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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
Amendment No. 1
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 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 of 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) 201-7150
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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 August 4, 2000 there were issued and outstanding 14,711,517 shares of the
Registrant's Common Stock, par value $0.0001.
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<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
GRAPHON CORPORATION
BALANCE SHEETS
June 30, December 31,
2000 1999
ASSETS (Unaudited)
Current Assets: ------------ ------------
<S> <C> <C>
Cash and cash equivalents ........................ $ 8,769,800 $ 8,481,500
Available for sale securities .................... 7,370,800 2,027,600
Accounts receivable, net of allowance for
doubtful accounts of $275,000 and $25,000 ...... 3,485,100 1,670,600
Prepaid expenses and other assets ................ 310,900 364,300
------------ ------------
Total Current Assets ........................... 19,936,600 12,544,000
------------ ------------
Property and Equipment, net ......................... 668,400 537,000
Purchased Technology, net ........................... 1,393,500 1,504,800
Capitalized Software, net ........................... 459,800 221,800
Patent, net ......................................... 387,500 400,000
Long Term Investment - Related Party ................ 2,347,200 --
Other Assets ........................................ 34,000 16,700
------------ ------------
TOTAL ASSETS ................................... $ 25,227,000 $ 15,224,300
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................. $ 466,100 $ 259,700
Accrued expenses ................................. 751,200 464,000
Deferred revenue ................................. 143,900 119,000
------------ ------------
Total Current Liabilities ...................... 1,361,200 842,700
------------ ------------
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, 14,645,406 and 12,342,322
shares issued and outstanding .................. 1,500 1,200
Additional paid in capital ....................... 37,957,700 25,413,500
Deferred Compensation ............................ (1,101,000) (1,472,100)
Accumulated other comprehensive income ........... (21,700) (4,400)
Accumulated deficit .............................. (12,970,700) (9,556,600)
------------ ------------
Stockholders' Equity ........................... 23,865,800 14,381,600
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $ 25,227,000 $ 15,224,300
============ ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GRAPHON CORPORATION
STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
JUNE 30, JUNE 30,
------- -------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues ....................... $ 542,400 $ 707,400 $ 1,844,200 $ 1,346,900
Revenues - related party ....... 1,300,000 -- 1,800,000 --
------------ ------------ ------------ ------------
Total Revenues ............. 1,842,400 707,400 3,644,200 1,346,900
------------ ------------ ------------ ------------
Cost of revenues ............... 192,400 877,600 349,600 1,760,900
Cost of revenues - related party 62,300 -- 73,900 --
------------ ------------ ------------ ------------
Total Cost of Revenues ..... 254,700 877,600 423,500 1,760,900
------------ ------------ ------------ ------------
Gross Profit (Loss) ........ 1,587,700 (170,200) 3,220,700 (414,000)
------------ ------------ ------------ ------------
Operating Expenses:
Selling and marketing .......... 1,362,800 819,800 2,781,300 1,575,400
General and administrative ..... 895,600 363,200 1,872,000 822,300
Research and development ....... 914,000 681,800 1,462,500 1,254,800
------------ ------------ ------------ ------------
Total Operating Expenses ....... 3,172,400 1,864,800 6,115,800 3,652,500
------------ ------------ ------------ ------------
Loss From Operations ........... (1,584,700) (2,035,000) (2,895,100) (4,066,500)
------------ ------------ ------------ ------------
Other Income (Expense):
Interest & Other Income ........ 264,700 11,300 651,600 19,600
Loss on Long Term Investment-
Related Party ................. (902,800) -- (1,152,800) --
------------ ------------ ------------ ------------
Total Other Income (Expense) ... (638,100) 11,300 (501,200) 19,600
------------ ------------ ------------ ------------
Loss Before Provision for Income
Taxes .................... (2,222,800) (2,023,700) (3,396,300) (4,046,900)
Provision for Income Taxes ..... 17,000 -- 17,800 800
------------ ------------ ------------ ------------
Net Loss ....................... $ (2,239,800) $ (2,023,700) $ (3,414,100) $ (4,047,700)
------------ ------------ ------------ ------------
Basic and Diluted Loss
per Common Share ......... $ (0.15) $ (0.22) $ (0.24) $ (0.45)
------------ ------------ ------------ ------------
Weighted Average Common
Shares Outstanding ....... 14,626,851 9,109,333 14,263,913 8,953,907
============ ============ ============ ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GRAPHON CORPORATION
STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
2000 1999
(Unaudited) (Unaudited)
------------ ------------
Cash Flows From Operating Activities:
<S> <C> <C>
Net loss ........................................... $ (3,414,100) $ (4,047,700)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization .................... 505,400 1,646,900
Loss on Disposal of Fixed Assets ................. 12,900 --
Amortization of deferred compensation ............ 685,200 83,500
Provision for doubtful accounts .................. 250,000 --
Loss on Long Term Investment - Related Party ..... 1,152,800 --
Changes in operating assets and liabilities:
Accounts receivable ............................ (2,064,500) (589,200)
Prepaid expenses and other assets .............. 53,400 (400,000)
Accounts payable ............................... 206,400 476,400
Accrued expenses ............................... 287,200 123,900
Deferred revenue ............................... 24,900 49,200
------------ ------------
Net Cash Used In Operating Activities ........ (2,300,400) (2,657,000)
------------ ------------
Cash Flows From Investing Activities:
Purchase of available-for-sale securities .......... (5,360,500) --
Capitalization of software development costs ....... (343,400) --
Capital expenditures ............................... (250,700) (149,800)
Other assets ....................................... (17,300) --
Purchase of technology ............................. (170,000) --
Investment in Related Party ........................ (3,500,000) --
------------ ------------
Net Cash Used In Investing Activities ........ (9,641,900) (149,800)
------------ ------------
Cash Flows From Financing Activities:
Repayment of convertible note payable .............. -- (475,000)
Net proceeds from issuance of common stock ......... 12,230,900 1,805,800
Purchase and retirement of common stock ............ -- (5,700)
------------ ------------
Net Cash Provided By Financing Activities .... 12,230,900 1,325,100
------------ ------------
Effect of exchange rate fluctuations on cash and
Cash equivalents .................................. (300) --
Net Increase (Decrease) in Cash and Cash Equivalents 288,300 (1,481,700)
------------ ------------
Cash and Cash Equivalents, beginning of period ..... 8,481,500 1,798,400
------------ ------------
Cash and Cash Equivalents, end of period ........... 8,769,800 316,700
============ ============
<FN>
Supplemental Disclosure of Cash Flow Information:
We paid interest expense of $0 and $6,400 and income tax of $800 and $800
during the six-month periods ended June 30, 2000 and June 30, 1999,
respectively.
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GRAPHON CORPORATION
STATEMENT OF SHAREHOLDER'S EQUITY
Additional
Common Stock Paid Deferred Comprehensive Accumulated
Shares Amount in Capital Compensation Loss Deficit Total
---------------- ---------- ------ ----------- ------------ ---------- ------------ -----------
Balances,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 335,000 335,000
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 (1,450,700) (24,900) (10,730,900) 25,693,200
---------------- ---------- ------ ----------- ------------ ---------- ------------ -----------
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 $(1,101,000) $(21,700) $(12,970,700) $23,865,800
================ ========== ====== =========== ============ ========== ============ ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
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, except as indicated in the
following sentence), which are, in the opinion of management, necessary to state
fairly the results for the periods presented. The results of operations for the
three months and six months ended June 30, 2000 have been restated. See Note 4.
The results for the three and six months ended June 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 six months ended June 30, 2000, a total of 27,398 and
79,175 shares, respectively, of common stock, totaling $59,500 and $171,400,
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 six months ended June 30, 2000 we issued
2,530 and 2,223,909 shares, respectively, of our common stock in connection with
the exercise of warrants and underwriter's units, resulting in net cash proceeds
of $0 and $12,059,500, 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.
During the third quarter of 2000, we decided 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 Loss on Long Term Investments - Related
Party for the three-month and six-month periods ended June 30, 2000 have been
increased by $478,700 ($0.03 per common share) and $673,200 ($0.05 per common
share) to $902,800 and $1,152,800, respectively.
5. Litigation
In late 1996, we disclosed numerous aspects of our proprietary technology
on a confidential basis to Insignia Solutions plc, some of whose assets were
later acquired by Citrix Systems, Inc. When we learned of that acquisition in
January 1998, we made inquiry of Citrix and Insignia seeking assurances that
there had been no potential misuse of our confidential information. On November
23, 1998, Citrix instituted litigation in the United States District Court for
the Southern District of Florida seeking a judicial declaration that Citrix 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 has appealed the dismissal of its case to the United
States Court of Appeals for the Eleventh Circuit, where the matter is awaiting
oral argument.
On October 4, 1999, Insignia filed a verified complaint against us, Citrix
Systems, Inc. and Citrix Systems UK in the Superior Court of the State of
California, Santa Clara County. Insignia's complaint alleges that we had
attempted to interfere with Insignia's sale to Citrix, on February 5, 1998, of
assets relating to, among other things, Insignia's NTRIGUE software product
line. The complaint alleges that, as a result of such efforts, Insignia was
required by Citrix to place $8.75 million in escrow to enable Citrix to deal
with 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 Insignia's complaint, and
on May 10, 2000, the court granted our motion for judgment on the pleadings and
dismissed Insignia's fifth cause of action against us for bad faith claim of
misappropriation of trade secrets.
On March 30, 2000, we filed an amended complaint in the Superior Court of
Santa Clara County alleging trade secret misappropriation and unfair competition
against Citrix Systems, Inc. and Citrix Systems UK and alleging trade secret
misappropriation, breach of contract, fraud and unfair competition against
Insignia Solutions. The complaint alleges that Insignia improperly disclosed our
proprietary technology to Citrix, thereby, among other things, breaching
Insignia's covenants not to disclose our trade secrets. The complaint also
alleges that Citrix improperly acquired and incorporated our proprietary
technology into its products and that Citrix knew or should have known that the
technology it purchased from Insignia was our proprietary technology. The
complaint seeks unspecified compensatory and exemplary damages from Citrix and
Insignia.
<PAGE>
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 Six-Month Periods Ended June 30, 2000
Versus the Three and Six-Month Periods Ended June 30, 1999
Revenues
Total revenues for the three-month period ended June 30, 2000 increased by
$1,135,000, or 160%, to $1,842,400 from $707,400 for the same period in 1999.
Revenues for the six-month period ended June 30, 2000 increased by $2,297,300,
or 171%, to $3,644,200 from $1,346,900 for the same period in 1999. The increase
for the three-month period ended June 30, 2000 was due to related party
licensing fees derived from our China joint venture, which were partially offset
by lower OEM licensing fees. OEM licensing fees, for the three-month period
ended June 30, 2000, decreased by approximately $759,000, or 58%, from
$1,301,800 to $542,400 from the three-month period ended March 31, 2000. The
decrease was primarily due to lower licensing fees derived from one of our
larger OEM customers. The increase for the six-month period ended June 30, 2000
was primarily due to related party licensing fees derived from our China joint
venture and increased OEM licensing fees. We derived no licensing fees from our
China joint venture during the three and six-month periods ended June 30, 1999
since our China joint venture did not begin operations until March 2000.
Cost of Revenues
Cost of revenues for the three-month period ended June 30, 2000 decreased
by $622,900, or 71%, to $254,700, from $877,600 for the same period in 1999.
Cost of revenues for the six-month period ended June 30, 2000 decreased by
$1,337,400, or 76%, to $423,500, from $1,760,900 for the same period in 1999.
The decrease for both the three-month and the six-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 June 30, 2000
increased by $543,000, or 66%, to $1,362,800 from $819,800 for the same period
in 1999. Sales and marketing expenses for the six-month period ended June 30,
2000 increased by $1,205,900, or 77%, to $2,781,300 from $1,575,400 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 June
30, 2000 increased by $532,400, or 147%, to $895,600 from $363,200 for the same
period in 1999. General and administrative expenses for the six-month period
ended June 30, 2000 increased by $1,049,700, or 128%, to $1,872,000 from
$822,300 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 increase was
primarily due to increases in legal fees in connection with ongoing litigation,
in the provision for doubtful accounts, and in accounting fees.
Research and Development
Research and development expenses for the three-month period ended June 30,
2000 increased by $232,200, or 34%, to $914,000 from $681,800 for the same
period in 1999. Research and development expenses for the six-month period ended
June 30, 2000 increased by $207,700, or 16%, to $1,462,500 from $1,254,800 for
the same period in 1999. Research and development expenses consist primarily of
salaries and benefits to software engineers, supplies and payments to contract
programmers and rent on facilities. The increase in research and development
expenses for the three and six-month period ended June 30, 2000 was primarily
due to an increase in allocated rent expense due to the move of our corporate
offices.
Interest and Other Income
Interest and other income for the three-month period ended June 30, 2000
increased by $253,400, or 2,242%, to $264,700 from $11,300 for the same period
during 1999. Interest and other income for the six-month period ended June 30,
2000 increased by $632,000, or 3,224%, to $651,600 from $19,600 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 six-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
six-month periods ended June 30, 2000 were $902,800 and $1,152,800,
respectively, as compared with $0 and $0, respectively for the same periods
during 1999. These losses reflect recognition of our share of the operating
results of the China joint venture, which began operations in March 2000. During
the third quarter of 2000, we decided 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 Loss on Long Term Investments - Related Party for the
three-month and six-month periods ended June 30, 2000 have been increased by
$478,700 ($0.03 per common share) and $673,200 ($0.05 per common share) to
$902,800 and $1,152,800, respectively.
Net Loss
As a result of the foregoing items, net loss for the three month period
ended June 30, 2000 was $2,239,800, an increase of $216,100, or 11%, from a net
loss of $2,023,700 for the same period during 1999. The net loss for the
six-month period ended June 30, 2000 was $3,414,100, a decrease of $663,600, or
16%, from a net loss of $4,047,700 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 six-month period ended June 30, 2000, we issued 2,303,084 shares
of our common stock in connection with the exercise of options, underwriter
units and warrants, resulting in net cash proceeds of $12,230,900.
Accounts receivable as of June 30, 2000 increased, net of the Allowance for
Doubtful Accounts, by $1,814,500, or 109%, to $3,485,100 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 June 30, 2000, accounts
receivable were $3,300,000 and $460,100 from related and unrelated parties,
respectively, against which we have recorded reserves of $275,000.
As of June 30, 2000, capitalized software, net of amortization, increased
by $238,000, or 107%, to $459,800 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 June 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
six-month period ended June 30, 2000.
Accounts payable and accrued expenses as of June 30, 2000 increased by
$493,600, or 68%, to $1,217,300 from $723,700 as of December 31, 1999. The main
reasons for the increase were accrued legal fees associated with ongoing
litigation (note 5) and accrued accounting and printing fees associated with our
year to date public filings.
As of June 30, 2000, we had cash and cash equivalents of $8,769,800 as well
as $7,370,800 in available-for-sale securities compared to total liabilities of
$1,217,300, exclusive of deferred revenue of $143,900.
We anticipate that cash balances as of June 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.
Year 2000 Compliance
We have experienced no material product or system failures or disruptions
to date, stemming from year 2000 issues.
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 138,
requires companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative instruments and
Hedging Activities--Deferring the Effective Date of FASB Statement No. 133,"
which amends SFAS No. 133 to be effective for all fiscal quarters of 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 $2,239,800 and $3,414,100 for the three and six
months ended June 30, 2000, respectively, and net losses of $2,023,700 and
$4,047,700 for the three and six months ended June 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 June 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.
<PAGE>
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.
<PAGE>
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 six-month period ended June 30, 2000, we granted options to
purchase 299,000 shares of our common stock, at a range of $6.62 to $15.62 per
share, to several of our employees. The options generally vest in three years
and they expire in ten years. These options 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.
Exhibits
Exhibit 27.1 - Financial Data Schedule.
Reports of Form 8-K.
On April 6, 2000, we filed a Form 8-K wherein we reported the resignation,
effective March 17, 2000, of our former Chief Financial Officer, Vice President
of Finance and Administration and Secretary, Edmund Becmer, and the appointment,
effective March 22, 2000, of his successor, our current Chief Financial Officer
and Secretary, William Swain.
<PAGE>
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 22, 2000 /s/ Walter Keller
By: ____________________________
Walter Keller,
Chief Executive Officer and President
(Principal Executive Officer)
Date: November 22, 2000 /s/ William Swain
By: ____________________________
William Swain,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
