UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-21511
V-ONE CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1953278
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
20250 CENTURY BLVD., SUITE 300, GERMANTOWN, MARYLAND 20874
----------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(301) 515-5200
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 [ ] .
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 6, 2002
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COMMON STOCK, $0.001 PAR VALUE PER SHARE 26,626,761
V-ONE Corporation
Quarterly Report on Form 10-Q
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Balance Sheets as of September 30, 2002 3
(unaudited) and December 31, 2001
Condensed Statements of Operations for the Three and 4
Nine Months Ended September 30, 2002 (unaudited) and
September 30, 2001 (unaudited)
Condensed Statements of Cash Flows for the Nine Months 5
Ended September 30, 2002 (unaudited) and September 30,
2001 (unaudited)
Notes to the Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 11
Market Risk
Item 4. Controls and Procedures 11
PART II. OTHER INFORMATION 12
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES AND CERTIFICATIONS 13
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
V-ONE CORPORATION
CONDENSED BALANCE SHEETS
September 30, 2002 December 31, 2001
ASSETS (Unaudited)
------------------ -----------------
Current assets:
Cash and cash equivalents $ 163,171 $ 2,608,690
Accounts receivable, net 1,172,768 859,658
Finished goods inventory, net 47,055 57,354
Prepaid expenses and other current assets 478,441 407,913
------------------ -----------------
Total current assets 1,861,435 3,933,615
Property and equipment, net 424,153 748,513
Other assets - 50,196
------------------ -----------------
Total assets $ 2,285,588 $ 4,732,324
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 1,380,699 $ 769,319
Deferred revenue 1,033,977 952,044
Note payable - current 452,264 -
Capital lease obligations - current 722 47,804
------------------ -----------------
Total current liabilities 2,867,662 1,769,167
Deferred rent 46,901 80,790
------------------ -----------------
Total liabilities 2,914,563 1,849,957
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock, $.001 par value, 13,333,333 shares authorized:
Series C redeemable preferred stock, 500,000 designated; 42,904
shares issued and outstanding
(liquidation preference of $1,126,388) 43 43
Series D convertible preferred stock 3,675,000 shares designated,
3,021,000 and 3,675,000 issued and outstanding, respectively 3,021 3,675
(liquidation preference of $5,770,110 and $7,019,500 respectively)
Common stock, $0.001 par value; 50,000,000 shares authorized;
26,626,761 and 23,594,904 shares issued and outstanding, respectively 26,627 23,595
Accrued dividends payable 1,401,883 875,808
Additional paid-in capital 61,775,588 60,766,392
Accumulated deficit (63,836,137) (58,787,146)
------------------ -----------------
Total shareholders' equity (deficit) (628,975) 2,882,367
------------------ -----------------
Total liabilities and shareholders' equity (deficit) $ 2,285,588 $ 4,732,324
================== =================
The accompanying notes are an integral part of these financial statements.
3
V-ONE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
Three months Three months Nine months Nine months
ended ended ended ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
(unaudited) (unaudited) (unaudited) (unaudited)
------------------ ------------------ ------------------ ------------------
Revenue:
Products $ 805,529 $ 762,949 $ 1,770,114 $ 1,857,950
Consulting and services 346,414 337,049 1,121,047 954,595
------------------ ------------------ ------------------- ------------------
Total revenue 1,151,943 1,099,998 2,891,161 2,812,545
Cost of revenue:
Products 57,611 287,062 148,521 619,408
Consulting and services 80,073 136,889 281,842 380,970
------------------ ------------------ ------------------- ------------------
Total cost of revenue 137,684 423,951 430,363 1,000,378
------------------ ------------------ ------------------- ------------------
Gross profit 1,014,259 676,047 2,460,798 1,812,167
Operating expenses:
Research and development 520,072 1,019,257 2,276,469 3,071,346
Sales and marketing 742,913 1,220,817 2,507,886 3,757,313
General and administrative 512,221 642,039 1,890,457 1,959,724
------------------ ------------------ ------------------- ------------------
Total operating expenses 1,775,206 2,882,113 6,674,812 8,788,383
------------------ ------------------ ------------------- ------------------
Operating loss (760,947) (2,206,066) (4,214,014) (6,976,216)
Other (expense) income:
Interest expense (314,875) (2,597) (317,220) (9,563)
Interest income 1,633 62,569 15,876 215,470
Other (expense) income (4,648) (2,468) (7,558) 1,306,862
------------------ ------------------ ------------------- ------------------
Total other (expense) income (317,890) 57,504 (308,902) 1,512,769
------------------ ------------------ ------------------- ------------------
Net loss (1,078,837) (2,148,562) (4,522,916) (5,463,447)
Dividend on preferred stock 173,826 205,311 526,075 3,467,957
------------------ ------------------ ------------------- ------------------
Loss attributable to holders of common stock $ (1,252,663) $ (2,353,873) $ (5,048,991) $ (8,931,404)
================== ================== =================== ==================
Basic and diluted loss per share attributable
to holders of common stock $ (0.05) $ (0.10) $ (0.20) $ (0.40)
================== ================== =================== ==================
Weighted average number of common
shares outstanding 25,955,863 22,850,427 24,759,695 22,429,965
================== ================== =================== ==================
The accompanying notes are an integral part of these financial statements.
4
V-ONE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
Nine months Nine months
ended ended
September 30, September 30,
2002 2001
(unaudited) (unaudited)
--------------- ---------------
Cash flows from operating activities:
Net loss $ (4,522,916) $ (5,463,447)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 389,183 413,916
Stock compensation 81,807 146,734
Amortization of deferred financing costs 304,642 -
Gain on sale of investment - (1,375,000)
Changes in assets and liabilities:
Accounts receivable, net (313,110) (139,827)
Inventory, net 10,299 54,916
Prepaid expenses and other assets 233,821 145,181
Accounts payable and accrued expenses 611,380 (405,053)
Deferred revenue 81,933 960,266
Deferred rent (33,889) (28,855)
--------------- ---------------
Net cash used in operating activities (3,156,850) (5,691,169)
Cash flows from investing activities:
Net purchases of property and equipment (64,823) (374,882)
Proceeds from sale of investment - 1,625,000
--------------- ---------------
Net cash provided by (used in) investing
activities (64,823) 1,250,118
Cash flows from financing activities:
Exercise of options and warrants - 48,642
Issuance of common stock 16,467 10,228
Issuance of preferred stock - 7,019,250
Issuance of notes payable 1,188,000 -
Payment of debt financing costs (381,231) -
Redemption of preferred stock - (84,449)
Payments of stock issuance costs - (632,918)
Payment of preferred stock dividends - (258)
Principal payments on capitalized lease
obligations (47,082) (53,424)
--------------- ---------------
Net cash provided by financing activities 776,154 6,307,071
--------------- ---------------
Net (decrease) increase in cash and cash
equivalents (2,445,519) 1,866,020
Cash and cash equivalents at beginning
of period 2,608,690 2,949,398
--------------- ---------------
Cash and cash equivalents at end of period
period $ 163,171 $ 4,815,418
=============== ===============
The accompanying notes are an integral part of these financial statements.
5
V-ONE CORPORATION
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of the Business
V-ONE Corporation ("Company") develops, markets and licenses a comprehensive
suite of network security products that enable organizations to conduct secured
electronic transactions and information exchange using private enterprise
networks and public networks, such as the Internet. The Company's principal
market is the United States, with headquarters in Maryland, with secondary
markets in Europe and Asia.
2. Basis of Presentation
The condensed financial statements for the three and nine months ended September
30, 2002 and September 30, 2001 are unaudited and reflect all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of
management, necessary to present fairly the results for the interim periods.
These financial statements should be read in conjunction with the audited
financial statements as of December 31, 2000 and 2001 and for the three years in
the period ended December 31, 2001, which are included in the Company's 2001
Annual Report on Form 10-K ("Form 10-K").
The preparation of financial statements to be in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates and would
affect future results of operations and cash flows.
The results of operations for the three and nine months ended September 30, 2002
are not necessarily indicative of the results expected for the full year ending
December 31, 2002.
Certain prior year amounts have been reclassified to conform to the 2002
presentation. These changes had no impact on previously reported results of
operations.
3. Common and Preferred Stock
On September 28, 2002, the Company sold 15,413 shares of common stock at a price
of $.1785 per share as part of its Employee Stock Purchase Plan.
4. Management's Plans
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company reported a net loss of $6,237,278,
$8,862,015 and $9,679,944 for the years ended December 31, 2001, 2000 and 1999,
respectively, and a further net loss of $4,522,916 for the nine months ended
September 30, 2002. In addition, the Company may continue to incur losses during
2002. Notwithstanding acceptance of V-ONE's security concepts and critical
acclaim for its products, there can be no assurance that the consummation of
sales of V-ONE's products to existing customers or proposed agreements with
potential customers will generate timely or sufficient revenue for V-ONE to
cover its costs of operations and meet its cash flow requirements. Accordingly,
V-ONE may not have the funds needed to sustain operations during 2002.
In addition, Nasdaq notified the Company that it had questions concerning, among
other things, the Company's ability to maintain the minimum listing requirements
for continued Nasdaq listing. The Company was not able to satisfy the minimum
listing requirements. As a result, the Company's common stock has been removed
from the Nasdaq SmallCap Market and is now trading on the OTC Bulletin Board
(OTCBB). The transfer to the OTCBB was effected without interruption in the
trading market for the Company's securities. The ticker symbol for the Company's
securities has not changed.
The Company is seeking to expand its current banking relationships to explore
alternatives to preserve its operations and maximize shareholder value,
including potential strategic partnering relationships, a business combination
with a strategically placed partner, or a sale of the Company.
6
In July and August 2002, the Company closed on approximately $1,188,000 in a
private placement of 8% Secured Convertible Notes with detachable warrants, due
180 days after issuance with an additional 180-day extension available at the
option of the Company or the holders. The holders may convert their notes at any
time prior to maturity into the Company's common stock at a conversion price
equal to the greater of $0.25 per share or 60% of the average closing sales
price of the Company's common stock for the five trading day period immediately
preceding the Company's receipt of the holders notification of conversion.
Detachable five year warrants, exercisable at $0.50 per share, are included to
provide one warrant share for every dollar invested as warrant coverage to the
note holders. As of September 30, 2002, holders had converted $585,000, or 49%,
of the notes into shares of common stock at $.25 per share.
Upon issuance of the Notes, the Company recorded a debt discount of
approximately $233,900 in accordance with the accounting requirements for a
beneficial conversion feature on the Notes. During the three months ended
September 30, 2002, the Company amortized approximately $83,000 of the discount
to interest expense. Additionally, the Company will record interest expense upon
conversion of the Notes as a result of the embedded conversion feature. The
additional interest expense is not recorded until conversion because the Notes
contain a contingency that does not permit the number of shares to be received
upon conversion to be calculated until conversion occurs. Upon conversion of the
$585,000 of Notes during the three months ended September 30, 2002, the Company
recorded $94,400 in interest expense.
The Company reduced operating expenses for the third quarter by approximately
$1,107,000 and by approximately $2,114,000 for the nine months ended September
30, 2002 compared with the same periods last year. Steps were taken to reduce
expenses in mid-July by implementing a reduced workweek designed to ensure that
customers' requirements are met without jeopardizing the Company's workforce.
With these cost saving measures in place, the Company will focus its engineering
design efforts on completing features committed to meet the needs of existing
and potential customers in the government sector and supporting the
relationships with its channel partners for sales and marketing to commercial
accounts. Even at reduced operating levels, however, the Company may not be able
to maintain operations for any extended period of time without additional
capital or a significant strategic transformative event. The Company's ability
to continue as a going concern is dependent on its ability to generate
sufficient cash flow to meet its obligations on a timely basis or to obtain
additional funding.
5. Supplemental Cash Flow Disclosure
Selected noncash activities were as follows:
-----------------------------------------
Nine Months ended September 30,
-----------------------------------------
2002 2001
------------------ ----------------
Noncash investing and financing activities:
Redemption of preferred stock $ - $ 225,571
Payment of preferred stock dividends $ - $ 46,088
6. Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per
share:
Three Months ended September Nine Months ended September 30,
30,
------------------------------ --------------------------------
2002 2001 2002 2001
------------ ------------- ------------ -------------
Numerator:
Net loss $(1,078,837) $(2,148,562) $(4,522,916) $(5,463,447)
Less: Dividend on preferred stock (173,826) (205,311) (526,075) (3,467,957)
------------ ------------- ------------ -------------
Net loss attributable to holders of common stock $(1,252,633) $(2,353,873) $(5,048,991) $(8,931,404)
============ ============= ============ =============
Denominator:
Denominator for basic and diluted net loss per
share - weighted average shares 25,955,863 22,850,427 24,759,695 22,429,965
============ ============= ============ =============
Basic and diluted loss per share -
Net loss attributable to holders of common stock $ (.05) $ (0.10) $ (.20) $ (0.40)
============ ============= ============ =============
Due to their anti-dilutive effect, outstanding shares of preferred stock, stock
options and warrants to purchase shares of common stock were excluded from the
computation of diluted earnings per share for all periods presented.
7
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of Section 21E
of the Exchange Act. These statements may differ in a material way from actual
future events. For instance, factors that could cause results to differ from
future events include rapid rates of technological change and intense
competition, among others. The Company's total revenues and operating results
have varied substantially from quarter to quarter and should not be relied upon
as an indication of future results. Several factors may affect the ability to
forecast the Company's quarterly operating results, including the size and
timing of individual software and hardware sales; the length of the Company's
sales cycle; the level of sales and marketing, research and development and
administrative expenses; and general economic conditions.
Operating results for a given period could be disproportionately affected by any
shortfall in expected revenues. In addition, fluctuation in revenues from
quarter to quarter will likely have an increasingly significant impact on the
Company's results of operations. The Company's performance in recent periods may
not be an accurate indication of future results of operations in light of the
evolving nature of the network security market and the uncertainty of the demand
for Internet and intranet products in general and the Company's products in
particular. Because the Company's operating expenses are based on anticipated
revenue levels, a small variation in the timing of recognition of revenues can
cause significant variations in operating results from quarter to quarter.
Readers are also referred to the documents filed by the Company with the SEC,
specifically the Company's latest Annual Report on Form 10-K that identifies
important risk factors for the Company.
RESULTS OF OPERATIONS
REVENUES
Total revenues increased slightly from approximately $1,100,000 for the three
months ended September 30, 2001, to approximately $1,152,000 for the three
months ended September 30, 2002. This increase of approximately $52,000 or 5% is
due primarily to an increase in product sales. Total revenues increased from
approximately $2,813,000 for the nine months ended September 30, 2001 to
approximately $2,891,000 for the nine months ended September 30, 2002 due
primarily to an increase in consulting and services revenue. Product revenues
are derived principally from software licenses and the sale of hardware
products. Product revenues increased from approximately $763,000 for the three
months ended September 30, 2001, to approximately $806,000 for the three months
ended September 30, 2002. The increase resulted from strong orders from existing
customers to expand current product deployments. Product revenues decreased from
approximately $1,858,000 for the nine months ended September 30, 2001, to
approximately $1,770,000 for the nine months ended September 30, 2002. The
decrease this year was due to weaker orders for turnkey products. Consulting and
services revenues are derived principally from fees for services complementary
to the Company's products, including consulting, maintenance, installation and
training. Consulting and services revenues increased slightly from approximately
$337,000 for the three months ended September 30, 2001, to approximately
$346,000 for the three months ended September 30, 2002. Consulting and services
revenues increased from approximately $955,00 for the nine months ended
September 30, 2001, to approximately $1,121,000 for the nine months ended
September 30, 2002. This was due principally to a higher number of new and
renewing maintenance contracts provided to customers in the third quarter and
year.
While the Company anticipates that the unpredictability of its revenue streams
may stabilize during the fourth quarter and that existing government customer
requirements are on track to achieve its previously announced revenue projection
for the second half of 2002, it cannot be certain that these requirements will
be funded during this period or of the relative levels of software, hardware,
consulting and services revenues to be generated in future periods.
COST OF REVENUES
Total cost of revenues as a percentage of total revenues decreased from
approximately 38% and 36%, or approximately $424,000 and $1,000,400 for the
three and nine months ended September 30, 2001, respectively, to approximately
12% and 15%, or approximately $137,700 and $430,400 for the three and nine
months ended September 30, 2002, respectively. The decreases were primarily due
to an increase in software product sales and reductions in large turnkey and
hardware system sales. Total cost of revenues is comprised of cost of product
revenues and cost of consulting and services revenues.
8
Cost of product revenues consists principally of the costs of computer hardware,
licensed technology, manuals and labor associated with the distribution and
support of the Company's products. Cost of product revenues decreased from
approximately $287,000 and $619,000 for the three and nine months ended
September 30, 2001, respectively, to approximately $58,000 and $149,000 for the
three and nine months ended September 30, 2002, respectively. The decrease in
costs of product revenue for the three and nine months ended September 30, 2002
was primarily attributable to an increase in software product sales and a lower
proportion of turnkey systems and third-party firewalls sales. Cost of product
revenues as a percentage of product revenues was approximately 38% and 33% for
the three and nine months ended September 30, 2001, respectively, and
approximately 7% and 8% for the three and nine months ended September 30, 2002,
respectively. The percentage decreases were primarily attributable to a lower
proportion of turnkey systems and third-party firewalls sales, as compared to
sales of software licenses.
Cost of consulting and services revenues consists principally of personnel and
related costs incurred in providing consulting, support and training services to
customers. Cost of consulting and services revenues decreased from approximately
$137,000 and $381,000 for the three and nine months ended September 30, 2001,
respectively, to approximately $80,000 and $282,000 for the three and nine
months ended September 30, 2002, respectively. Cost of consulting and services
revenues as a percentage of consulting and services revenues was approximately
41% and 40% for the three and nine months ended September 30, 2001,
respectively, and approximately 23% and 25% for the three and nine months ended
September 30, 2002, respectively. The percentage decreases were due mainly to
the reduction in training staff and a lower proportion of sales of third-party
firewall maintenance contracts.
OPERATING EXPENSES
Research and Development -- Research and development expenses consist
principally of the costs of research and development personnel and other
expenses associated with the development of new products and enhancement of
existing products. Research and development expenses decreased from
approximately $1,019,000 and $3,071,000 for the three and nine months ended
September 30, 2001, respectively, to approximately $520,000 and $2,276,000 for
the three and nine months ended September 30, 2002, respectively. The dollar
decreases for the three and nine months ended September 30, 2002 of
approximately $499,000 and $795,000, respectively, over the same periods in the
prior fiscal year were primarily due to lower wage related expenses of $231,000
and $168,000, respectively, as well as lower consulting expenses of $176,000 and
$347,000, respectively. Research and development expenses as a percentage of
total revenues were approximately 93% and 109% for the three and nine months
ended September 30, 2001, respectively and approximately 45% and 79% for the
three and nine months ended September 30, 2002, respectively. The Company has
completed and released the product enhancements needed to meet existing customer
requirements and believes it can maintain development requirements in the near
term with the current headcount.
Sales and Marketing -- Sales and marketing expenses consist principally of the
costs of sales and marketing personnel, advertising, promotions and trade shows.
Sales and marketing expenses decreased from approximately $1,221,000 and
$3,757,000 for the three and nine months ended September 30, 2001, respectively,
to approximately $743,000 and $2,508,000 for the three and nine months ended
September 30, 2002, respectively. The dollar decreases for the three and nine
months ended September 30, 2002 of $478,000 and $1,249,000, respectively, relate
to lower wage related expenses of $227,000 and $170,000, respectively, lower
travel expense of $39,000 and $117,000, respectively, lower advertising and
trade show expenses of $71,000 and $145,000, respectively, lower recruiting
expenses of $16,000 and $127,000, respectively, and lower consulting expenses of
$82,000 and $336,000, respectively. Sales and marketing expenses as a percentage
of total revenues were approximately 111% and 134% for the three and nine months
ended September 30, 2001, respectively, and approximately 65% and 87% for the
three and nine months ended September 30, 2002, respectively. The percentage
decreases for the quarter and year are due to lower expenses for fiscal 2002
when compared to similar periods for fiscal 2001.
General and Administrative -- General and administrative expenses consist
principally of the costs of accounting and finance, legal and human resources
management, administrative personnel and facilities expenses. General and
administrative expenses decreased from approximately $642,000 and $1,960,000 for
the three and nine months ended September 30, 2001, respectively, to
approximately $512,000 and $1,890,000 for the three and nine months ended
September 30, 2002, respectively. The decrease for the third quarter of 2002 of
approximately $130,000 was due principally to lower wage related expenses of
$117,000 and consulting fees of $54,000, partially offset by an increase in bad
debt expense of $50,000. The decrease in general and administrative expenses for
the nine months ended September 30, 2002 of approximately $69,000 was due to
lower wages related expenses of approximately $200,000, lower consulting expense
of $76,000, and lower board meeting expenses of approximately $54,000, partially
offset by increased D & O insurance expense of $198,000, and increased legal
9
fees of $66,000. General and administrative expenses as a percentage of total
revenues were approximately 58% and 70% for the three and nine months ended
September 30, 2001, respectively, and 44% and 65% for the three and nine months
ended September 30, 2002, respectively. The percentage decreases were due to
lower expenses in fiscal 2002.
Other (Expense) Income -- Other (expense) income represents the net income or
expense resulting from non-operational activities that are of an infrequently
occurring nature. Other (expense) income for the three and nine months ended
September 30, 2002 was approximately ($5,000) and ($8,000), respectively. Other
(expense) income for the three and nine months ended September 30, 2001 was
approximately $2,000 and $1,307,000, respectively. Other (expense) income for
the nine months ended September 30, 2001 includes the gain of $1,334,000 on the
sale to NFR Security, Inc. of a 6.8% minority interest in its common stock.
Interest Income and Expenses -- Interest income represents interest earned on
cash and cash equivalents. Interest income decreased from approximately $63,000
and $215,000 for the three and nine months ended September 30, 2001,
respectively, to approximately $2,000 and $16,000 for the three and nine months
ended September 30, 2002, respectively. The decreases were attributable to lower
levels of cash and cash equivalents. Interest expense represents interest paid
or payable on loans and capitalized lease obligations. Interest expense
increased from approximately $3,000 and $10,000 for the three and nine months
ended September 30, 2001, respectively, to approximately $315,000 and $317,000
for the three and nine months ended September 30, 2002, respectively,
substantially all of which was for recognition of a beneficial conversion
feature on the 8% Secured Convertible Notes.
Income Taxes -- The Company did not incur income tax expenses as a result of the
net loss incurred during the nine months ended September 30, 2001 and 2002.
Dividend on Preferred Stock -- The Company provided for dividends on preferred
stock of approximately $205,000 and $2,467,000 for the three and nine months
ended September 30, 2001, respectively, and approximately $174,000 and $526,000
for the three and nine months ended September 30, 2002, respectively. Under the
terms of the purchase agreements for the Series C and Series D Preferred Stock,
the Company may elect to pay these dividends in cash or stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used cash of approximately $5,691,000 for the
nine months ended September 30, 2001, which was net of the gain on the sale of
the Company's minority interest in the common stock of NFR Security, Inc. and
approximately $3,157,000 for the nine months ended September 30, 2002. The
decrease was primarily due to an increase in accounts payable.
The Company's investing activities provided approximately $1,250,000 for the
nine months ended September 30, 2001 and used cash of approximately $65,000 for
the nine months ended September 30, 2002. Net capital expenditures for property
and equipment were approximately $375,000 and $65,000 during the nine months
ended September 30, 2001 and 2002, respectively. These expenditures have
generally been for computer workstations and personal computers, office
furniture and equipment, and leasehold additions and improvements. The capital
expenditures were higher in 2001 as the Company acquired approximately $300,000
of equipment and furniture, which had been under a three-year operating lease.
Proceeds from the sale of the Company's minority interest in the common stock of
NFR Security, Inc. were approximately $1,625,000 in the nine months ended
September 30, 2001.
The Company's financing activities provided cash of approximately $6,307,000 and
$776,000 during the nine months ended September 30, 2001 and 2002, respectively.
In fiscal 2001, the cash was provided primarily by the issuance of a private
placement of Series D Convertible Preferred Stock to certain accredited
investors pursuant to Rule 506 of Regulation D under the Securities Act of 1933,
as amended, for an aggregate offering price of $7,019,250. The Company received
$6,469,250 in net proceeds after payment of all fees and offering expenses. In
fiscal 2002, the cash was provided primarily by the issuance of 8% Secured
Convertible Notes with detachable warrants, due 180 days after issuance with an
additional 180-day extension available at the option of the Company or the
holders. The Company received $807,000 in net proceeds after payment of all fees
and offering expenses. The holders may convert their notes at any time prior to
maturity into the Company's common stock at a conversion price equal to the
greater of $0.25 per share or 60% of the average closing sales price of the
Company's common stock for the five trading day period immediately preceding the
Company's receipt of the holders notification of conversion. Detachable five
year warrants, exercisable at $0.50 per share, are included to provide one
warrant share for every dollar invested as warrant coverage to the note holders.
As of September 30, 2002, holders had converted $585,000, or 49%, of the notes
into shares of common stock at $.25 per share.
10
The Company had net tangible assets of $2,882,000 and ($629,000) at December 31,
2001 and September 30, 2002, respectively.
As of September 30, 2002, the Company had an accumulated deficit of
approximately $63,836,000.
The Company reported a net loss of $6,237,278, $8,862,015 and $9,679,944 for the
years ended December 31, 2001, 2000 and 1999, respectively, and a further net
loss of $4,522,916 for the nine months ended September 30, 2002. In addition,
the Company may continue to incur losses during 2002. Notwithstanding acceptance
of V-ONE's security concepts and critical acclaim for its products, there can be
no assurance that the consummation of sales of V-ONE's products to existing
customers or proposed agreements with potential customers will generate timely
or sufficient revenue for V-ONE to cover its costs of operations and meet its
cash flow requirements. Accordingly, V-ONE may not have the funds needed to
sustain operations during 2002.
In addition, Nasdaq notified the Company that it had questions concerning, among
other things, the Company's ability to maintain the minimum listing requirements
for continued Nasdaq listing. The Company was not able to satisfy the minimum
listing requirements. As a result, the Company's common stock has been removed
from the Nasdaq SmallCap Market and is now trading on the OTC Bulletin Board.
The transfer to the OTCBB was effected without interruption in the trading
market for the Company's securities. The ticker symbol for the Company's
securities has not changed.
The Company is seeking to expand its current banking relationships to explore
alternatives to preserve its operations and maximize shareholder value,
including potential strategic partnering relationships, a business combination
with a strategically placed partner, or a sale of the Company.
The Company reduced operating expenses for the third quarter by approximately
$1,107,000 and by approximately $2,114,000 for the nine months ended September
30, 2002, compared with the same periods last year. Steps were taken to reduce
expenses in mid-July by implementing a reduced workweek designed to ensure that
customers' requirements are met without jeopardizing the Company's workforce.
With these cost saving measures in place, the Company will focus its engineering
design efforts on completing features committed to meet the needs of existing
and potential customers in the government sector and supporting the
relationships with its channel partners for sales and marketing to commercial
accounts. Even at reduced operating levels, however, the Company may not be able
to maintain operations for any extended period of time without additional
capital or a significant strategic transformative event. The Company's ability
to continue as a going concern is dependent on its ability to generate
sufficient cash flow to meet its obligations on a timely basis or to obtain
additional funding.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is not materially exposed to fluctuations in currency exchange rates
as all of its products are invoiced in U.S. dollars. The Company does not hold
any derivatives or marketable securities. However, the Company is exposed to
interest rate risk. The Company believes that the market risk arising from
holdings of its financial instruments is not material.
Item 4. Controls and Procedures
Within the ninety-day day period prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's President, Chief Executive
Officer and Principal Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to Rule
13a-14 promulgated under the Securities Exchange Act of 1934, as amended. Based
upon that evaluation, the Company's President, Chief Executive Officer and
Principal Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting management to material information
relating to the Company required to be included in the Company's periodic
filings with the SEC. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date the Company carried out its evaluation.
11
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
In closings on July 23 and 26 and August 2, 2002, the Company issued in a
private placement to accredited investors 8% Secured Convertible Notes with
detachable warrants for an aggregate price of $1,188,000. The notes are due 180
days after issuance with an additional 180-day extension available at the option
of the Company or the holders. The holders may convert their notes at any time
prior to maturity into the Company's common stock at a conversion price equal to
the greater of $0.25 per share or 60% of the average closing sales price of the
Company's common stock for the five trading day period immediately preceding the
Company's receipt of the holders notification of conversion. Detachable five
year warrants to purchase 1,188,000 shares of the Company's common stock,
exercisable six months after issuance at $0.50 per share, are included to
provide 100% warrant coverage to the note holders. The net proceeds of the
offering will be used for general working capital purposes. The offering was
made pursuant to Rule 506 of Regulation D promulgated under the Securities Act
of 1933, as amended. The Company has filed a registration statement to register
for resale the common stock underlying the notes and detachable warrants.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this quarterly report on Form
10-Q for the period ended September 30, 2002:
Exhibit Description
------- -----------
99.1 Certification of Chief Executive Officer and Principal Financial
Officer Pursuant to Title 18, United States Code, Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
V-ONE CORPORATION
Registrant
Date: November 12, 2002 By: /s/ Margaret E. Grayson
------------------------------------------
Name: Margaret E. Grayson
Title: President, Chief Executive Officer
and Principal Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND
PRINCIPAL FINANCIAL OFFICER
I, Margaret E. Grayson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of V-ONE Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Margaret E. Grayson
---------------------------------------
Margaret E. Grayson
Chief Executive Officer and Principal
Financial Officer
13