UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED: SEPTEMBER 30, 1998
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
-----------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1953278
--------------------------------------------------------
(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
--------------
(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 12, 1998
----- --------------------------------
COMMON STOCK, $0.001 PAR VALUE PER SHARE 13,930,379
<PAGE>
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 3
September 30, 1998 (unaudited) and
December 31, 1997 (unaudited)
Condensed Statements of Operations 4
for the Three and Nine Months Ended
September 30, 1998 (unaudited) and
1997 (unaudited)
Condensed Statements of Cash Flows 5
for the Nine Months Ended September
30, 1998 (unaudited) and 1997
(unaudited)
Notes to the Condensed Financial 6
Statements (unaudited)
Item 2 Management's Discussion and Analysis 9
of Financial Condition and Results of
Operations
Item 3 Quantitative and Qualitative 12
Disclosures About
Market Risk
PART II. OTHER INFORMATION 13
Signatures 15
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
V-ONE CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
1998 1997
(unaudited - as (as adjusted,
adjusted, Note 6) Note 6)
----------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 529,657 $ 6,203,525
Accounts receivable, net 1,109,348 794,395
Inventory, net 609,368 583,894
Prepaid expenses and other current assets 240,593 328,261
------------------- ---------------
Total current assets 2,488,966 7,910,075
Property and equipment, net 897,599 1,001,581
Licensing fee, net 326,142 538,434
Other assets 985,005 863,186
------------------- ---------------
Total assets $ 4,697,712 $ 10,313,276
=================== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,074,498 $ 1,151,589
Deferred income 843,207 812,647
Notes payable - current 9,425 16,667
Capital lease obligations - current 63,950 17,126
------------------- --------------
Total current liabilities 2,991,080 1,998,029
Notes payable - noncurrent - 5,555
Deferred rent - 36,879
Capital lease obligations - noncurrent 204,662 295,306
------------------- --------------
Total liabilities 3,195,742 3,225,769
------------------- --------------
Commitments and contingencies
Series A convertible preferred stock, mandatorily redeemable,
$0.001 par value; 13,333,333 shares authorized;
2,462 and 4,000 shares outstanding
as of September 30, 1998 and December 31, 1997,
respectively (liquidation preference of $2,472,258) 2,188,884 3,766,297
------------------- --------------
Shareholders' equity:
Common stock, $0.001 par value; 33,333,333 shares authorized;
13,915,379 and 13,070,235 shares issued and outstanding as
of September 30, 1998 and December 31, 1997, respectively 13,915 13,070
Additional paid-in capital 26,669,890 24,649,538
Notes receivable from sales of common stock (50,726) (166,011)
Accumulated deficit (27,319,993) (20,285,387)
------------------- --------------
Total shareholders' equity (686,914) 4,211,210
------------------- --------------
Total liabilities and shareholders' equity $ 4,697,712 $ 10,313,276
=================== ==============
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
<PAGE>
V-ONE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
(as adjusted, (as adjusted, (as adjusted, (as adjusted,
Note 6) Note 6) Note 6) Note 6)
-------------- -------------- -------------- -------------
Revenues:
Products $ 1,860,151 $ 2,056,693 $ 4,101,531 $ 4,362,312
Consulting and services 139,319 125,015 436,664 383,583
-------------- -------------- -------------- -------------
Total revenues 1,999,470 2,181,708 4,538,195 4,745,895
-------------- -------------- -------------- -------------
Cost of revenues:
Products 285,140 666,231 1,256,835 1,514,090
Consulting and services 45,000 27,745 68,060 60,032
-------------- -------------- -------------- -------------
Total cost of revenues 330,140 693,976 1,324,895 1,574,122
-------------- -------------- -------------- -------------
Gross profit 1,669,330 1,487,732 3,213,300 3,171,773
-------------- -------------- -------------- -------------
Operating expenses:
Sales and marketing 1,260,937 1,582,389 4,358,175 5,320,227
General and administrative 880,468 480,896 2,903,368 2,328,809
Research and development 1,050,561 800,452 2,932,843 2,254,400
-------------- -------------- -------------- -------------
Total operating expenses 3,191,966 2,863,737 10,194,386 9,903,436
Operating loss (1,522,636) (1,376,005) (6,981,086) (6,731,663)
-------------- -------------- -------------- -------------
Other (expense) income:
Interest expense (8,405) (742) (51,870) (5,248)
Interest income 14,940 73,662 122,930 291,303
-------------- -------------- -------------- -------------
Total other income 6,535 72,920 71,060 286,055
-------------- -------------- -------------- -------------
Net loss (1,516,101) (1,303,085) (6,910,026) (6,445,608)
Deemed dividend on preferred stock 13,701 - 13,701 -
Dividend on preferred stock 30,775 - 110,879 -
-------------- -------------- -------------- -------------
Loss attributable to holders
of common stock $ (1,560,577) $ (1,303,085) $ (7,034,606) $ (6,445,608)
============== ============== ============== =============
Basic and diluted loss per share
attributable to holders of
common stock $ (0.11) $ (0.0) $ (0.52) $ (0.0)
============== ============== ============== =============
Weighted average number of
common shares outstanding 13,907,408 12,956,924 13,559,314 12,806,831
============== ============== ============== =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
4
<PAGE>
V-ONE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Nine months Nine months
ended ended
September 30, September 30,
1998 1997
(as adjusted, (as adjusted,
Note 6) Note 6)
-------------- -------------
Cash flows from operating activities:
Net loss $ (6,910,026) $ (6,445,608)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 466,446 362,286
Noncash charge related to issuance of warrants 394,000 -
Changes in assets and liabilities:
Accounts receivable, net (314,953) (648,806)
Inventory, net (25,474) 77,328
Prepaid expenses and other assets (34,151) (330,312)
Deferred income 30,560 148,003
Deferred rent (36,879) (41,396)
Accounts payable and accrued expenses 922,899 (409,191)
------------- ------------
Net cash used in operating activities (5,507,578) (7,287,696)
------------- ------------
Cash flows from investing activities:
Purchase of property and equipment (150,172) (459,430)
Investment in affiliate - (250,000)
Collection of note receivable - 88,480
------------- ------------
Net cash used in investing activities (150,172) (620,950)
------------- ------------
Cash flows from financing activities:
Exercise of options and warrants 200,791 1,057,688
Payment of stock issuance costs (49,413) -
Dividends paid (110,879) -
Principal payments on capitalized lease obligations (43,820) (62,761)
Repayment of notes payable (12,797) (8,333)
------------- ------------
Net cash (used in) provided by
financing activities (16,118) 986,594
------------- ------------
Net decrease in cash and cash equivalents (5,673,868) (6,922,052)
Cash and cash equivalents at beginning of period 6,203,525 10,894,375
------------- ------------
Cash and cash equivalents at end of period $ 529,657 $ 3,972,323
============= ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
5
<PAGE>
V-ONE CORPORATION
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The condensed financial statements for the three and nine months ended September
30, 1998 and September 30, 1997 of V-ONE Corporation ("V-ONE" or the "Company")
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 for the year ended
December 31, 1997, which are included in the Company's 1997 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
impact future results of operations and cash flows.
The results of operations for the three and nine month periods ended September
30, 1998 are not necessarily indicative of the results expected for the full
year ending December 31, 1998.
2. Risks and Uncertainties
The Company invests its cash primarily in money market funds with an
international commercial bank. The Company has not experienced any losses to
date on its invested cash. The Company's cash balances exceed federally insured
amounts. The Company sells its product to a wide variety of customers in a
variety of industries. The Company performs ongoing credit evaluations of its
customers but does not require collateral or other security to support customer
accounts receivable. In management's opinion, the Company has provided
sufficient provisions to prevent a significant impact of credit losses to the
financial statements.
3. Computation of Net Loss Per Common Share
The Company adopted Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128") effective December 31, 1997. All prior period
net loss per share amounts have been restated to comply with the provisions of
SFAS 128. Basic earnings (or loss) per share is computed by dividing net income
or (loss) by the weighted average number of shares of common stock outstanding.
Diluted earnings per share is computed by dividing net income (or loss) by the
weighted average common and potentially dilutive common equivalent shares
outstanding. However, the computation of diluted loss per share was antidilutive
in each of the periods presented; therefore, basic and diluted loss per share
are the same for all periods.
4. Series A Convertible Preferred Stock
During the six months ended June 30, 1998, holders of Series A Convertible
Preferred Stock ("Series A Stock"), which is mandatorily redeemable, had elected
to convert a total of 1,538 shares into 720,670 shares of Common Stock at
conversion prices ranging from $2.1038 to $2.2950 per share, and received
warrants to purchase 144,135 shares of Common Stock at an exercise price of
$4.77 per share. No conversion of Series A Stock took place during the quarter
ended September 30, 1998.
Due to the Maximum Share Amount limitation found in Section 7(a)(1) of the
Certificate of Designations of the Series A Stock ("Certificate"), the Company
is not presently obligated to convert shares of Series A Stock held by Advantage
Fund II Ltd. ("Advantage"). On September 21, 1998, the Company sent an
inconvertibility notice to Advantage pursuant to Section 7(a)(2) of the
Certificate indicating that, as of September 11, 1998, Advantage had the right
to have 619 shares of Series A Stock redeemed by the Company for the Share
Limitation Redemption Price (which term is defined in the Certificate). This
6
<PAGE>
amount will vary as the market price of the Company's Common Stock changes.
On September 22, 1998, the Company and Advantage entered into a waiver agreement
("Waiver Agreement") and Amendment No. 1 ("Amendment No. 1") to the Registration
Rights Agreement dated as of December 3, 1997 by and between the Company and
Advantage (as amended, "Registration Rights Agreement"). Pursuant to the Waiver
Agreement, Advantage has waived its right until November 20, 1998 (1) to convert
or require the Company to redeem its Series A Stock under certain circumstances,
(2) to an adjustment to the "Ceiling Price" and the "Conversion Percentage" (as
such terms are defined in the Certificate), and (3) to the "Periodic Amount"
pursuant to Section 2(c) of the Registration Rights Agreement (the term
"Periodic Amount" is defined in Section 2(c) of the Registration Rights
Agreement).
Under the Waiver Agreement, the Company also has the right to redeem the Series
A Stock held by Advantage at any time until November 20, 1998 at a price of
$1,300 per share. If the shares of Series A Stock are so redeemed, all accrued
dividends will be waived by Advantage, without any additional payment by the
Company. The Company entered into a Placement Agent Agreement on October 9, 1998
with LaSalle St. Securities, Inc. ("LaSalle") to raise the funds needed to
redeem the shares of Series A Stock held by Advantage. (See note 7.)
In consideration for Advantage entering into the Waiver Agreement, the Company
granted to Advantage warrants to purchase 100,000 shares of the Company's Common
Stock at an exercise price of $2.125 per share and warrants to purchase an
additional 389,441 shares of the Company's Common Stock at an exercise price of
$4.77 per share, all of which expire on September 21, 2003 (collectively
"Additional Warrants"). As a result of issuing the Additional Warrants, the
Company will ratably record a deemed dividend over the effective period of the
Waiver Agreement. In addition, under the terms of the Waiver Agreement,
Advantage will no longer receive Series A Warrants upon conversion of the Series
A Stock. The Series A Stock is convertible solely into shares of Common Stock as
provided in the Certificate without any other adjustment to the terms of
conversion as a result of this change. Pursuant to the terms of Amendment No. 1,
the Company has agreed to file a registration statement with respect to the
shares of Common Stock underlying the Additional Warrants.
5. New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 133 is effective for fiscal years
beginning after June 15, 1999 and cannot be applied retroactively. SFAS 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS 133 requires that changes in the derivative's
fair value be recognized currently in earning unless specific hedge accounting
criteria are met. The Company currently plans to adopt SFAS 133 effective
January 1, 2000, and will determine both the method and impact of adoption prior
to that date.
The Financial Accounting Standards Board has issued new standards that became
effective for reporting periods after December 15, 1997, Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) and
Statement of Financial Account Standards No. 131, "disclosures about Segments of
an Enterprise and Related Information" (SFAS 131). Effective March 31, 1998, the
Company adopted SFAS 130 and SFAS 131. The adoption of these standards has no
material affect on the Company's financial statements.
In October 1997, the AICPA issued Statement of Position (SOP) 97-2, "Software
Revenue Recognition", which superseded SOP 91-1 effective January 1, 1998.
Effective January 1, 1998, the Company adopted SOP 97-2. The adoption of this
statement has no material affect on the Company's financial statements.
6. Restatement of Financial Statements
The Company has revised its revenue recognition accounting from recognizing
revenue upon the initial shipment of software to the distributor to recognizing
revenue when the software is deployed to an end-user customer. In addition,
certain costs originally classified as restructuring costs have been
reclassified as sales and marketing, general and administrative and research and
development expenses in the period in which the costs were incurred. The effect
of the restatement as of and for the three months ended September 30, 1997 and
1998 and as of December 31, 1997 is as follows:
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Increase (Decrease) Increase (Decrease)
three months ended September 30, nine months ended September 30,
-------------------------------- -------------------------------
1997 1998 1997 1998
---- ---- ---- ----
Effect on:
Total revenue $(582,644) $(398,335) $(2,567,053) $(3,766,887)
Gross profit (582,644) (398,335) (2,567,053) (3,982,660)
Operating expenses 286,798 (296,131) (575,799) (273,002)
Loss attributable to holders of
common stock 869,442 102,204 1,991,254 3,709,659
Basic loss per share 0.07 0.01 0.16 0.27
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) Increase (Decrease)
as of September 30, as of December 31, 1997
------------------- -----------------------
1997 1998
---- ----
Accounts receivable $(3,108,324) $(5,130,442) $(1,762,584)
Inventory, net - (250,788) 215,774
Deferred income - 270,939 400,000
Accumulated deficit 3,108,324 5,652,149 1,946,310
</TABLE>
7. Subsequent Event
PRIVATE PLACEMENT OF COMMON STOCK
On October 9, 1998, the Company entered into a Placement Agent Agreement with
LaSalle to solicit the sale of V-ONE's Common Stock. The Company is seeking to
sell not less than 1,800,000 shares of Common Stock and not more than 2,722,070
shares at a price of $2.00 per share. LaSalle and its designees would receive
warrants for 50,000 shares of Common Stock at an exercise price of $2.125 per
share if at least 1,800,000 shares are sold. The private placement has not yet
been consummated.
8
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This 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. 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, fluctuations in revenues from
quarter to quarter have had and are expected to continue to have a significant
impact on the Company's results of operations. The Company's growth in recent
periods may not be an accurate indication of future results of operations in
light of the Company's short operating history, 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, the
timing of revenue recognition can cause significant variations in operating
results from quarter to quarter.
Readers are also referred to the documents filed by the Company with the
Securities and Exchange Commission, specifically the Company's latest report on
Form 10-K that identifies important risk factors for the Company.
RESULTS OF OPERATIONS
REVENUES
Total revenues decreased by 8.4% to approximately $1,999,000 for the third
quarter of 1998 down from $2,182,000 in the same period of 1997. For the nine
months ended September 30, 1998, total revenues decreased 4.4% to $4,538,000
from $4,746,000 in the same period of 1997. The quarterly decrease was due to
reduced sales of the Company's bundled turnkey firewall product, SmartWall,
while the decrease for the nine month period reflected the reduced sales of
SmartWall, partially offset by the continued growth in sales of the Company's
software Virtual Private Network ("VPN") product, SmartGate. Product revenues
are derived primarily from software licenses and the sale of hardware products.
Product revenues were approximately $1,860,000 and $4,102,000 for the quarter
and nine months ended September 30, 1998, respectively, a decrease of 9.6% and
6.0% over the same periods in 1997, as lower sales of SmartWall during the
quarter and for the nine month period were partially offset by sales growth of
SmartGate over the entire period. Consulting and services revenues were
approximately $139,000 and $437,000 for the quarter and nine months ended
September 30, 1998, respectively, an increase of 11.4% and 13.8% over the same
periods in 1997, and reflect the increase in sales of services complementary to
the Company's products, including consulting, maintenance and training.
COST OF REVENUES
Total cost of revenues as a percentage of total revenues were approximately
31.8% and 16.5% for the three months and approximately 33.2% and 29.2% for the
nine months ended September 30, 1997 and 1998, respectively. Total cost of
revenues is composed 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 as a percentage of
product revenues decreased from 32.4% for the third quarter of 1997 to 15.3% in
the same period of 1998. Cost of product revenues as a percentage of product
revenues also decreased in the nine months ended September 30, 1998 to 30.6%
from 34.7% in the same period of 1997. Cost of product revenues was
approximately $285,000 for the third quarter of 1998 compared with $666,000 in
same period of 1997. Cost of product revenues was approximately $1,257,000 for
9
<PAGE>
the nine months ended September 30, 1998 compared with $1,514,000 for the same
period of 1997. The dollar and percentage decreases for the three month period
ended September 30, 1998 were primarily attributable to decreased sales combined
with a higher proportion of sales from software licenses as compared to turnkey
hardware sales. The dollar and percentage decrease for the nine month period
ended September 30, 1998 were primarily attributable to an increase in the
proportion of sales from software licenses as compared to turnkey hardware
sales.
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 as a percentage of
consulting and services revenues increased from 22.2% for the third quarter of
1997 to 32.3% in the same period of 1998. Cost of consulting and services
revenues as a percentage of consulting and services revenues decreased in the
nine months ended September 30, 1998 to 15.6% from 15.7% in the same period of
1997. Cost of consulting and services revenues were approximately $28,000 for
the third quarter of 1997 compared with $45,000 in the same period of 1998. Cost
of consulting and services revenues was approximately $60,000 for the nine
months ended September 30, 1997 compared with $68,000 for the same period of
1998. The dollar and percentage increases in the third quarter of 1998 were
primarily attributable to increased consulting and service revenues and higher
costs related to software maintenance. The dollar increase and the small
percentage decrease for the nine months ended September 30, 1998 was primarily
attributable to lower costs related to software maintenance spread over higher
consulting and services revenues.
OPERATING EXPENSES
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 by 20.3% to approximately $1,261,000 in
the third quarter of 1998, down from approximately $1,582,000 in the same period
of 1997. Sales and marketing expenses decreased in the nine month period ended
September 30, 1998 to approximately $4,358,000, down from approximately
$5,320,000 in the same period of 1997. As a percentage of total revenue, sales
and marketing expenses were 63.1% and 96.0%, respectively, for the three month
and nine month periods ended September 30, 1998 compared to 72.5% and 112.1%,
respectively, in the comparable periods of 1997. The percentage and dollar
decreases in the three months ended September 30, 1998 and the dollar and
percentage decreases in the nine month period were principally due to reduced
headcount and marketing expenditures. Sales and marketing expenses are expected
to remain at current levels but fall as a percentage of total revenues in the
near term as a result of the Company's continuing sales and marketing efforts.
This statement is based on current expectations. It is forward-looking, and the
actual results could differ materially. For information about factors that could
cause the actual results to differ materially, please refer to Item 1. "Business
- - Risk Factors That May Affect Future Results and Market Price of Common Stock"
in the Company's Form 10-K.
General and Administrative -- General and administrative expenses consist
principally of the costs of finance, management and administrative personnel and
facilities expenses. General and administrative expenses increased by 83.1% to
approximately $880,000 in the third quarter of 1998, up from approximately
$481,000 in the same period of 1997. General and administrative expenses
increased in the nine month period ended September 30, 1998 to approximately
$2,903,000, up from approximately $2,329,000 in the same period of 1997. As a
percentage of revenue, general and administrative expenses were 44.0% and 64.0%
for the three and nine month periods ended September 30, 1998 compared to 22.0%
and 49.1% in the comparable periods of 1997. The dollar and percentage increases
in the third quarter of 1998 were principally due to additions to senior
management this year. The dollar and percentage increases for the nine months
ended September 30, 1998 were primarily due to noncash charges of approximately
$394,000 attributable to anti-dilution adjustments to the terms of the warrants
held by JMI Equity Fund II, L.P., which were triggered by conversions of Series
A Stock during the period. A noncash charge of approximately $29,000 will be
incurred upon successful completion of the private placement because of a
further anti-dilution adjustment to the exercise price of these warrants to
$2.00 per share. See Note 4 to the Notes to the Condensed Financial Statements.
The Company anticipates that general and administrative expenses, exclusive of
noncash charges will increase modestly in future periods. This statement is
based on current expectations. It is forward-looking, and the actual results
could differ materially. For information about factors
10
<PAGE>
that could cause the actual results to differ materially, please refer to Item
1. "Business - Risk Factors That May Affect Future Results and Market Price of
Common Stock" in the Company's Form 10-K.
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 increased by 31.2% to approximately
$1,051,000 in the third quarter of 1998, up from approximately $800,000 in the
same period of 1997. Research and development also increased in the nine month
period ended September 30, 1998 to approximately $2,933,000, up by 30.1% from
approximately $2,254,000 in the same period of 1997. As a percentage of total
revenue, expenses were 52.5% and 64.6% for the three month and nine month
periods ended September 30, 1998 compared to 36.7% and 47.5% in 1997. The dollar
and percentage increases were primarily due to increases in the number of
personnel associated with the Company's product development efforts and
inclusive of costs previously shown in restructuring costs. The Company believes
that a continuing commitment to research and development is required to remain
competitive. Accordingly, the Company intends to allocate substantial resources
to research and development, but research and development expenses may vary as a
percentage of total revenues. This statement is based on current expectations.
It is forward-looking, and the actual results could differ materially. For
information about factors that could cause the actual results to differ
materially, please refer to Item 1. "Business - Risk Factors That May Affect
Future Results and Market Price of Common Stock" in the Company's Form 10-K.
Restructuring Changes -- Certain costs originally classified as restructuring
costs have been reclassified as sales and marketing, general and administrative
and research and development expenses in the period in which the costs were
incurred (see Note 6 to the Condensed Financial Statements).
Interest Income and Expenses -- Interest income represents interest earned on
cash and cash equivalents. Interest income decreased from approximately $74,000
and $291,000 for the three and nine month periods ended September 30, 1997,
respectively, to approximately $15,000 and $123,000 for the three and nine month
periods ended September 30, 1998, respectively. The decreases were attributable
to reduced levels of cash and cash equivalents. Interest expense represents
interest paid or payable on promissory notes and capitalized lease obligations.
Interest expense paid and increased from approximately $1,000 and $5,000 for the
three and nine month periods ended September 30, 1997, respectively, to
approximately $8,000 and $52,000 for the three and nine month periods ended
September 30, 1998, respectively. The increases were due to capitalized lease
obligations.
Income Taxes -- The Company did not incur income tax expenses as a result of the
net loss incurred during the three and nine month periods ended September 30,
1998 and 1997, respectively.
Dividends on Preferred Stock -- The Company provided approximately $31,000 for a
dividend on the Series A Stock and approximately $14,000 for a deemed dividend
(arising from the issuance of warrants for 100,000 shares of Common Stock at an
exercise price of $2.125 per share and warrants for 389,441 shares of Common
Stock at an exercise price of $4.77 per share as a result of the Waiver
Agreement) for the three month period ended September 30, 1998 and approximately
$111,000 and $14,000, respectively, for the nine month period ended September
30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used cash of approximately $7,288,000 and
$5,508,000 for the nine months ended September 30, 1997 and 1998, respectively.
Cash used in operating activities for the nine months ended September 30, 1998
resulted principally from net losses and increases in accounts receivable,
partially offset by an increase in accounts payable, the noncash charge related
to the issuance of warrants and depreciation.
Capital expenditures for property and equipment were approximately $459,000 and
$150,000 for the nine months ended September 30, 1997 and 1998, respectively.
These expenditures have generally been for computer workstations and personal
computers, office furniture and equipment, and leasehold additions and
improvements. The Company expects to purchase additional computer equipment in
1998. In the nine months ended September 30, 1997, the Company made an
investment of $250,000 in Network Flight Recorder, Inc.
The Company believes that its current cash and cash equivalents and funds that
may be generated from on-going operations, from the private placement described
in Note 4 to the financial statements for the period ended September 30, 1998,
11
<PAGE>
and from other financing activities will be sufficient to finance the Company's
operations at least through September 30, 1999. The Company will, however, need
to raise additional capital either through the private placement or other
financing activities in the short term to redeem the Series A Stock and to
finance its ongoing operations.
As of September 30, 1998, the Company had an accumulated deficit of
approximately $27,320,000. The Company currently expects to incur net losses in
the next quarter.
YEAR 2000 ISSUE
The Year 2000 issue concerns the potential exposures related to the automated
generation of business and financial misinformation resulting from the
application of computer programs that have been written using six digits (E.G.,
12/31/99), rather than eight (E.G., 12/31/1999), to define the applicable year
of business transactions.
V-ONE has completed the identification and assessment of most of its IT systems,
and those systems have been modified by the suppliers of those systems to V-ONE
to address Year 2000 problems. In addition to its internal systems, V-ONE has
begun to assess the level of Year 2000 problems associated with its suppliers of
software incorporated or bundled with its products, other suppliers, customers
and creditors. V-ONE has also started its identification and assessment of its
non-IT systems, which include its telephone systems, heating and
air-conditioning, elevators, and other business equipment.
V-ONE's own software products are Year 2000 compliant.
V-ONE's costs to date for its Year 2000 compliance program, excluding the
salaries of its employees, has not been material. In fact, most of V-ONE's IT
systems have been modified by the suppliers of those systems and such
modifications were included as part of normal upgrades of those systems.
Although V-ONE has not completed its assessment, it does not currently believe
that the future costs associated with its remaining IT systems or its non-IT
systems will be material.
V-ONE cannot determine currently its most likely worst case Year 2000 scenario,
as it has not identified and assessed all of its systems, particularly its
non-IT systems. As V-ONE completes its identification and assessment of internal
and third party systems, it expects to develop contingency plans for various
worst-case scenarios. V-ONE expects to complete such contingency planning by
September 1999. A failure to address Year 2000 issues successfully could have a
material adverse effect on the Company's business, financial condition or
results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
12
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
(b) On December 8, 1997, the Company issued 4,000 shares of Series A Stock to
Advantage for $4 million in the aggregate. Advantage currently holds 2,462
shares of Series A Stock. Each share of Series A Stock is convertible into
shares of Common Stock, $0.001 par value per share, of the Company ("Common
Stock") and was convertible into warrants to purchase shares of Common Stock
("Series A Warrants").
Due to the Maximum Share Amount limitation found in Section 7(a)(1) of the
Certificate, the Company is not presently obligated to convert shares of Series
A Stock held by Advantage. On September 21, 1998, the Company sent an
inconvertibility notice to Advantage pursuant to Section 7(a)(2) of the
Certificate indicating that, as of September 11, 1998, Advantage had the right
to have some of its shares of Series A Stock redeemed by the Company for the
Share Limitation Redemption Price (which term is defined in the Certificate).
On September 22, 1998, the Company and Advantage entered into the Waiver
Agreement and Amendment No. 1 to the Registration Rights Agreement. Pursuant to
the Waiver Agreement, Advantage has until November 20, 1998 waived its right (1)
to convert or require the Company to redeem its Series A Stock under certain
circumstances, (2) to an adjustment to the "Ceiling Price" and the "Conversion
Percentage" (as such terms are defined in the Certificate), and (3) to the
"Periodic Amount" pursuant to Section 2(c) of the Registration Rights Agreement
(the term "Periodic Amount" is defined in Section 2(c) of the Registration
Rights Agreement).
Under the Waiver Agreement, the Company also has the right to redeem the Series
A Stock held by Advantage at any time until November 20, 1998 at a price of
$1,300 per share. If the shares of Series A Stock are so redeemed, all accrued
dividends will be waived by Advantage, without any additional payment by the
Company.
Simultaneously with the execution of the Waiver Agreement, the Company granted
to Advantage warrants to purchase 100,000 shares of the Company's Common Stock
at an exercise price of $2.125 per share and warrants to purchase 389,441 shares
of the Company's Common Stock at an exercise price of $4.77 per share, all of
which expire on September 21, 2003 (collectively "Additional Warrants"). In
addition, under the terms of the Waiver Agreement, Advantage will no longer
receive Series A Warrants upon conversion of the Series A Stock. The Series A
Stock is convertible solely into shares of Common Stock as provided in the
Certificate without any other adjustment to the terms of conversion as a result
of this change. Pursuant to the terms of Amendment No. 1, the Company has agreed
to file a registration statement with respect to the shares of Common Stock
underlying the Additional Warrants.
The descriptions of the Certificate, the Waiver Agreement, Amendment No. 1 and
of the agreements and other documents described in this Form 10-Q are qualified
in their entirety by reference to the exhibits filed with the Company's Form 8-K
dated September 22, 1998 and with the Company's Form 8-K dated December 15,
1997.
(c) Warrants Issued to Directors
On August 7, 1998, the Company issued warrants to purchase 10,000 shares each of
Common Stock at an exercise price of $2.688 per share to William E. Odom and A.
L. "Tom" Giannopoulos, both of whom are directors of the Company. These warrants
were issued in consideration for their service as directors of the Company in
reliance on Section 4(2) of the Securities Act of 1933.
Warrants Issued to Advantage
On September 22, 1998, the Company issued warrants to purchase 489,441 shares of
Common Stock to Advantage Fund II Ltd. ("Advantage") in consideration of
Advantage's entering into the Waiver Agreement, dated September 22, 1998.
389,441 of the warrants are exercisable at a price of $4.77 per share and
100,000 of the warrants are exercisable at $2.125 per share. The warrants were
13
<PAGE>
issued pursuant to Rule 506 of Regulation D promulgated under the Securities Act
of 1933.
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, 1998.
Exhibit Index
Exhibit Description
- ------- -----------
10.1 Inconvertibility Notice, dated September 21, 1998. (1)
10.2 Waiver Agreement, dated September 22, 1998, between the Company and
Advantage. (1)
10.3 Amendment No. 1 dated September 22, 1998 to the Registration Rights
Agreement between the Company and Advantage. (1)
10.4 Warrant Granted to Advantage to Purchase 100,000 shares of the Company's
Common Stock. (1)
10.5 Warrant Granted to Advantage to Purchase 389,441 shares of the Company's
Common Stock. (1)
10.6 Waiver Letter, dated November 5, 1998, between the Company and
Advantage. (2)
10.7 Placement Agent Agreement, dated October 9, 1998, between the Company and
LaSalle.(2)
10.8 Amendment No. 1 to Placement Agent Agreement, dated November 9, 1998,
between the Company and LaSalle.(2)
10.9 Escrow Agreement, dated October 9, 1998, among the Company, LaSalle and
LaSalle National Bank.
10.10 Amendment No. 1 to Escrow Agreement, dated November 9, 1998, among the
Company, LaSalle and LaSalle National Bank.(2)
10.11 Form of Subscription Documents.(2)
10.12 Form of Addendum #1 to Subscription Documents.(2)
10.13 Form of Addendum #2 to Subscription Documents.(2)
10.14 Form of Warrant to Purchase 50,000 shares of the Company's Common
Stock.(2)
10.15 Form of Warrant Granted to A. L. Giannopoulos to Purchase 10,000 shares
of the Company's Common Stock.(2)
10.16 Form of Warrant Granted to William E. Odom to Purchase 10,000 shares of
the Company's Common Stock.(2)
27 Revised financial data schedule for the nine months ended September 30,
1998.
- --------------------
(1) Incorporated by reference to the Company's filing on Form 8-K dated
September 22, 1998.
(2) Filed previously.
(b) Reports on Form 8-K
Form 8-K dated September 22, 1998 reporting under Item 5.
14
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
V-ONE CORPORATION
Registrant
Date: April 23, 1999 By: /s/ Charles B. Griffis
-----------------------------------------
Name: Charles B. Griffis
Title: Senior Vice President, Chief Financial
Officer and Treasurer (Duly authorized
officer and Principal Financial Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S AMENDED FORM 10-Q FOR
THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001008946
<NAME> V-ONE
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 529,657
<SECURITIES> 0
<RECEIVABLES> 1,633,986
<ALLOWANCES> (523,638)
<INVENTORY> 609,368
<CURRENT-ASSETS> 2,488,966
<PP&E> 1,567,410
<DEPRECIATION> (669,811)
<TOTAL-ASSETS> 4,697,712
<CURRENT-LIABILITIES> 2,991,080
<BONDS> 0
2,188,884
0
<COMMON> 13,915
<OTHER-SE> (700,829)
<TOTAL-LIABILITY-AND-EQUITY> 4,697,712
<SALES> 4,538,195
<TOTAL-REVENUES> 4,538,195
<CGS> 1,324,895
<TOTAL-COSTS> 10,194,386
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (51,870)
<INCOME-PRETAX> (6,910,026)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,910,026)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (124,580)
<NET-INCOME> (7,034,606)
<EPS-PRIMARY> (.52)
<EPS-DILUTED> (.52)
</TABLE>
