of our capital stockownership with insiders will likely limit the ability of other stockholders toinfluence corporate matters.**

 

As of October 31, 2003, our executive officers and directors, andtheir related entities, owned a majority of our outstanding common stock andcommon stock equivalents, including the effect of a voting agreement thatcovers elections of directors, to which some of our stockholders are parties.As a result, these stockholders will be able to exercise control over allmatters requiring approval of our stockholders, including the election ofdirectors and approval of significant corporate transactions.  This concentration of ownership might alsohave the effect of delaying or preventing a change in control of the Companythat might be viewed as beneficial by other stockholders.

 

The interests of some of these stockholders may not be aligned with theinterests of the common stockholders. The holders of our Series A Preferred Stock have special rights,preferences and privileges, including liquidation preferences that are seniorto those of the holders of our common stock in the event of a bankruptcy orliquidation.

 

**Provisions in our charter documents mightdeter a company from acquiring us, which could inhibit your ability to receivean acquisition premium for your shares.**

 

Provisions of our certificate of incorporation, bylaws and Delaware lawmake it difficult for a third party to acquire us, despite the possible benefitto our stockholders, and this may potentially lower the price of our commonstock. These provisions of our certificate of incorporation and bylaws:

 

•                                          authorizethe board to issue preferred stock without stockholder approval;

 

•                                          prohibitcumulative voting in the election of directors;

 

•                                          limitthe persons who may call special meetings of stockholders; and

 

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•                                          establishadvance notice requirements for nominations for the election of the board ofdirectors or for proposing matters that can be acted on by stockholders at stockholdermeetings.

 

In addition, we have elected to remain subject to the anti-takeoverprovisions of Delaware law. These factors may discourage takeover attempts.

 

**Security concerns may deter the use of theInternet for Internet-based communications, which would reduce demand for ourproducts and services.**

 

The secure transmission of confidential information over publicnetworks is a significant barrier to widespread adoption of electronic commerceand communications. The Internet is a public network and information is sentover this network from many sources. Advances in computer capabilities, newdiscoveries in the field of code breaking or other developments could result incompromised security on our network or the networks of others. Security and authenticationconcerns with respect to the transmission over the Internet of confidentialinformation, such as corporate access passwords, and the ability ofunauthorized computer users, so-called hackers, to penetrate online securitysystems may reduce the demand for our services. If any well-publicizedcompromises of confidential information were to occur, it could reduce demandfor Internet-based communications and our products and services.

 

**Government regulations and legaluncertainties regarding the Internet could harm our business.**

 

We are not currently subject to federal or state regulations imposed ontelecommunications service providers, and we do not believe that we are subjectto local regulation or laws or regulations applicable to access to or commerceon the Internet, other than regulations applicable to businesses generally.

 

*United States.*  We believe that, under United States law,the Internet-related services that we provide constitute information servicesor other non-telecommunications services, and do not constitute regulatedtelecommunications services. Therefore our services are not currently subjectto regulation by the Federal Communications Commission, and, by operation offederal preemption law, are also exempt from regulation by state agenciescharged with regulating telecommunications carriers. We do not know the extentto which our Internet-related services may be subject to regulation by theFederal Communications Commission or state telecommunications authorities inthe future.

 

The Federal Communications Commission has initiated several proceedingsthat may change the regulatory and legal framework for the provision ofbroadband and Internet services. Recently, the Federal Communications Commission determined that cablemodem services constitute unregulated information services.  This decision is currently under appeal inthe Court of Appeals for the Ninth Circuit. In addition, the industry and policy makers continue to debate theobligation of cable operators to provide ISPs non-discriminatory access tocable broadband platforms.  The FederalCommunications Commission also has recently issued new rules in its TriennialReview proceeding relieving incumbent local exchange carriers of certain regulatoryobligations in the provision of broadband services, including requirements thatthey provide certain types of network access services on an unbundled anddiscounted basis to competitors. The Federal Communications Commission is alsoconsidering whether incumbent local exchange carriers should be treated asnon-dominant in the provision of broadband services as well as whetherfacilities-based broadband Internet access providers should be required tocontribute to the universal service fund, which is used to subsidize theuniversal availability of telecommunications services. If adopted, theseregulatory measures may lessen some of the regulatory burdens on existingproviders of broadband services, particularly incumbent local exchangecarriers, but may increase barriers to entry for new providers and may resultin increased costs to customers of such services. We cannot be certain of theimpact that any of these measures would have on our business.

 

The regulatory status and treatment of various configurations of voiceover Internet protocol (“VoIP”) service is also under consideration by theFederal Communications Commission as well as certain state regulatorycommissions.  We cannot determine theimpact that any changes in the regulatory treatment of VoIP may have on ourbusiness.

 

Federal rules and regulations governing inter-carrier compensation arealso currently under review at the Federal Communications Commission and theU.S. Court of Appeals for the District of Columbia Circuit. To the extent thatour U.S. customers are adversely affected by the combination of increased costsof Internet access and transport services and decreased revenues frominter-carrier compensation, we cannot be certain that our business will not beadversely affected as well.

 

Congress has adopted legislation addressing certain other aspects ofthe Internet, including intellectual property protection, child privacyprotection, Internet spamming, privacy, taxes, Internet fraud, security andbroadband deployment in rural areas. Various states also have adopted and areconsidering Internet-related legislation. Increased U.S. restriction of the

 

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Internet or Internet-related services may slow our growth, particularlyif other governments follow suit, which may negatively impact the cost of doingbusiness over the Internet and materially adversely affect our business,prospects, results of operations and financial condition.

 

*International.*  Foreign regulatory frameworks affecting theInternet vary from country to country. However, as is the case in the U.S.,most countries currently do not impose telecommunications licensing or otherregulatory requirements on the information and other non-telecommunicationsservices that we provide. Increased regulation of the Internet andInternet-related services, or the imposition of other restrictions, couldmaterially adversely affect our business, prospects, operating results andfinancial condition.

 

In particular, the European Union has enacted several directivesconcerning the Internet and Internet-related activities. The European Unionhas, for example, adopted a directive that requires Member States to imposerestrictions on the collection and processing of personal data and to preventtransmission outside of Europe of personal data, which can include customer andbilling information as well as human resource data, except to countries thatprovide adequate protection of such data. In response to the European Uniondirective, the U.S. negotiated with the European Union the establishment ofcertain “Safe Harbor” principles, effective as of November 2000, whichprovide U.S. companies choosing to adhere to them a presumption of adequateprotection of privacy. Companies complying with the Safe Harbor principles mustprovide notice to users of personal data collection, provide choices to usersregarding certain uses, including the transfer of information to third parties,guarantee the security and integrity of personal data collected, provide userswith the ability to access, correct and delete personal information that isbeing stored, and provide for user enforcement and redress in the event ofviolation of the principles. These principles are more restrictive than otherapplicable U.S. laws and may impose additional cost on companies that decide tocomply. Currently, the Safe Harbor principles are voluntary and are intended tobe implemented through self-regulation and industry self-certification. In thefuture, however, the requirements embodied in the principles may become mandatory.To date, we have not certified that we will operate under the Safe Harborprinciples.

 

Although we do not engage in the collection of data for purposes otherthan routing our services and billing for our services, the directive is broadand the European Union privacy standards are stringent. Accordingly, thepotential effect on us is uncertain. In conducting our businessinternationally, we must comply with privacy laws directly applicable to ouractivities in Europe and similar privacy and data protection rules in othercountries in which we do business. Any such requirements may adversely affectour ability to collect demographic and personal information from users, whichcould have an adverse effect on our ability to provide targeted advertisements.Although we will endeavor to meet the requirements of the European Uniondirective and any U.S. regulations, we cannot guarantee that adequacy of ourcompliance will not be subject to challenge.

 

As our services are made available in foreign countries, and as wefacilitate sales by our customers and affiliates to end users located inforeign countries, these countries may claim that we or our customers arerequired to qualify to do business in the particular foreign country, that weare otherwise subject to regulation, including requirements to obtainauthorization, or that we or our customers are prohibited in all cases fromconducting business as currently conducted in that foreign country. Our failureto qualify as a foreign corporation in a jurisdiction in which we are requiredto do so or to comply with foreign laws and regulations could subject us totaxes and penalties or preclude us from, or limit our ability in, enforcingcontracts in these jurisdictions, which could materially adversely affect ourbusiness, prospects, operating results and financial condition.

 

Our customers and affiliates may also currently be, or in the futuremay become, subject to requirements to qualify to do business in a particularforeign country, to comply with regulations, including requirements to obtainauthorization, or to cease from conducting their business as conducted in thatforeign country. We cannot be certain that our customers and affiliates arecurrently in compliance with any of these requirements, will be able to complywith any of these requirements, or will continue in compliance with any ofthese requirements. The failure of our customers and affiliates to comply withthese requirements could materially adversely affect our business, prospects,operating results and financial condition.

 

**Compliance with new rules and regulationsconcerning corporate governance may be costly and could harm our business.**

 

The Sarbanes-Oxley Act, which was signed into law in July 2002,mandates, among other things, that companies adopt new corporate governancemeasures and imposes comprehensive reporting and disclosure requirements, setsstricter independence and financial expertise standards for audit committeemembers and imposes increased civil and criminal penalties for companies, theirchief executive officers and chief financial officers and directors forsecurities law violations. In addition, The Nasdaq National Stock Market, onwhich our common stock is listed, is also considering the adoption ofadditional comprehensive rules and regulations relating to corporategovernance. These laws, rules and regulations will increase the scope,complexity and cost of our corporate governance, reporting and disclosurepractices, which could harm our results of operations and divert management’sattention from business operations. We also expect these developments to

 

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make it more difficult and more expensive for us to obtain director andofficer liability insurance, and we may be required to accept reduced coverageor incur substantially higher costs to obtain coverage.

 

Further, our board members, Chief Executive Officer and Chief FinancialOfficer could face an increased risk of personal liability in connection withthe performance of their duties. As a result, we may have difficultlyattracting and retaining qualified board members and executive officers, whichwould adversely affect our business.

 

**The current regulatory environment affectingaccounting principles generally accepted in the United States of America isuncertain and volatile, and significant changes in current principles couldaffect our financial statements going forward.**

 

Recent actions and public comments from the Securities and ExchangeCommission have focused on the integrity of financial reporting generally. Inaddition, the FASB and other regulatory accounting agencies have recentlyintroduced several new or proposed accounting standards, or are developing newproposed standards, such as accounting for guarantees, restructuring chargesand stock options, some of which would represent a significant change fromcurrent industry practices. While we believe that our financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States of America, we cannot predict the impact of the adoption ofany such proposals on our financial statements going forward.

 

## **ITEM 3.  QUALITATIVE AND QUANTITATIVE DISCLOSURESABOUT MARKET RISK**

 

*Foreign Currency Risk. *We have limitedexposure to financial market risks, including changes in foreign currencyexchange rates and interest rates. Although we have foreign operations inEurope and Asia, to date our exposure to foreign currency fluctuations has notbeen significant. Therefore, no accompanying table has been provided.

 

*Interest Rate Risk. *Our exposure to interest rate riskrelates primarily to our investment portfolio and debt obligations. Interestrate risk occurs when we cannot hold a purchased investment to its maturity.The weighted-average maturity of our investment portfolio, when taking intoaccount the reset feature of floating rate municipal bonds, is limited to90 days. We intend to hold our securities until maturity and, therefore,do not expect to recognize an adverse impact on income or cash flows, althoughthere can be no assurance of this. We have established policies and businesspractices regarding our investment portfolio to preserve principal whileobtaining reasonable rates of return without significantly increasing risk. Weplace investments with high credit quality issuers according to our investmentpolicy. We do not use derivative financial instruments in our investmentportfolio. All investments are carried at fair market value atSeptember 30, 2003. Due to the short-term nature of our investments andthe immaterial amount of our debt obligation, we believe that there is nomaterial exposure to interest fluctuation. Therefore, no accompanying table hasbeen provided.

 

## **ITEM 4. CONTROLS AND PROCEDURES**

 

***Evaluation ofDisclosure Controls and Procedures***.  Regulations under the Securities Exchange Act of1934 require public companies to maintain “disclosure controls and procedures,”which are defined to mean a company’s controls and other procedures that aredesigned to ensure that information required to be disclosed in the reportsthat it files or submits under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in theCommission’s rules and forms. Our Chief Executive Officer and our ChiefFinancial Officer, based on their evaluation of the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport, concluded that our disclosure controls and procedures were effectivefor this purpose.

 

*Changes in Internal Controls.*  During the period covered by this report,there has been no change in the Company’s internal control over financialreporting that has materially affected or is reasonably likely to materially affectthe Company’s internal control over financial reporting.

 

# **PART II. OTHERINFORMATION**

 

## **ITEM 1. LEGAL PROCEEDINGS**

 

We are subjectto various legal proceedings and claims arising in the ordinary course ofbusiness. Our management does not expect that the results in any of these legalproceedings will have a material adverse effect on our financial condition,results of operations or cash flows.

 

In July and August 2001, we and certain of our officers werenamed as defendants in five purported securities class action lawsuits filed inthe United States District Court, Southern District of New York, captioned asIn re GRIC Communications, Inc. Initial Public Offering Securities Litigation,No. 01 Civ 6771 (SAS), and consolidated with more than three hundredsubstantially identical proceedings as In re Initial Public Offering SecuritiesLitigation, Master File No. 21 MC

 

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92 (SAS).  The ConsolidatedAmended Class Action Complaint for Violation of the Federal Securities Laws(“Consolidated Complaint”) was filed on or about April 19, 2002, andalleges claims against certain of our officers and against CIBC World MarketsCorp., Prudential Securities Incorporated, DB Alex. Brown, as successor toDeutsche Bank, and U.S. Bancorp Piper Jaffray Inc., underwriters of ourDecember 14, 1999 initial public offering (“underwriter defendants”),under Sections 11 and 15 of the Securities Act of 1933, as amended, and underSection 10(b) and 20(a) of the Securities Exchange Act of 1934, asamended.

 

Citing several press articles, the Consolidated Complaint alleges thatthe underwriter defendants used improper methods in allocating shares ininitial public offerings, and claim the underwriter defendants entered intoimproper commission agreements regarding aftermarket trading in our commonstock purportedly issued pursuant to the registration statement for the initialpublic offering. The Consolidated Complaint also alleges market manipulationclaims against the underwriter defendants based on the activities of theirrespective analysts, who were allegedly compromised by conflicts of interest.The plaintiffs in the Consolidated Complaint seek damages as measured underSection 11 and Section 10(b) of the Securities Act of 1933, pre-judgmentand post-judgment interest, and reasonable attorneys’ and expert witnesses’fees and other costs; no specific amount is claimed in the plaintiffs’ prayerin the Consolidated Complaint. By Order of the Court, no responsive pleading isyet due, although motions to dismiss on global issues affecting all of theissuers have been filed.

 

In October 2002, certain of our officers and directors who hadbeen named as defendants in the In re Initial Public Offering SecuritiesLitigation were dismissed without prejudice upon order of the presiding judge.In February 2003, the presiding judge dismissed the Section 10(b)claims against us and our named officers and directors with prejudice.

 

For severalmonths, we participated in settlement negotiations with a committee of Issuers’litigation counsel, plaintiffs’ executive committee and representatives ofvarious insurance companies (the “Insurers”) regarding the remainingSection 11 claim against us.  OurInsurers were actively involved in the settlement negotiations, and stronglysupported a settlement proposal presented to us for consideration in earlyJune 2003.  The settlement proposedby the plaintiffs would be paid for by the Insurers and would dispose of all remainingclaims against us.

 

After careful consideration, we decided to approve the settlementproposal during July 2003. Although we believe that plaintiffs’ claims are without merit we havedecided to accept the settlement proposal (which does not admit wrongdoing) toavoid the cost and distraction of continued litigation.  Because the settlement will be fundedentirely by our Insurers, we do not believe that the settlement will have anyeffect on our financial condition, results or operations or cash flows.

 

The settlement will be presented to the Court for approval in thecoming months.  There can be noguarantee that the settlement will be judicially approved.

 

## **ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS**

 

Not applicable.

 

## **ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**

 

Not applicable.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Not applicable.

 

## **ITEM 5. OTHER INFORMATION**

 

Not applicable.

 

## **ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)                Exhibits

 
| **Exhibit** |   |                                                                     |   | **Incorporated  by Reference** |   | **Filed or  Furnished** |
|-------------|--------|--------------------------------------------------------------------------|--------|--------------------------------|--------|-------------------------|
| **Number**  |   | **Exhibit  Description**                                                 |   | **Form**                       |   | **File No.**            |   | **Exhibit** |   | **Filing  Date** |   | **Herewith** |
|        |   |                                                                     |   |                           |   |                    |   |   |   |   |   |   |
| 31.01       |   | Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of |   |                           |   |                    |   |   |   |   |   | X |

 

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|   |   | 2002 of the Registrant’s Chief Executive Officer, dated  November 14, 2003.                                                                          |   |   |   |   |   |   |   |   |   |   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| 31.02  |   | Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 of the Registrant’s Chief Financial Officer, dated November 14,  2003. |   |   |   |   |   |   |   |   |   | X      |
| 32.01* |   | Certification pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002 of the Registrant’s Chief Executive Officer, dated November 14,  2003. |   |   |   |   |   |   |   |   |   | X*     |
| 32.02* |   | Certification pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002 of the Registrant’s Chief Financial Officer, dated November 14,  2003. |   |   |   |   |   |   |   |   |   | X*     |

 

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*                                         Thesecertifications accompany GRIC’s Quarterly Report on Form 10-Q for the quarterlyperiod ended September 30, 2003. These certifications are not deemed filed with the Securities andExchange Commission and are not to be incorporated by reference in any filingof GRIC under the Securities Act of 1933 or the Securities Exchange Act of1934, whether made before or after the date hereof and irrespective of anygeneral incorporation language in any filings.

 

(b)**Reports on Form 8-K**

 
| **Date Filed or  Furnished** |   | **Item(s)** |   | **Description**                                                                                                                                                                                                                 |
|------------------------------|--------|-------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 7/28/03                      |   | 5,12        |   | In  July 2003, we filed a Form 8-K furnishing information related to a press  release announcing our financial results for the quarter ended June 30,  2003 and announcing the naming of our Chief Executive Officer. |
|                         |   |        |   |                                                                                                                                                                                                                            |
| 8/13/03                      |   | 5           |   | In  August 2003, we filed a Form 8-K announcing that we had entered into a  definitive agreement to acquire Axcelerant, Inc.                                                                                               |
|                         |   |        |   |                                                                                                                                                                                                                            |
| 9/22/03                      |   | 5           |   | In  September 2003, we filed a form 8-K announcing the resignation of two  members of the Board of Directors.                                                                                                              |

 

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## **SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized, on November 14, 2003.

 
|   | GRIC  COMMUNICATIONS, INC.                            |
|--------|------------------------------------------------------------|
|   |                                                       |
|   |                                                       |
|   | **/s/ KIM S. SILVERMAN**                                   |
|   | Kim S. Silverman                                           |
|   | Vice President and Chief Financial Officer                 |
|   | (principal financial officer and  duly authorized officer) |

 

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