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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission File Number: 0-21683
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GRAPHON CORPORATION
(Exact name of Registrant as specified in its charter)
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Delaware 13-3899021
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
400 Cochrane Circle
Morgan Hill, California 95037
(Address of principal executive offices)
Registrant's telephone number: (408) 201-7100
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of November 6, 2000 there were issued and outstanding 14,734,234 shares
of the Registrant's Common Stock, par value $0.0001.
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRAPHON CORPORATION
BALANCE SHEETS
September 30, December 31,
2000 1999
ASSETS (Unaudited)
- ------ ------------ ------------
Current Assets:
Cash and cash equivalents ........................ $ 6,849,900 $ 8,481,500
Available for sale securities .................... 7,906,500 2,027,600
Accounts receivable, net of allowance for
doubtful accounts of $100,000 and $25,000 ...... 2,518,500 1,670,600
Prepaid expenses and other assets ................ 486,600 364,300
------------ ------------
Total Current Assets ........................... 17,761,500 12,544,000
------------ ------------
Property and Equipment, net ......................... 925,800 537,000
Purchased Technology, net ........................... 3,300,800 1,504,800
Capitalized Software, net ........................... 404,900 221,800
Patent, net ......................................... 381,700 400,000
Long Term Investment - Related Party ................ 1,334,400 --
Other Assets ........................................ 230,200 16,700
------------ ------------
TOTAL ASSETS ................................... $ 24,339,300 $ 15,224,300
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................. $ 385,300 $ 259,700
Accrued expenses ................................. 1,180,700 464,000
Note Payable ..................................... 156,200 --
Deferred revenue ................................. 334,400 119,000
------------ ------------
Total Current Liabilities ...................... 2,056,600 842,700
------------ ------------
Commitments and Contingencies (note 5)
Stockholders' Equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $0.0001 par value, 45,000,000
shares authorized, 14,658,870 and 12,342,322
shares issued and outstanding .................. 1,500 1,200
Additional paid in capital ....................... 38,289,700 25,413,500
Deferred Compensation ............................ (1,018,800) (1,472,100)
Accumulated other comprehensive income ........... 100 (4,400)
Accumulated deficit .............................. (14,989,800) (9,556,600)
------------ ------------
Total Stockholders' Equity ..................... 22,282,700 14,381,600
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $ 24,339,300 $ 15,224,300
============ ============
See accompanying notes to financial statements.
GRAPHON CORPORATION
STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------- --------- --------- ---------
Revenues $2,382,500 $502,600 $4,226,700 $1,849,500
Revenues - related party 350,000 600,000 2,150,000 600,000
--------- --------- --------- ---------
Total Revenues 2,732,500 1,102,600 6,376,700 2,449,500
--------- --------- --------- ---------
Cost of revenues 255,000 815,300 604,600 2,576,200
Cost of revenues - related party 21,900 58,300 95,800 58,300
--------- --------- --------- ---------
Total Cost of Revenues 276,900 873,600 700,400 2,634,500
--------- --------- --------- ---------
Gross Profit (Loss) 2,455,600 229,000 5,676,300 (185,000)
--------- --------- --------- ---------
Operating Expenses:
Selling and marketing 1,388,100 783,800 4,169,600 2,359,200
General and administrative 1,150,600 559,200 3,022,400 1,381,500
Research and development 1,195,600 517,000 2,658,100 1,771,800
--------- --------- --------- ---------
Total Operating Expenses 3,734,300 1,860,000 9,850,100 5,512,500
--------- --------- --------- ---------
Loss From Operations (1,278,700) (1,631,000) (4,173,800) (5,697,500)
--------- --------- --------- ---------
Other Income (Expense):
Interest & Other Income 255,400 49,900 907,000 76,900
Interest & Other Expense - (1,700) - (9,100)
Loss on Long Term Investment-
Related Party (1,012,800) - (2,165,600) -
--------- --------- --------- ---------
Total Other Income (Expense) (757,400) 48,200 (1,258,600) 67,800
--------- --------- --------- ---------
Loss Before Provision for Income
Taxes (2,036,100) (1,582,800) (5,432,400) (5,629,700)
--------- --------- --------- ---------
Provision for Income Taxes (17,000) - 800 800
--------- --------- --------- ---------
Net Loss $(2,019,100) $(1,582,800) $(5,433,200) $(5,630,500)
========= ========= ========= =========
Basic and Diluted Loss
per Common Share $(0.14) $(0.15) $(0.38) $(0.59)
========= ========= ========= =========
Weighted Average Common
Shares Outstanding 14,651,037 10,712,629 14,394,263 9,540,148
========== ========== ========== =========
See accompanying notes to financial statements.
GRAPHON CORPORATION
STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
2000 1999
(Unaudited) (Unaudited)
----------- -----------
Cash Flows From Operating Activities:
Net loss $(5,433,200) $(5,630,500)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 857,100 2,473,900
Loss on Disposal of Fixed Assets 12,900 -
Amortization of deferred compensation 1,081,600 125,200
Provision for doubtful accounts 75,000 -
Loss on Long Term Investment - Related Party 2,165,600 -
Changes in operating assets and liabilities:
Accounts receivable (922,900) (758,100)
Prepaid expenses and other assets (335,800) (522,000)
Accounts payable 125,600 266,300
Accrued expenses 716,700 (4,400)
Deferred revenue 215,400 (37,200)
---------- ----------
Net Cash Used In Operating Activities (1,442,000) (4,086,800)
---------- ----------
Cash Flows From Investing Activities:
Purchase of available-for-sale securities (6,411,100) (1,000,600)
Proceeds from sale of available-for-sale securities 537,400 1,900
Capitalization of software development costs (343,400) -
Capital expenditures (606,600) (412,100)
Purchase of technology (2,270,000) -
Investment in Related Party (3,500,000) -
---------- ----------
Net Cash Used In Investing Activities (12,593,700) (1,410,800)
---------- ----------
Cash Flows From Financing Activities:
Repayment of convertible note payable - (475,000)
Proceeds from note payable 156,200 -
Net proceeds from issuance of common stock 12,248,200 6,975,100
Purchase and retirement of common stock - (5,700)
---------- ----------
Net Cash Provided By Financing Activities 12,404,400 6,494,400
---------- ----------
Effect of exchange rate fluctuations on cash and
Cash equivalents (300) -
Net Increase (Decrease) in Cash and Cash Equivalents (1,631,600) 996,800
---------- ----------
Cash and Cash Equivalents, beginning of period 8,481,500 1,798,400
---------- ----------
Cash and Cash Equivalents, end of period 6,849,900 2,795,200
========== ==========
Supplemental Disclosure of Cash Flow Information:
We paid interest expense of $2,400 and $7,800 and income tax of $800 and $800
during the nine-month periods ended September 30, 2000 and September 30, 1999,
respectively.
See accompanying notes to financial statements.
GRAPHON CORPORATION
STATEMENT OF SHAREHOLDER'S EQUITY
Additional
Common Stock Paid Deferred Comprehensive Accumulated
Shares Amount in Capital Compensation Loss Deficit Total
---------- ------ ----------- ----------- ------- ----------- -----------
Balances,
December 31, 1999 12,342,322 $1,200 $25,413,500 $(1,472,100) $(4,400) $(9,556,600) $14,381,600
- ---------------- ---------- ------ ----------- ----------- ------- ----------- -----------
The following information is unaudited:
Issuance of common
stock due to the
exercise of warrants
and underwriter units,
net of costs of $167,600 2,273,156 300 12,171,100 12,171,400
Deferred Compensation
Related to stock options 313,600 (313,600)
Amortization of deferred
compensation 335,500 335,500
Change in market value of
Available-for-sale
securities (20,500) (20,500)
Net loss (1,174,300) (1,174,300)
- ------------------------ ---------- ------ ----------- ----------- ------- ----------- -----------
Balances, March 31, 2000 14,615,478 1,500 37,898,200 (1,450,200) (24,900) (10,730,900) 25,888,200
- ------------------------ ---------- ------ ----------- ----------- ------- ----------- -----------
Issuance of common
stock due to the
exercise of options
and underwriter units,
net of costs of $3,700 29,928 59,500 59,500
Deferred Compensation
Related to stock options
Amortization of deferred
compensation 349,700 349,700
Change in market value of
Available-for-sale
securities 3,200 3,200
Net loss (2,239,800) (2,239,800)
- ------------------------ ---------- ------ ----------- ----------- ------- ----------- -----------
Balances, June 30, 2000 14,645,406 $1,500 $37,957,700 $(1,100,500) $(21,700) $(12,970,700) $23,866,300
- ------------------------ ---------- ------ ----------- ----------- ------- ----------- -----------
Issuance of common
stock due to the
exercise of options
and underwriter units,
net of costs of $6,500 13,464 17,300 17,300
Deferred Compensation
Related to stock options 314,700 (314,700)
Amortization of deferred
compensation 396,400 396,400
Change in market value of
Available-for-sale
securities 21,800 21,800
Net loss (2,019,100) (2,019,100)
- ------------------------ ---------- ------ ----------- ----------- ------- ----------- -----------
Balances, Sept. 30, 2000 14,658,870 $1,500 $38,289,700 $(1,018,800) $100 $(14,989,800) $22,282,700
======================== ========== ====== =========== =========== ======= =========== ===========
See accompanying notes to financial statements.
GRAPHON CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. MERGER WITH UNITY FIRST ACQUISITION CORP. AND BASIS OF PRESENTATION
On July 12, 1999, GraphOn Corporation, a California corporation
("GraphOn-CA"), merged with and into Unity First Acquisition Corp., a Delaware
corporation ("Unity"). Unity, as the surviving entity to the merger and the
Registrant, then changed its name to GraphOn Corporation ("GraphOn"), and the
GraphOn-CA management team continued in their existing roles at GraphOn.
Pursuant to the merger, each outstanding share of GraphOn-CA common stock was
exchanged for 0.5576 shares of Unity common stock and each outstanding option
and warrant to purchase one share of GraphOn-CA common stock was exchanged for
one option or warrant, as the case may be, to purchase 0.5576 shares of Unity
common stock. Additionally, GraphOn received $5,425,000 in cash that had been
placed into trust upon Unity's initial public offering in November 1996 and
released from trust upon consummation of the merger. As of July 12, 1999,
GraphOn-CA had outstanding 16,296,559 shares of common stock. As a result of the
merger, the GraphOn-CA shareholders acquired 9,086,961 shares of Unity common
stock, or approximately 82.9% of the then outstanding Unity common stock. The
merger was accounted for as a capital transaction which is equivalent to the
issuance of stock by GraphOn-CA for Unity's net monetary assets of approximately
$5,425,000, accompanied by a recapitalization of GraphOn-CA.
The unaudited historical financial statements of GraphOn included herein have
been prepared in accordance with the instructions for Form 10-Q and, therefore,
do not include all information and footnotes necessary for a complete
presentation of GraphOn results of operations, financial position and cash
flows.
The unaudited financial statements included herein reflect all adjustments
(which include only normal, recurring adjustments), which are, in the opinion of
management, necessary to state fairly the results for the periods presented. The
results for the three and nine months ended September 30, 2000 are not
necessarily indicative of the results expected for the full fiscal year.
Certain amounts in the 1999 financial statements have been reclassified to
conform to the 2000 presentation.
2. EARNINGS PER SHARE
Basic earnings per share are calculated using the weighted average number of
shares outstanding during the period. Dilutive earnings per share is computed on
the basis of the weighted average number of common shares outstanding plus the
dilutive effect of outstanding stock options and warrants using the "treasury
stock" method and are not included since they are antidilutive.
As noted above, in July 1999, GraphOn-CA merged with and into Unity. All
references to share and per-share data for all periods presented have been
adjusted to give effect to the .5576 exchange of GraphOn-CA stock (See Note 1).
3. STOCKHOLDERS' EQUITY
During the three and nine months ended September 30, 2000, a total of 13,283
and 92,428 shares, respectively, of common stock, totaling $17,000 and $188,400,
respectively, were issued to employees pursuant to the exercise by those
employees of stock options granted under the GraphOn 1998 stock option plan.
Additionally, during the three and nine months ended September 30, 2000, we
issued 181 and 2,224,120 shares, respectively, of our common stock in connection
with the exercise of warrants and underwriter's units, resulting in net cash
proceeds of $300 and $12,059,800, respectively.
4. INVESTMENTS IN JOINT VENTURE
Investments in our China Joint Venture are accounted for by using the equity
method, under which our share of earnings (loss) from the joint venture is
reflected as income earned (lost) and dividends are credited against the
investment in the joint venture as received.
5. LITIGATION
In late 1996, pursuant to a non-disclosure agreement, we disclosed aspects of
our proprietary technology on a confidential basis to Insignia Solutions plc,
some of whose assets were later acquired by Citrix Systems, Inc. and Citrix
Systems UK, LTD. When we learned of that acquisition in January 1998, we made
inquiry of Insignia Solutions seeking assurances that there had been no
potential misuse of our confidential information. On November 23, 1998, Citrix
Systems, Inc. instituted litigation in the United States District Court for the
Southern District of Florida seeking a judicial declaration that it had not
misappropriated or infringed upon our proprietary technology or breached the
non-disclosure agreement. We responded by filing a motion to dismiss the action
for lack of jurisdiction. On May 14, 1999, the court granted our motion to
dismiss the case. Citrix Systems, Inc. has appealed the dismissal of its case to
the United States Court of Appeals for the Eleventh Circuit, where the matter
has been argued and is awaiting decision.
On October 4, 1999, Insignia Solutions filed a verified complaint against us,
Citrix Systems, Inc. and Citrix Systems UK, LTD. in the Superior Court of the
State of California, Santa Clara County. Their complaint alleges that we had
attempted to interfere with their sale to Citrix Systems, Inc. and Citrix System
UK, LTD., on February 5, 1998, of assets relating to, among other things, their
NTRIGUE software product line. The complaint alleges that, as a result of such
efforts, they were required by Citrix Systems Inc. and Citrix Systems UK, LTD.
to place $8.75 million in escrow for potential claims by us of proprietary
rights in the assets being sold. The complaint seeks unspecified general and
punitive damages. On December 13, 1999 we filed an answer denying the material
allegations in their complaint, and on May 10, 2000, the court granted our
motion for judgment on the pleadings and dismissed their fifth cause of action
against us for bad faith claim of misappropriation of trade secrets.
On March 14, 2000, we filed a complaint in the Superior Court of Santa Clara
County, State of California, alleging misappropriation, unfair competition, and
breach of contract against Insignia Solutions and alleging misappropriation and
unfair competition against Citrix Systems, Inc. On March 30, 2000, we filed an
amended complaint alleging trade secret misappropriation and unfair competition
against Citrix Systems, Inc. and Citrix Systems UK, LTD. and alleging trade
secret misappropriation, breach of contract, fraud and unfair competition
against Insignia Solutions. The complaint alleges that Insignia Solutions
improperly disclosed our proprietary technology to Citrix Systems, Inc. and
Citrix Systems UK, LTD., thereby, among other things, breaching Insignia
Solutions' covenants not to disclose our trade secrets. The complaint also
alleges that Citrix Systems, Inc. and Citrix Systems UK, LTD. improperly
acquired and incorporated our proprietary technology into their products and
that they knew or should have known that the technology they purchased from
Insignia Solutions was our proprietary technology. The complaint seeks
unspecified compensatory and exemplary damages from Citrix Systems, Inc., Citrix
Systems UK, LTD., and Insignia Solutions.
On September 6, 2000, Insignia Solutions amended its complaint in the
Superior Court of the State of California, Santa Clara County against us, and
omitted its previous claims against Citrix Systems, Inc and Citrix Systems UK,
LTD. Insignia Solutions alleges that we attempted to interfere and did
intentionally interfere with the sales of assets between them and Citrix
Systems, Inc. and Citrix Systems UK, LTD. The amended complaint alleges that, as
a result of such efforts, they were required by Citrix Systems, Inc. and Citrix
Systems UK, LTD. to place $8.75 million in escrow for any potential claims by us
of proprietary rights in the assets being sold. The amended complaint also
alleges that we engaged in unfair competition by resurrecting stale claims of
trade secret misappropriation by them. The amended complaint seeks unspecified
general and punitive damages, as well as restitution and an injunction.
On September 11, 2000, we filed in the Superior Court of the State of
California, Santa Clara County a cross-complaint against Citrix Systems, Inc.
and Citrix Systems UK, LTD. for unfair competition and a declaratory relief for
comparative indemnity from Citrix Systems, Inc. and Citrix Systems UK, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
The following discussion of the financial condition and results of operations
of GraphOn Corporation contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Our actual results and the timing of certain events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including, but not limited to, those set forth
under "Risk Factors" elsewhere in this Quarterly Report and in other documents
we filed with the Securities and Exchange Commission.
OVERVIEW
We develop, market, sell and support server-based software that is designed
to enable a diverse range of desktop computers to access server-based Windows
and UNIX applications from any location, over fast or slow Internet connections.
Our powerful and innovative software is creating an important paradigm shift in
how software is used. Utilizing our server-based architecture, organizations can
instantly provide web-based access to Windows, UNIX, and Linux applications from
anywhere in the world, because our technology allows universal access to
software regardless of the operating system, organizations are now free from
frequent and costly hardware and software updates.
We believe that this provides a significant advantage for our customers.
Independent software vendors (ISVs) can web-enable their applications while
retaining the rich look and feel that their customers expect to see.
Organizations can provide easy access to their own enterprise applications over
the corporate intranet with web browsers. Applications service providers (ASPs)
can serve up applications to their users regardless of display device and data
connection. In the fourth quarter of 1999, we introduced Bridges for Windows,
which expanded our web-enabling solution beyond the UNIX and Linux world to
include the much larger Windows market as well.
RESULTS OF OPERATIONS FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,
2000 VERSUS THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999
REVENUES
Total revenues for the three-month period ended September 30, 2000 increased
by $1,629,900, or 148%, to $2,732,500 from $1,102,600 for the same period in
1999. Revenues for the nine-month period ended September 30, 2000 increased by
$3,927,200, or 160%, to $6,376,700 from $2,449,500 for the same period in 1999.
The increase for the three-month period ended September 30, 2000 was primarily
due to a $1,845,000 increase in licensing fees, which were offset by a
$250,000 decrease in Revenues-Related Party. The increase for the nine-month
period ended September 30, 2000 was primarily due to an increase in
Revenues-Related Party ($1,550,000), and increased licensing fees ($2,307,000).
A substantial portion of the increase in licensing fees for the three months and
nine months ended September 30, 2000 was derived from an increase in product
offerings, such as Bridges for Windows, and the licensing of Bridges for Windows
technology, which became available during 2000. Currently, the licensing fees
for Bridges for Windows and Bridges for Windows technology are primarily derived
from a limited number of customers, which vary from quarter to quarter. All
Revenues-Related Party for the three and nine-month periods ended September 30,
2000 represent licensing fees derived from our China Joint Venture. We derived
no licensing fees from our China Joint Venture during the three and nine-month
periods ended September 30, 1999 since our China Joint Venture did not begin
operations until March 2000. All Revenues-Related Party for the three and
nine-month periods ended September 30, 1999 represent licensing fees derived
from Corel Corporation. We derived no licensing fees from Corel Corporation
during the three and nine-month periods ended September 30, 2000.
COST OF REVENUES
Cost of revenues for the three-month period ended September 30, 2000
decreased by $596,700, or 68%, to $276,900, from $873,600 for the same period in
1999. Cost of revenues for the nine-month period ended September 30, 2000
decreased by $1,934,100, or 73%, to $700,400, from $2,634,500 for the same
period in 1999. The decrease for both the three-month and the nine-month periods
was principally due to decreased amounts of purchased technology amortization
being charged to cost of revenues. Various purchased technologies became fully
depreciated during 1999.
SALES AND MARKETING EXPENSES
Sales and marketing expenses for the three-month period ended September 30,
2000 increased by $604,300, or 77%, to $1,388,100 from $783,800 for the same
period in 1999. Sales and marketing expenses for the nine-month period ended
September 30, 2000 increased by $1,810,400, or 77%, to $4,169,600 from
$2,359,200 for the same period in 1999. Sales and marketing expenses primarily
consist of salaries, sales commissions, travel expenses, trade show related
activities, promotional, and advertising costs. The increase was primarily due
to increases in trade show, promotional and public relations activities as well
as increased commissions and the amortization of non-cash compensation.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three-month period ended
September 30, 2000 increased by $591,400, or 106%, to $1,150,600 from $559,200
for the same period in 1999. General and administrative expenses for the
nine-month period ended September 30, 2000 increased by $1,640,900, or 119%, to
$3,022,400 from $1,381,500 for the same period in 1999. General and
administrative expenses primarily consist of salaries, legal and professional
services, and bad debt expense. In addition, our corporate rent, utilities and
administrative employee benefits are included in general and administrative
expenses. The increases for the three and nine month periods ended September 30,
2000 were primarily due to increases in legal fees in connection with ongoing
litigation, in accounting and SEC filing fess in connection with our listing on
the Nasdaq National Market, and the accrual of various employee expenses
including bonuses and amounts payable under the employee stock purchase plan
adopted at the annual shareholders meeting.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three-month period ended September
30, 2000 increased by $678,600, or 131%, to $1,195,600 from $517,000 for the
same period in 1999. Research and development expenses for the nine-month period
ended September 30, 2000 increased by $886,300, or 50%, to $2,658,100 from
$1,771,800 for the same period in 1999. Research and development expenses
consist primarily of salaries and benefits paid to software engineers, supplies,
payments to contract programmers, rent on facilities, and Internet access
charges. The increase in research and development expenses for the three and
nine-month period ended September 30, 2000 was primarily due to an increase in
allocated rent expense due to the move of our corporate offices, and increased
consulting and contractor fees as we continually strive to enhance our product
line.
INTEREST AND OTHER INCOME
Interest and other income for the three-month period ended September 30, 2000
increased by $205,500, or 412%, to $255,400 from $49,900 for the same period
during 1999. Interest and other income for the nine-month period ended September
30, 2000 increased by $830,100, or 1,079%, to $907,000 from $76,900 for the same
period during 1999. Interest and other income consists primarily of interest
income on excess cash, and interest and dividend income on available-for-sale
securities. The primary reason for the three-month and nine-month increases was
the interest and dividend income earned on substantially higher amounts of
excess cash and available-for-sale securities on-hand during 2000 as compared
with 1999. A one-time relocation assistance payment of $85,000 received from the
City of Campbell, CA in conjunction with our move to Morgan Hill, CA also
contributed to the increase.
LOSS ON LONG TERM INVESTMENTS - RELATED PARTY
Loss on Long-Term Investment - Related Party for the three-month and nine-month
periods ended September 30, 2000 was $1,012,800 and $2,165,600, respectively, as
compared with $0 and $0, respectively for the same periods during 1999. These
losses reflect our decision to reclassify as expense certain technology acquired
by the China Joint Venture based upon our determination that such acquired
technology represents in-process research and development, which should have
been expensed at the date of acquisition. As a consequence, our previously
announced losses for the three-month and nine-month periods ended
September 30, 2000 have been increased by $224,000 ($0.02 per common share) and
$897,200 ($0.06 per common share), respectively and we will restate our
financial statements for each of the three month periods ended March 31, 2000
and June 30, 2000 to reflect increased quarterly losses of $194,500 ($0.01 per
common share) and $478,700 ($0.03 per common share), respectively.
NET LOSS
As a result of the foregoing items, net loss for the three month period ended
September 30, 2000 was $2,019,100, an increase of $436,300 or 28%, from a net
loss of $1,582,800 for the same period during 1999. The net loss for the
nine-month period ended September 30, 2000 was $5,433,200, a decrease of
$197,300, or 4%, from a net loss of $5,630,500 for the same period during
1999.
LIQUIDITY AND CAPITAL RESOURCES
In September 1998, we commenced a private placement of shares of our common
stock and warrants. In January 1999, a convertible note in the amount of
$475,000 was repaid from the net proceeds of the final closing of this private
placement of securities whereby we received additional net proceeds of
$1,708,600 in consideration of 1,095,053 shares of our common stock and warrants
to purchase an additional 219,010 shares of our common stock.
In February 1999, we sold 62,525 shares of our common stock and warrants to
purchase an additional 676 shares of our common stock, for gross proceeds of
$97,200.
On July 12, 1999, we completed a merger with Unity First Acquisition Corp.
pursuant to which each share of our common stock was exchanged for 0.5576 shares
of Unity common stock and each outstanding option and warrant to purchase our
common stock was exchanged for one option or warrant, as the case may be, to
purchase 0.5576 shares of Unity common stock. The transaction was a forward
merger with Unity surviving the merger and changing its name to GraphOn
Corporation and with GraphOn's management team continuing in their existing
roles. The merger provided us with $5,425,000 in net cash proceeds, which was
previously held in trust for Unity until it consummated a merger with an
operating business.
In December 1999, we issued 1,353,028 shares of our common stock in
connection with the exercise of underwriter units and warrants, resulting in net
cash proceeds of $8,402,000.
During the nine-month period ended September 30, 2000, we issued 2,316,548
shares of our common stock in connection with the exercise of options,
underwriter units and warrants, resulting in net cash proceeds of $12,248,200.
Accounts receivable as of September 30, 2000 increased, net of the Allowance
for Doubtful Accounts, by $847,900, or 51%, to $2,518,500 from $1,670,600 as of
December 31, 1999. The primary reason for the increase is due to the nature of
our OEM licensing royalty agreements whereby the royalty payments generally are
not due until 30 days after the quarter end. As of September 30, 2000, accounts
receivable were $1,850,000 and $768,500 from related and unrelated parties,
respectively, against which we have recorded reserves of $100,000. Subsequent to
September 30, 2000, we received all amounts due under accounts receivable from
related parties.
As of September 30, 2000, capitalized software, net of amortization,
increased by $183,100, or 83%, to $404,900 from $221,800 as of December 31,
1999. This increase represents capitalized software engineering costs, net of
costs amortized to cost of revenues, which were incurred by us, substantially
during the first quarter of 2000, during the production phase of readying our
Bridges for Windows product for market. Once we began shipping Bridges for
Windows, towards the end of the first quarter 2000, we discontinued capitalizing
software engineering costs, and resumed charging those costs directly to expense
(research and development) in accordance with generally accepted accounting
principles. The balance in capitalized software as of September 30, 2000,
represents the unamortized portion of capitalized software engineering costs and
is generally amortized over a three-year period.
In March, 2000 we funded our China Joint Venture with $3,500,000. Long-term
investments-related party represents our initial investment, offset by the
recognition of our share of the China Joint Venture's operations for the
nine-month period ended September 30, 2000.
Accounts payable and accrued expenses as of September 30, 2000 increased by
$842,300, or 116%, to $1,566,000 from $723,700 as of December 31, 1999. The main
reasons for the increase were accrued employee expenses, including bonuses and
amounts payable under the employee stock purchase plan approved at the annual
shareholders meeting. Additionally, accrued legal fees associated with our
on-going litigation and legal, accounting and SEC filing fees in conjunction
with our listing on the Nasdaq National Market have increased significantly over
year-end levels.
During the three-month period ended September 30, 2000, we entered into a
short-term financing agreement for certain insurance policies. Notes Payable, as
of the balance sheet date reflects the outstanding principal amount due under
the term of the note, which matures during the second quarter of 2001.
As of September 30, 2000, we had cash and cash equivalents of $6,849,900 as
well as $7,906,500 in available-for-sale securities compared to total
liabilities of $1,722,200, exclusive of deferred revenue of $334,400.
We anticipate that cash balances as of September 30, 2000, as well as
anticipated revenue from operations, will be sufficient to meet our working
capital and capital expenditure needs through the next twelve months.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 132, "EMPLOYER'S DISCLOSURE ABOUT
PENSIONS AND OTHER POSTRETIREMENT BENEFITS," which standardizes the disclosure
requirements for pension and other post-retirement benefits. The adoption of
SFAS No. 132 did not impact our disclosures.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, as amended by SFAS Nos. 137
and 138, requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS No. 133, as amended, is
effective for all fiscal years beginning after June 15, 2000.
Historically, we have not entered into derivative contracts either to hedge
existing risks or for speculative purposes. Accordingly, we do not expect
adoption of the new standard to have a material impact on our results of
operations, financial position or cash flows.
RECENTLY ISSUED ACCOUNTING STANDARDS AND PRONOUNCEMENTS NOT YET ADOPTED
In December 1999, the Staff Accounting Bulletin (SAB) No. 101 was released
which provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements. Management believes that the guidance will not
materially impact our disclosures.
RISK FACTORS
The risks and uncertainties described below are not the only ones facing our
company. Additional risks and uncertainties not presently known to us, or risks
that we do not consider significant, may also impair our business. This document
also contains forward-looking statements that involve risks and uncertainties,
and actual results may differ materially from the results we discuss in the
forward-looking statements. If any of the following risks actually occur, they
could have a severe negative impact on our financial results and stock price.
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT THESE LOSSES TO CONTINUE AND
INCREASE, AT LEAST FOR THE NEAR FUTURE
We have experienced significant losses since we began operations. We expect
to continue to incur significant losses for the foreseeable future. We incurred
net losses of approximately $2,019,100 and $5,433,200 for the three and nine
months ended September 30, 2000, respectively, and net losses of $1,582,800 and
$5,630,500 for the three and nine months ended September 30, 1999, respectively.
We expect our expenses to increase as we expand our business but cannot assure
you that our revenues will increase as a result of increased spending. If
revenues grow more slowly than anticipated, or if operating expenses exceed
expectations, we may not become profitable. Even if we become profitable, we may
be unable to sustain profitability.
OUR OPERATING RESULTS IN ONE OR MORE FUTURE PERIODS ARE LIKELY TO FLUCTUATE
SIGNIFICANTLY AND MAY FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES
ANALYSTS OR INVESTORS
Our operating results are likely to fluctuate significantly in the future on
a quarterly and on an annual basis due to a number of factors, many of which are
outside our control. Factors that could cause our revenues to fluctuate include
the following:
o the degree of success of new products;
o variations in the timing of and shipments of our products;
o variations in the size of orders by our customers;
o increased competition;
o the proportion of overall revenues derived from different sales channels such
as distributors, OEMs and others;
o changes in our pricing policies or those of our competitors;
o the financial stability of major customers;
o new product introductions or enhancements by us or by competitors;
o delays in the introduction of products or product enhancements by us or by
competitors;
o any changes in operating expenses; and
o general economic conditions and economic conditions specific to the software
industry.
In addition, our royalty and license revenues are impacted by fluctuations in
OEM licensing activity from quarter to quarter, which may involve one-time
royalty payments and license fees. Our expense levels are based, in part, on
expected future orders and sales. Therefore, if orders and sales levels are
below expectations, our operating results are likely to be materially adversely
affected.
Additionally, because a significant portion of our expenses is fixed, a
reduction in sales levels may disproportionately affect our net income. Also, we
may reduce prices or increase spending in response to competition or to pursue
new market opportunities. Because of these factors, our operating results in one
or more future periods may fail to meet or exceed the expectations of securities
analysts or investors. In that event, the trading price of our common stock
would likely decline.
OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS MAY ADVERSELY AFFECT US
Our commercial success is dependent, in large part, upon our ability to
protect our proprietary rights. We rely on a combination of patent, copyright
and trademark laws, and on trade secrets and confidentiality provisions and
other contractual provisions to protect our proprietary rights. These measures
afford only limited protection. We cannot assure you that measures we have taken
will be adequate to protect us from misappropriation or infringement of our
intellectual property. Despite our efforts to protect proprietary rights, it may
be possible for unauthorized third parties to copy aspects of our products or
obtain and use information that we regard as proprietary. In addition, the laws
of some foreign countries do not protect our intellectual property rights as
fully as do the laws of the United States. Furthermore, we cannot assure you
that the existence of any proprietary rights will prevent the development of
competitive products. The infringement upon or loss of any proprietary rights,
or the development of competitive products despite such proprietary rights,
could have a material adverse effect on our business.
WE FACE RISKS OF CLAIMS FROM THIRD PARTIES FOR INTELLECTUAL PROPERTY
INFRINGEMENT THAT COULD ADVERSELY AFFECT OUR BUSINESS
At any time, we may receive communications from third parties asserting that
features or content of our products may infringe upon their intellectual
property rights. Any such claims, with or without merit, and regardless of their
outcome, may be time consuming and costly to defend. We may not have sufficient
resources to defend such claims and they could divert management's attention and
resources, cause product shipment delays or require us to enter into new royalty
or licensing agreements. New royalty or licensing agreements may not be
available on beneficial terms, and may not be available at all. If a successful
infringement claim is brought against us and we fail to license the infringed or
similar technology, our business could be materially adversely affected.
OUR BUSINESS SIGNIFICANTLY BENEFITS FROM STRATEGIC RELATIONSHIPS AND THERE CAN
BE NO ASSURANCE THAT SUCH RELATIONSHIPS WILL CONTINUE IN THE FUTURE
Our business and strategy relies to a significant extent on our strategic
relationships with other companies. There is no assurance that we will be able
to maintain or develop any of these relationships or to replace them in the
event any of these relationships are terminated. In addition, any failure to
renew or extend any licenses between any third party and us may adversely affect
our business.
BECAUSE OUR MARKET IS NEW AND EMERGING, WE CANNOT ACCURATELY PREDICT ITS FUTURE
GROWTH RATE OR ITS ULTIMATE SIZE, AND WIDESPREAD ACCEPTANCE OF OUR PRODUCTS IS
UNCERTAIN
The market for server-based software, which enables programs to be accessed
and run with minimal memory resident on a desktop computer or remote user
device, still is emerging, and we cannot assure you that our products will
receive broad-based market acceptance or that this market will continue to grow.
Additionally, we cannot accurately predict our market's future growth rate or
its ultimate size. Even if server-based software products achieve market
acceptance and the market for these products grows, we cannot assure you that we
will have a significant share of that market. If we fail to achieve a
significant share of the server-based software market or if such market does not
grow as anticipated, our business, results of operations and financial condition
may be adversely affected.
WE RELY ON INDIRECT DISTRIBUTION CHANNELS FOR OUR PRODUCTS AND MAY NOT BE ABLE
TO RETAIN EXISTING RESELLER RELATIONSHIPS OR TO DEVELOP NEW RESELLER
RELATIONSHIPS
Our products primarily are sold through several distribution channels. An
integral part of our strategy is to strengthen our relationships with resellers
such as value-added resellers, distributors, OEMs, systems integrators and other
vendors to encourage these parties to recommend or distribute our products and
to add resellers both domestically and internationally. We currently invest in
and intend to continue to invest significant resources to expand our sales and
marketing capabilities. We cannot assure you that we will be able to attract
and/or retain resellers to market our products effectively. Our inability to
attract resellers and the loss of any current reseller relationships could have
a material adverse effect on our business, results of operations and financial
condition. Additionally, we cannot assure you that resellers will devote enough
resources to provide effective sales and marketing support to our products.
THE BANKRUPTCY ON NOVEMBER 15, 1991 OF A PREDECESSOR COMPANY MAY EXPOSE US TO
CREDITORS' CLAIMS OF UP TO $2.23 MILLION AND INTEREST, IF ANY
On November 15, 1991, GraphOn-CA filed for reorganization under Chapter 11 of
the United States Bankruptcy Code and, later, submitted a Debtor's Proposed
Amended Plan of Reorganization. The plan was confirmed by order of the
bankruptcy court on July 11, 1994 and the court established a plan of payment
for the benefit of our creditors. Under the bankruptcy court order, we
established a disbursement account into which 50% of the ongoing terminal
royalties we receive from OEMs with whom we had a current relationship must be
deposited to pay named creditors. For all but one unsecured creditor, payments
from the disbursement account were ordered to continue up to the earlier of:
o the limit of our liability to each unsecured creditor; or
o through the year 2000.
However, the largest unsecured creditor's claim, which currently totals
approximately $964,000, must be paid from available funds, if any, in the
disbursement account until such amount is fully paid. Our total remaining
liability under the bankruptcy, as of September 30, 2000, is limited to the
lesser of:
o approximately $2,230,000; or
o 50% of future ongoing terminal royalties we receive from the OEMs.
To date, only royalties received pursuant to some of our license agreements
existing at the time of the bankruptcy have been deposited into the disbursement
account, and we have not deposited into such account or paid creditors out of
royalties received or currently received on our subsequently developed and
licensed server-based technology. We believe that our royalty payment
obligations under the bankruptcy court order relate only to licenses in place as
of July 11, 1994, and no payments to creditors have been made since November 14,
1997. We cannot assure you that a court will not interpret our obligation to
include payments to the disbursement account from royalties earned from
subsequent licenses of the server-based technology or licenses that we secure in
the future, or that our current technology will not be deemed derivative of our
technology existing at July 11, 1994. Consequently, we cannot assure you that we
will not be required to repay creditors referenced in the bankruptcy proceedings
the full amount of our liability, which is approximately $2,230,000, and
interest on any payments that a court deems to be owed based upon a ruling that
our interpretation is wrong. In addition, we cannot guarantee you that a
creditor will not assert a claim for payment out of the royalties from
subsequent licenses of the server-based technology. Such claims could be costly
and time-consuming for us. If any of these events takes place, it could have a
material adverse effect on our business, financial condition and results of
operations.
OUR FAILURE TO MANAGE EXPANDING OPERATIONS COULD ADVERSELY AFFECT US
To exploit the emerging server-based software market, we must rapidly execute
our business strategy and further develop products while managing our
anticipated growth in operations. To manage our growth, we must:
o continue to implement and improve our operational, financial and management
information systems;
o hire and train additional qualified personnel;
o continue to expand and upgrade core technologies;
o effectively manage multiple relationships with various licensees,
consultants, strategic and technological partners and other third
parties.
We cannot assure you that our systems, procedures, personnel or controls will
be adequate to support our operations or that management will be able to execute
strategies rapidly enough to exploit the market for our products and services.
Our failure to manage growth effectively or execute strategies rapidly could
have a material adverse effect on our business, financial condition and results
of operations.
COMPETITION FOR KEY MANAGEMENT AND OTHER PERSONNEL IN OUR INDUSTRY IS INTENSE,
AND WE MAY NOT BE SUCCESSFUL IN ATTRACTING AND RETAINING THESE PERSONNEL
Our success and business strategy is dependent in large part on our ability
to attract and retain key management and other personnel. Such individuals are
in high demand and often have competing employment offers. In particular, our
success depends on our ability to retain the services of Mr. Walter Keller, our
President and Chief Executive Officer, and Ms. Robin Ford, our Executive Vice
President of Marketing and Sales. We have entered into employment agreements
with these individuals that each contains non-competition and confidentiality
covenants. We currently anticipate the need to attract additional sales,
marketing, financial and software engineer personnel in the near future.
Competition for such personnel in the computer software and services industry is
intense, and therefore, we cannot assure you we will be able to attract or
retain such personnel. The loss of the services of one or more members of our
management group or the inability to retain or hire additional personnel as
needed may have a material adverse effect on our business.
THE MARKET IN WHICH WE PARTICIPATE IS HIGHLY COMPETITIVE AND HAS MORE
ESTABLISHED COMPETITORS
The market we participate in is intensely competitive, rapidly evolving and
subject to technological changes. We expect competition to increase as other
companies introduce additional competitive products. In order to compete
effectively, we must continually develop and market new and enhanced products
and market those products at competitive prices. As markets for our products
continue to develop, additional companies, including companies in the computer
hardware, software and networking industries with significant market presence,
may enter the markets in which we compete and further intensify competition. A
number of our current and potential competitors have longer operating histories,
greater name recognition and significantly greater financial, sales, technical,
marketing and other resources than we do. We cannot assure you that our
competitors will not develop and market competitive products that will offer
superior price or performance features or that new competitors will not enter
our markets and offer such products. We believe that we will need to invest
increasing financial resources in research and development to remain competitive
in the future. Such financial resources may not be available to us at the time
or times that we need them or upon terms acceptable to us. We cannot assure you
that we will be able to establish and maintain a significant market position in
the face of our competition and our failure to do so would adversely affect our
business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not exposed to financial market risks from changes in foreign currency
exchange rates or changes in interest rates and do not use derivative financial
instruments. A substantial majority of our revenue and capital spending is
transacted in U.S. dollars. However, in the future, we may enter into
transactions in other currencies. An adverse change in exchange rates would
result in a decline in income before taxes, assuming that each exchange rate
would change in the same direction relative to the U.S. dollar. In addition to
the direct effects of changes in exchange rates, such changes typically affect
the volume of sales or foreign currency sales price as competitors' products
become more or less attractive.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Reference is made to note 5 to the unaudited financial statements comprising
a portion of this report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the three-month period ended September 30, 2000, we granted options
to purchase 19,500 shares of our common stock, at $4.81 per share, to several of
our employees. The options generally vest in three years and they expire in ten
years. We also granted five year warrants to purchase 300,000 shares of our
common stock, at an exercise price of $5.25 per share, to two unrelated parties
for services. These options and warrants were granted in a transaction not
involving a public offering in reliance on the exemption provided by Section
4(2) of the Securities Act of 1933 for transactions by an issuer not involving a
public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule.
(b) Reports of Form 8-K.
We filed no reports on Form 8-K for the three-month period ended September
30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
GraphOn Corporation
(Registrant)
Date: November 14, 2000 /s/ Walter Keller
By: _________________________________
Walter Keller,
Chief Executive Officer and President
(Principal Executive Officer)
Date: November 14, 2000 /s/ William Swain
By: _________________________________
William Swain,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)