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: March 31, 2004
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
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
20300 Century Blvd., Suite 200, Germantown, Maryland 20874
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(301) 515-5200
--------------
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
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 April 30, 2004
----- -----------------------------
Common Stock, $0.001 par value per share 30,304,865
V-ONE Corporation
Quarterly Report on Form 10-Q
INDEX
Page No.
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Condensed Balance Sheets as of March 31, 3
2004 (unaudited) and December 31, 2003
Condensed Statements of Operations for the 4
three months ended March 31, 2004
(unaudited) and March 31, 2003 (unaudited)
Condensed Statements of Cash Flows for the 5
three months ended March 31, 2004
(unaudited) and March 31, 2003 (unaudited)
Notes to the Condensed Financial Statements 6
(unaudited)
Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures 14
About Market Risk
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 2. Changes in Securities, Use of Proceeds and 14
Issuer Purchases of Equity Securities
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security 15
Holders
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
V-ONE CORPORATION
CONDENSED BALANCE SHEETS
March 31, 2004 December 31, 2003
ASSETS (Unaudited)
---------------- -----------------
Current assets:
Cash and cash equivalents $ 733,376 $ 27,755
Certificate of deposit-restricted - 26,500
Accounts receivable, less allowances of $15,500 570,064 606,426
Inventory, less allowances of $9,226 and $8,901 respectively 2,586 3,636
Deferred financing costs, net 387,101 -
Prepaid expenses and other assets 68,086 61,875
---------------- -----------------
Total current assets 1,761,213 726,192
Property and equipment, net 64,987 64,138
Deposits 95,141 95,141
---------------- -----------------
Total assets $ 1,921,341 $ 885,471
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,271,347 $ 1,320,361
Deferred revenue 850,994 692,914
Convertible notes payable, net of debt
discount of $1,178,302 and 0, respectively 171,698 493,000
Notes payable, other 155,203 151,248
---------------- -----------------
Total current liabilities 2,449,242 2,657,523
Notes payable, other - noncurrent 11,463 45,287
Deferred rent 41,597 40,535
---------------- -----------------
Total liabilities 2,502,302 2,743,345
Commitments and contingencies
Shareholders' deficiency:
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 shares issued and outstanding 3,021 3,021
(liquidation preference of $5,770,110)
Common stock, $.001 par value; 75,000,000 shares authorized;
30,304,865 and 27,900,568 shares issued and outstanding,
respectively 30,305 27,901
Accrued dividends payable 2,741,752 2,517,765
Additional paid-in capital 64,314,689 62,107,340
Accumulated deficit (67,670,771) (66,513,944)
---------------- -----------------
Total shareholders' deficiency (580,961) (1,857,874)
---------------- -----------------
Total liabilities and shareholders' deficiency $ 1,921,341 $ 885,471
================ =================
The accompanying notes are an integral part of these financial statements.
3
V-ONE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
Three months Three months
ended ended
March 31, 2004 March 31, 2003
(unaudited) (unaudited)
--------------------------------
Revenues:
Products $ 258,631 $ 641,102
Consulting and services 390,088 364,168
--------------------------------
Total revenues 648,719 1,005,270
Cost of revenues:
Products 6,563 15,405
Consulting and services 27,544 25,775
--------------------------------
Total cost of revenues 34,107 41,180
--------------------------------
Gross profit 614,612 964,090
Operating expenses:
Research and development 222,336 322,113
Sales and marketing 374,643 383,588
General and administrative 432,859 474,318
--------------------------------
Total operating expenses 1,029,838 1,180,019
--------------------------------
Operating loss (415,226) (215,929)
Other (expense) income:
Interest expense (518,460) (132,731)
Interest income 587 5,032
Other (expense) income 259 (8,970)
--------------------------------
Total other (expense) income (517,614) (136,669)
--------------------------------
Net loss (932,840) (352,598)
Dividends on preferred stock 223,987 170,047
--------------------------------
Loss attributable to holders of common stock $ (1,156,827) $ (522,645)
================================
Basic and diluted loss per share attributable
to holders of common stock $ (0.04) $ (0.02)
================================
Weighted average number of common
shares outstanding 29,922,594 26,718,329
================================
The accompanying notes are an integral part of these financial statements.
4
V-ONE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
Three months Three months
ended ended
March 31, 2004 March 31, 2003
(unaudited) (unaudited)
-------------- --------------
Cash flows from operating activities:
Net loss $ (932,840) $ (352,598)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 13,940 123,994
Amortization of debt discount 21,698 11,758
Interest expense-beneficial conversion feature 434,888 14,000
Interest expense on repricing of warrants - 23,890
Amortization of deferred financing costs 33,561 68,974
Noncash charge related to issuance of warrants,
options and stock as compensation 1,053 609
Changes in operating assets and liabilities:
Accounts receivable 36,362 (101,902)
Inventory 1,050 2,628
Prepaid expenses and other assets (6,210) (2,205)
Accounts payable and accrued expenses (49,014) 293,614
Accrued interest on note payable related to 748 -
financing costs
Deferred revenue 158,080 (70,320)
Deferred rent 1,061 (14,683)
-------------- --------------
Net cash used in operating activities (285,623) (2,241)
Cash flows from investing activities:
Net purchase of property and equipment (14,789) 6,248
Certificate of deposit redemption 26,500 8,500
-------------- --------------
Net cash provided by investing activities 11,711 14,748
Cash flows from financing activities:
Exercise of options and warrants 900 1,488
Issuance of common stock under employee stock plans 2,217 -
Proceeds of notes payable 1,200,000 -
Payments of deferred financing costs (192,967) -
Payments of notes payable (30,617) -
-------------- --------------
Net cash provided by financing activities 979,533 1,488
-------------- --------------
Net increase in cash and cash equivalents 705,621 13,995
Cash and cash equivalents, beginning of period 27,755 93,985
-------------- --------------
Cash and cash equivalents, end of period $ 733,376 $ 107,980
============== ==============
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" or "V-ONE") develops, markets and licenses a
comprehensive suite of network security products that enables 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 months ended March 31, 2004 and
March 31, 2003 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. The balance sheet at
December 31, 2003 is as presented in the financial statements at that date, but
does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. These
financial statements should be read in conjunction with the audited financial
statements as of December 31, 2003 and 2002 and for the three years ended
December 31, 2003, which are included in the Company's 2003 Annual Report on
Form 10-K ("Form 10-K").
The preparation of financial statements to be in conformity with accounting
principles generally accepted in the United States 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-month period ended March 31, 2004 are
not necessarily indicative of the results expected for the full year ending
December 31, 2004.
Certain prior year amounts have been reclassified to conform to the 2004
presentation. These changes had no impact on previously reported results of
operations.
3. Common and Preferred Stock
On March 31, 2004, the Company sold 14,570 shares of common stock at a price of
$.152 per share as part of its Employee Stock Purchase Plan.
As of March 31, 2004, holders had converted $1,038,000 or 87% of its 8% Secured
Convertible Notes ("8% Notes") into shares of Common Stock. In April 2004,
holders converted the remaining $150,000 or 13% of the 8% Notes into shares of
Common Stock.
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 $449,650,
5,635,191 and $6,237,278 for the years ended December 31, 2003, 2002 and 2001,
respectively, and a further net loss of $932,840 for the three months ended
March 31, 2004. Notwithstanding acceptance of the Company's security concepts
and critical acclaim for its products, there can be no assurance that the
consummation of sales of the Company's products to existing customers or
proposed agreements with potential customers will generate timely or sufficient
revenue for the Company to cover its costs of operations and meet its cash flow
requirements. Accordingly, the Company may not have the funds needed to sustain
operations during 2004.
In July 2002, the Company took steps to reduce expenses by implementing a
reduced workweek designed to ensure that customers' requirements are met without
jeopardizing the Company's workforce. The Company effected additional staff
reductions in January 2003 and implemented a four-day work week further reducing
expenses. The Company returned its staff to a full work week effective February
1, 2004 to meet engineering enhancements required for existing customers and to
introduce its products to a broader customer base. For the immediate future,
V-ONE will focus on existing and potential customers in the government sector,
6
targeted marketing operations to commercial accounts and continued minimization
of general and administrative expenditures. V-ONE may not be successful in
further reducing operating levels without jeopardizing the ability to serve
existing customers or grow its business base. In February 2004, the Company
completed a private placement of 7% Subordinated Convertible Notes with
detachable warrants for an aggregate of $1,200,000, which resulted in net
proceeds to the Company of $1,065,690. The Company believes that to maintain
operations for any extended period of time it must generate revenue from
existing and new customers, raise additional capital or undergo a significant
strategic transformative event. The Company's ability to reach sustainable
profitability is dependent on its ability to generate sufficient cash flow to
meet its obligations and needs on a timely basis or to obtain additional
funding.
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.
5. 8% Secured Convertible Notes with Detachable Warrants
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. 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. In January 2003, the Company
elected to extend the 8% Notes for an additional 180 days, paid the interest
accrued under the initial term of the 8% Notes and agreed to adjust the exercise
price of the warrants from $0.50 per share to $0.15 per share. In July 2003, the
Company requested and received an extension of the 8% Notes for an additional
180 days and agreed to an increase in the interest rate from 10% to 12% during
the extension period. In connection with a restructuring of the 8% Notes, the
Company agreed in January 2004 to adjust the conversion price of certain 8%
Notes constituting $150,000 in principal to $.18 per share in exchange for an
extension of the term of such 8% Notes to July 15, 2004 at an interest rate of
10%. Also in connection with the January 2004 restructuring, the Company
adjusted the conversion price of the remaining 8% Notes outstanding, which
constituted $343,000 in principal, to $.15 per share and granted warrants to
purchase a total of 250,000 shares of Common Stock at an exercise price of $0.18
per share to Joseph Gunnar & Co., LLC, placement agent for the 8% Notes
offering. The holders of such 8% Notes converted them into 2,286,667 shares of
Common Stock. In the three months ended March 31, 2004, 8% Note holders
exercised warrants to purchase 29,455 shares of Common Stock and Joseph Gunnar &
Co., LLC exercised warrants to purchase 62,355 shares of Common Stock.
Upon the restructuring of the 8% Notes in January 2004, the Company recorded
interest expense of $434,888 in accordance with the accounting requirements for
a beneficial conversion feature on the 8% Notes.
As of March 31, 2004, holders had converted $1,038,000 or 87% of the 8% notes
into shares of Common Stock. In April 2004, holders converted the remaining
$150,000 or 13% of the 8% Notes into shares of Common Stock at $.18 per share.
The Company recorded $3,250 in accrued interest expense for the first quarter of
2004. Interest expense is payable upon conversion of the 8% Notes.
6. 7% Subordinated Convertible Notes
In a closing on February 27, 2004, V-ONE issued 7% Subordinated Convertible
Notes ("7% Notes") with warrants for an aggregate principal amount of
$1,200,000, resulting in net proceeds to V-ONE of $1,065,690. The 7% Notes
mature on February 27, 2009. Interest at the rate of 7% per annum is payable
semi-annually at the option of V-ONE in cash or in shares of Common Stock. The
7% Notes rank senior to the Common Stock and junior to the Series C Shares and
Series D Shares as to the payment of dividends and as to distribution of assets
upon liquidation, dissolution or winding up of V-ONE. So long as at least
$500,000 of the principal amount of the 7% Notes is outstanding, the affirmative
vote of the holders of at least 75% of the principal amount of the 7% Notes
outstanding is required to issue any securities that rank senior to or on parity
with the 7% Notes.
The holders may convert the principal amount of their 7% Notes, in whole or in
part, at any time into shares of Common Stock at a conversion price of $0.20 per
share. In addition, subject to certain terms, the principal amount of the 7%
Notes plus all accrued and unpaid interest shall automatically convert into
shares of Common Stock at the then current conversion price on the earlier of
(i) February 27, 2009 and (ii) the first date which is at least 180 days
following the effective date of the Registration Statement providing for the
resale of the shares of Common Stock issuable upon conversion of the 7% Notes
7
that the closing bid price of V-ONE Common Stock exceeds $1.00 for a period of
20 consecutive trading days.
An event of default will occur if V-ONE fails to make any principal payment
under the 7% Notes, V-ONE fails to make any interest payment for a period of
five days after such payment is due, V-ONE fails to timely file the Registration
Statement providing for the resale of the shares of Common Stock issuable upon
conversion of the 7% Notes or the Registration Statement is not declared
effective by the SEC within 180 days of February 27, 2004, the effectiveness of
the Registration Statement lapses for a period of 20 consecutive trading days,
or upon the occurrence of other default events, including, but not limited to,
an assignment for the benefit of creditors, an application for the appointment
of a trustee or receiver or the commencement of a bankruptcy proceeding. If an
event of default occurs, the Notes will bear interest at the lesser of 12% and
the maximum applicable legal rate per annum from the date of the event of
default until such default is cured.
Upon the occurrence of certain events of default and other triggering events, a
7% Note holder shall have the right to require V-ONE to prepay in cash all or a
portion of the holder's 7% Note at 120% of the aggregate principal amount of the
7% Note, plus all accrued and unpaid interest. Similar provisions apply if V-ONE
cannot fully convert a 7% Note into shares of registered Common Stock upon the
receipt of a proper conversion notice from the holder. In addition, in the event
of a major corporate transaction such as the consolidation, merger or other
business combination of V-ONE into another entity or a sale or transfer of more
than 50% of V-ONE's assets, the 7% Note holder shall have the right to require
V-ONE to prepay in cash all or a portion of the holder's 7% Note at 100% of the
aggregate principal amount of the 7% Note, plus all accrued and unpaid interest.
If the major corporate transaction is consummated within six months of the
issuance of the 7% Note, then the prepayment shall be at 110% of the aggregate
principal amount of the 7% Note, plus all accrued and unpaid interest. Also,
beginning one year after the issuance of the 7% Notes, V-ONE may prepay any
portion or all of the outstanding principal balance of the 7% Notes together
with all accrued and unpaid interest at 110% of the aggregate principal amount
of the 7% Notes plus any accrued and unpaid interest.
For twelve months after the issuance of the 7% Notes, each holder shall have a
right of first refusal to purchase its pro rata portion of V-ONE Common Stock
(or any securities convertible, exercisable or exchangeable into Common Stock)
offered to a third party in a private transaction on the same terms as those
offered to the third party, other than in certain permitted financings. If a
holder elects not to exercise its right of first refusal, the other holders may
participate on a pro rata basis. If the holders do not participate, V-ONE may
proceed with the transaction with the third party.
In connection with the 7% Notes offering, V-ONE issued detachable warrants to
purchase 6,000,000 shares of Common Stock to the holders of the 7% Notes. The
warrants are exercisable beginning on August 27, 2004 at an exercise price of
$0.25 per share and expire on August 27, 2008. Beginning 180 days after the
effective date of a Registration Statement providing for the resale of the
shares of Common Stock issuable upon conversion of the 7% Notes and exercise of
the warrants, V-ONE may call up to 100% of the warrants if the per share market
value of its Common Stock has been greater than $0.75 for a period of 20
consecutive trading days by issuing a call notice to the warrant holders. The
rights and privileges granted to a warrant holder with respect to the shares
subject to the call notice shall expire on the twentieth day after the holder
receives the call notice if the holder does not exercise the warrant. If the
holder does not exercise the warrant, V-ONE shall remit to the warrant holder
(i) $0.01 per share subject to the call notice and (ii) a new warrant
representing the number of shares of Common Stock, if any, which were not
subject to the call notice.
The exercise price and number of shares of Common Stock to be issued upon
conversion of the 7% Notes and exercise of the warrants are subject to equitable
adjustment in the event of stock dividends, stock splits and similar events
affecting the Common Stock. In addition, if V-ONE issues any shares of Common
Stock or equivalents at a purchase price less than the then current conversion
price for the 7% Notes or warrant exercise price, the conversion price and
warrant exercise price will be equitably reduced, and number of shares of Common
Stock to be issued upon conversion of the 7% Notes and exercise of the warrants
adjusted accordingly. However, in no event shall the conversion price, or
exercise price in the event of the issuance of V-ONE securities at less than the
current warrant exercise price, be less than $0.15 per share.
In connection with the 7% Notes offering, V-ONE granted warrants to purchase up
to a total of 780,000 shares of Common Stock to H.C. Wainwright & Co., Inc.,
placement agent for the 7% Notes offering. The placement agent warrants include
a cashless exercise provision. The remaining terms of the placement agent
warrants mirror those of the warrants granted in connection with the 7% Notes
offering.
Upon issuance of the 7% Notes, the Company recorded a debt discount of
approximately $1,200,000 in accordance with the accounting requirements for a
beneficial conversion feature on the 7% Notes. The debt discount will be
amortized over the 5 year term of the notes. During the three months ended March
31, 2004, the Company amortized approximately $21,698 of the discount to
8
interest expense. Additionally, the Company recorded $7,933 in accrued interest
expense for the first quarter of 2004.
7. Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), allows companies to account for stock-based
compensation either under the provisions of SFAS 123 or under the provisions of
Accounting Principles Bulletin No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), as amended by FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation (an Interpretation of APB
Opinion No. 25)," but requires pro forma disclosure in the footnotes to the
financial statements as if the measurement provisions of SFAS 123 had been
adopted. The Company has elected to account for its stock-based compensation in
accordance with the provisions of APB 25. The following table illustrates the
effect on net income (loss) and earnings per share if the Company had applied
the fair value recognition provisions of SFAS 123:
------------ ------------
2004 2003
------------ ------------
Net Loss, as reported $ (1,156,827) $ (522,645)
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects $ (30,476) $ (66,407)
------------ ------------
Pro forma net loss $ (1,187,303) $ (589,052)
============ ============
Earnings per share:
Basic - as reported $ (0.04) $ (0.02)
Basic - pro forma $ (0.04) $ (0.02)
Diluted - as reported $ (0.04) $ (0.02)
Diluted - pro forma $ (0.04) $ (0.02)
This disclosure is in accordance with Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," that the Company has adopted in these financial statements.
Stock options and warrants granted to non-employees are accounted for in
accordance with SFAS 123 and the Emerging Issues Task Force Consensus No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services," which requires
the value of the options to be periodically re-measured as they vest over a
performance period. The fair value of the options and warrants is determined
using the Black-Scholes model.
8. Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per
share:
9
Three Months ended March 31,
------------------------------------
2004 2003
---------------- ---------------
Numerator:
Net Loss $ (932,840) $ (352,598)
Less: Dividend on preferred stock (223,987) (170,047)
Net loss attributable to holders of common stock $ (1,156,827) $ (522,645)
================ ================
Denominator:
Denominator for basic and diluted net loss per share
- weighted average shares 29,922,594 26,718,329
Effect of dilutive securities:
Preferred Stock - -
Stock Options - -
Warrants - -
---------------- ----------------
Dilutive potential common shares - -
---------------- ----------------
Denominator for diluted net loss per share-adjusted
weighted average shares 29,922,594 26,718,329
================ ================
Net loss attributable to holders of common stock $ (0.04) $ (0.02)
================ ================
The following equity instruments were not included in the diluted net loss per
share calculation because their effect would be anti-dilutive:
Three Months ended March 31,
2004 2003 2002
--------- --------- ----------
Preferred stock:
Series D 3,021,000 3,021,000 3,021,000
Stock options 5,917,532 4,900,532 4,526,857
Warrants 9,387,326 2,810,908 2,586,204
9. Supplemental Cash Flow Disclosure
Three Months Ended
March 31, 2004 March 31, 2003
-------------- --------------
Cash paid for interest $ 37,481 $ 24,120
Non-cash investing and financing activities:
Debt discount on 7% Convertible Notes $ 1,200,000 -
Issuance of warrants for financing costs $ 227,696 -
10
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 Securities Exchange Act of 1934, as amended. 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 decreased from approximately $1,005,000 for the three months
ended March 31, 2003 to approximately $649,000 for the three months ended March
31, 2004. This decrease of approximately $356,000 or 35% is due primarily to a
$382,000 decrease in product revenue while consulting and services revenue for
the three months ended March 31, 2004 was up approximately $26,000 or 7%
compared to the first quarter of 2003. Product revenues are derived principally
from software licenses and the sale of hardware products. Product revenues
decreased from approximately $641,000 for the three months ended March 31, 2003
to approximately $259,000 for the three months ended March 31, 2004. 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 from
approximately $364,000 for the three months ended March 31, 2003 to
approximately $390,000 for the three months ended March 31, 2004. This was due
principally to an increase in the number of renewing maintenance contracts
provided to customers in the first quarter of fiscal 2004.
The Company cannot be certain that revenue will, in fact, become more
predictable or certain 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 increased from
approximately 4% for the three months ended March 31, 2003 to approximately 5%
for the three months ended March 31, 2004. The percentage increase was primarily
due to lower sales of software licenses and SmartGuard appliances sales in the
current year. Total cost of revenues is comprised of cost of product revenues
and cost of consulting and services revenues.
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 $15,000 for the three months ended March 31, 2003 to approximately
$7,000 for the three months ended March 31, 2004. The decrease in cost of
product revenues for the three months ended March 31, 2004 was primarily
attributable to higher sales of software licenses and lower sales of SmartGuard
appliances in the current year. Cost of product revenues as a percentage of
product revenues was approximately 2% for the three months ended March 31, 2003
and March 31, 2004.
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Cost of consulting and services revenue consists principally of personnel and
related costs incurred in providing consulting, support and training services to
customers and costs of third-party product support. Cost of consulting and
services revenues increased from approximately $26,000 for the three months
ended March 31, 2003 to approximately $28,000 for the three months ended March
31, 2004. Cost of consulting and services revenues as a percentage of consulting
and services revenue was approximately 7% for the three months ended March 31,
2003 and March 31, 2004.
OPERATING EXPENSES
Research and Development -- Research and development expense consists
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 $322,000 for the three months ended March 31, 2003 to
approximately $222,000 for the three months ended March 31, 2004. The dollar
decrease of approximately $100,000 was primarily due to lower salary expenses of
$30,000, lower depreciation expense of $50,000, lower rent expense of $12,000
and lower telephone expense of $5,000. Research and development expense as a
percentage of total revenue was approximately 32% for the three months ended
March 31, 2003 and approximately 34% for the three months ended March 31, 2004.
Sales and Marketing -- Sales and marketing expense consists principally of the
costs of sales and marketing personnel, advertising, promotions and trade shows.
Sales and marketing expenses decreased from approximately $384,000 for the three
months ended March 31, 2003 to approximately $375,000 for the three months ended
March 31, 2004. The dollar decrease for the three months ended March 31, 2004 of
$9,000 relates primarily to lower travel expense of $5,000, lower telephone
expense of $5,000, lower public relations expense of approximately $9,000 and
lower depreciation expense of $41,000 offset in part by higher salary expense of
$38,000, higher commission expense of $11,000 and higher marketing materials
expense of $8,000. Sales and marketing expenses as a percentage of total
revenues were approximately 38% for the three months ended March 31, 2003 and
approximately 58% for the three months ended March 31, 2004. The percentage
increase is due to lower revenue for fiscal 2004 when compared to the same
period for fiscal 2003.
General and Administrative -- General and administrative expense consists
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 $474,000 for the three
months ended March 31, 2003 to approximately $433,000 for the three months ended
March 31, 2004. The decrease in expense of approximately $41,000 was due
principally to lower accounting and audit fees of $81,000, lower depreciation
expense of $19,000, lower membership fee expense of $22,000 and a decrease in
miscellaneous expense of $15,000 partially offset by an increase in legal fees
of $63,000 and higher consulting expense of $42,000. General and administrative
expenses as a percentage of total revenues were approximately 47% for the three
months ended March 31, 2003 and 67% for the three months ended March 31, 2004.
Other (Expense) Income -- Other (expense) income represents the income or
expense resulting from non-operational activities that are of an infrequently
occurring nature. Other (expense) income increased from approximately $(9,000)
for the three months ended March 31, 2003 to approximately zero for the three
months ended March 31, 2004. The expense in 2003 was due primarily to early
retirement of certain fixed assets.
Interest Income and Expense -- Interest income represents interest earned on
cash and cash equivalents. Interest income decreased from approximately $5,000
for the three months ended March 31, 2003 to approximately $1,000 for the three
months ended March 31, 2004. The decrease was attributable to lower levels of
cash and cash equivalents in the current period. Interest expense represents
interest paid or payable on loans and capitalized lease obligations. Interest
expense increased from approximately $133,000 for the three months ended March
31, 2003 to approximately $518,000 for the three months ended March 31, 2004,
substantially all of which was for recognition of a beneficial conversion
feature on the 7% Subordinated Convertible Notes.
Income Taxes -- The Company did not incur income tax expenses as a result of the
net loss incurred during the three months ended March 31, 2003 and 2004.
Dividend on Preferred Stock -- The Company provided for dividends on preferred
stock of approximately $224,000 during the three months ended March 31, 2004 and
approximately $170,000 for the three months ended March 31, 2003. 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.
12
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used cash of approximately $2,000 for the
three months ended March 31, 2003 and used cash of approximately $286,000 for
the three months ended March 31, 2004. Cash used in operating activities
resulted principally from net operating losses in the periods offset in part by
an increase in accounts payable in 2003 and interest expense in 2004. The
increase in cash used in operating activities of approximately $283,000 in the
first quarter of 2004 was attributable primarily to an increase in net operating
loss of $580,000.
The Company's investing activities provided cash of approximately $15,000 in the
three months ended March 31, 2003 and approximately $12,000 in the three months
ended March 31, 2004. Net capital expenditures for property and equipment were
approximately $6,000 and ($15,000) during the three months ended March 31, 2003
and 2003, respectively. These expenditures have generally been for computer
workstations and personal computers, office furniture and equipment, and
leasehold additions and improvements.
The Company's financing activities provided cash of approximately $1,500 during
the three months ended March 31, 2003 and provided cash of approximately
$980,000 during the three months ended March 31, 2004. In fiscal 2004, the cash
was provided primarily by the 7% Notes.
The Company had net tangible assets of ($1,858,000) and ($1,076,000) at December
31, 2003 and March 31, 2004, respectively. As of March 31, 2004, the Company had
an accumulated deficit of approximately $67,560,000.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company reported a net loss of $449,650,
$5,635,191 and $6,237,278 for the years ended December 31, 2003, 2002 and 2001,
respectively, and a further net loss of $932,840 for the three months ended
March 31, 2004. Notwithstanding acceptance of the Company's security concepts
and critical acclaim for its products, there can be no assurance that the
consummation of sales of the Company's products to existing customers or
proposed agreements with potential customers will generate timely or sufficient
revenue for the Company to cover its costs of operations and meet its cash flow
requirements. Accordingly, the Company may not have the funds needed to sustain
operations during 2004.
In July 2002, the Company took steps to reduce expenses by implementing a
reduced workweek designed to ensure that customers' requirements are met without
jeopardizing the Company's workforce. The Company effected additional staff
reductions in January 2003 and implemented a four-day work week further reducing
expenses. The Company returned its staff to a full work-week effective February
1, 2004 to meet engineering enhancements required for existing customers and to
introduce its products to a broader customer base. For the immediate future,
V-ONE will focus on existing and potential customers in the government sector,
targeted marketing operations to commercial accounts and continued minimization
of general and administrative expenditures. V-ONE may not be successful in
further reducing operating levels without jeopardizing the ability to serve
existing customers or grow its business base. In February 2004, the Company
completed a private placement of 7% Subordinated Convertible Notes with
detachable warrants for an aggregate of $1,200,000, which resulted in net
proceeds to the Company of $1,065,690. The Company believes that to maintain
operations for any extended period of time it must generate revenue from
existing and new customers, raise additional capital or undergo a significant
strategic transformative event. The Company's ability to reach sustainable
profitability is dependent on its ability to generate sufficient cash flow to
meet its obligations and needs on a timely basis or to obtain additional
funding.
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.
CONTRACTUAL OBLIGATIONS
The following table discloses aggregate information about the Company's
contractual obligations as of March 31, 2004 and the periods in which payments
are due:
13
Payments Due By Period
-------------------------------------------------------
Remainder 2005 2007 Thereafter Total
of 2004 and 2006 and 2008
-------------------------------------------------------
Long-term debt obligations $104,027 $ 46,234 $0 $0 $ 150,261
Convertible debt 150,000 0 0 1,200,000 1,350,000
--------- -------- -------- ---------- ----------
Operating leases 174,096 465,069 296,275 0 935,440
--------- ------- -------- ---------- ----------
$428,123 $511,303 $296,275 $1,200,000 $2,435,701
========= ======== ======== ========== ==========
OFF-BALANCE SHEET ARRANGEMENTS
The Company had no material off-balance sheet arrangements during the first
three months of fiscal 2004 or 2003.
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 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.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On March 20, 2003, BSA Sales, Inc. d/b/a BSA ("BSA") filed a complaint against
the Company in the Court of Common Pleas in the County of Greenville, South
Carolina, alleging breach of contract for failure to pay disputed fees and
seeking damages of a maximum of $75,000. The fees relate to the early
termination of a contract by the Company for BSA's non-performance under the
contract. The parties proceeded to arbitration as required by the state of North
Carolina, but were unsuccessful in settling the matter. The Company agreed to a
$20,000 settlement in the matter in April 2004 and the complaint was dismissed
with prejudice.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
In a closing on February 27, 2004, V-ONE issued 7% Subordinated Convertible
Notes with warrants to certain accredited investors for an aggregate principal
amount of $1,200,000, resulting in net proceeds to V-ONE of $1,065,690, which
will be used for general working capital purposes. The 7% Notes mature on
February 27, 2009 and were sold pursuant to Rule 506 of Regulation D promulgated
under the Securities Act of 1933, as amended. Interest at the rate of 7% per
annum is payable semi-annually at the option of V-ONE in cash or in shares of
Common Stock. The holders may convert the principal amount of their 7% Notes, in
whole or in part, at any time into shares of Common Stock at a conversion price
of $0.20 per share. In addition, subject to certain terms, the principal amount
of the 7% Notes plus all accrued and unpaid interest shall automatically convert
into shares of Common Stock at the then current conversion price on the earlier
of (i) February 27, 2009 and (ii) the first date which is at least 180 days
following the effective date of the Registration Statement providing for the
resale of the shares of Common Stock issuable upon conversion of the 7% Notes
that the closing bid price of V-ONE Common Stock exceeds $1.00 for a period of
20 consecutive trading days.
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In connection with the 7% Notes offering, V-ONE issued detachable warrants to
purchase 6,000,000 shares of Common Stock to the holders of the 7% Notes. The
warrants are exercisable beginning on August 27, 2004 at an exercise price of
$0.25 per share and expire on August 27, 2008. Beginning 180 days after the
effective date of a Registration Statement providing for the resale of the
shares of Common Stock issuable upon conversion of the 7% Notes and exercise of
the warrants, V-ONE may call up to 100% of the warrants if the per share market
value of its Common Stock has been greater than $.75 for a period of 20
consecutive trading days by issuing a call notice to the warrant holders. The
rights and privileges granted to a warrant holder with respect to the shares
subject to the call notice shall expire on the twentieth day after the holder
receives the call notice if the holder does not exercise the warrant. If the
holder does not exercise the warrant, V-ONE shall remit to the warrant holder
(i) $0.01 per share subject to the call notice and (ii) a new warrant
representing the number of shares of Common Stock, if any, which were not
subject to the call notice. Also in connection with the 7% Notes offering, V-ONE
granted warrants to purchase up to a total of 1,260,000 shares of Common Stock
to H.C. Wainwright & Co., Inc., placement agent for the 7% Notes offering. The
placement agent warrants contain a cashless exercise provision. The other terms
of the placement agent warrants mirror those of the warrants granted in
connection with the 7% Notes offering.
For the terms and conditions of the 7% Notes and warrants, refer to V-ONE's Form
8-K filed with the SEC on March 5, 2004 and note 6 to the financial statements
contained herein.
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 March 31, 2004:
Exhibit Description
------- -----------
31 Certification of Chief Executive Officer and Principal Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 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
Form 8-K filed March 5, 2004, reporting under Items 5 and 7.
15
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: May 11, 2004 By: /s/ Margaret E. Grayson
---------------------------------------
Name: Margaret E. Grayson
Title: President, Chief Executive Officer
and Principal Financial Officer
16