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 QUARTER ENDED: SEPTEMBER 30, 1999
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
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
20250 CENTURY BLVD., SUITE 300, GERMANTOWN, MARYLAND 20874
----------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(301) 515-5200
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X ] No [ ] .
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 5, 1999
----- -------------------------------
COMMON STOCK, $0.001 PAR VALUE PER SHARE 17,049,159
<PAGE>
V-ONE Corporation
Quarterly Report on Form 10-Q
INDEX
Page No.
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PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Condensed Balance Sheets as of September 30, 3
1999 (unaudited) and December 31, 1998
Condensed Statements of Operations for the 4
Three and Nine Months Ended September 30,
1999 (unaudited) and 1998 (unaudited)
Condensed Statements of Cash Flows for the 5
Nine Months Ended September 30, 1999
(unaudited) and 1998 (unaudited)
Notes to the Condensed Financial Statements 6
(unaudited)
Item 2 Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures About 12
Market Risk
PART II. OTHER INFORMATION 12
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of 12
Proceeds
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote 12
of Security Holders
Item 5. Other Information 12
Item 6. Exhibits and reports on form 8-K 13
Signatures 14
2
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
V-ONE CORPORATION
CONDENSED BALANCE SHEETS
September 30 December 31,
1999 1998
(unaudited)
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,512,729 $ 635,959
Accounts receivable, net 574,649 513,221
Inventory, net 209,452 385,481
Prepaid expenses and other current assets 85,897 276,456
------------ ----------
Total current assets 9,382,727 1,811,117
Property and equipment, net 714,008 874,553
Licensing fee, net 43,086 255,378
Other assets 913,688 981,144
------------ ----------
Total assets $ 11,053,509 $ 3,922,192
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,649,377 $ 2,124,156
Deferred income 567,986 888,295
Notes payable - current 2,900,000 5,259
Capital lease obligations - current 76,865 70,775
------------ -----------
Total current liabilities 5,194,228 3,088,485
Capital lease obligations - noncurrent 140,132 197,982
------------ -----------
Total liabilities 5,334,360 3,286,467
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Commitments and contingencies
Shareholders' equity:
Common stock, $0.001 par value; 33,333,333
shares authorized; 17,049,159 and
16,478,046 shares issued and
outstanding as of September 30, 1999
and December 31, 1998, respectively 17,049 16,478
Redeemable preferred stock, $0.001 par
value, 13,333,333 shares authorized.
Series B preferred stock; 1,287,554 shares
designated; 1,287,554 and zero shares issued
and outstanding as of September 30, 1999 and
December 31, 1998, respectively (liquidation
preference of $3,000,000). 1,288 -
Series C preferred stock; 335,000 shares
designated; 335,000 and zero shares issued
and outstanding as of September 30, 1999 and
December 31, 1998, respectively (liquidation
preference of $8,795,000). 335 -
Additional paid-in capital 42,502,846 30,361,685
Notes receivable from sales of common stock ( 49,343) ( 50,021)
Accumulated deficit (36,753,026) (29,692,417)
------------ -----------
Total shareholders' equity 5,719,149 635,725
------------ -----------
Total liabilities and shareholders'
equity $ 11,053,509 $ 3,922,192
============ ===========
The accompanying notes are an integral part of these financial statements.
3
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V-ONE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
(unaudited) (unaudited) (unaudited) (unaudited)
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Products $ 638,364 $ 1,860,151 $ 2,726,781 $ 4,101,531
Consulting and services 294,530 139,319 909,253 436,664
---------- --------------- -------------- --------------
Total revenues 932,894 1,999,470 3,636,034 4,538,195
---------- --------------- -------------- --------------
Cost of revenues:
Products 127,697 285,140 507,863 1,256,835
Consulting and services 17,682 45,000 50,294 68,060
---------- --------------- -------------- --------------
Total cost of revenues 145,379 330,140 558,157 1,324,895
---------- --------------- -------------- --------------
Gross profit 787,515 1,669,330 3,077,877 3,213,300
---------- --------------- -------------- --------------
Operating expenses:
Sales and marketing 1,221,370 1,260,937 4,094,964 4,358,175
General and administrative 784,930 880,468 2,377,729 2,903,368
Research and development 841,852 1,050,561 2,776,994 2,932,843
---------- --------------- -------------- --------------
Total operating expenses 2,848,152 3,191,966 9,249,687 10,194,386
Operating loss (2,060,637) (1,522,636) (6,171,810) (6,981,086)
---------- --------------- -------------- --------------
Other (expense) income:
Interest expense (592,600) (8,405) (893,616) (51,870)
Interest income 15,186 14,940 55,412 122,930
---------- --------------- -------------- --------------
Total other (expense) income (577,414) 6,535 (838,204) 71,060
---------- --------------- -------------- --------------
Net loss (2,638,051) (1,516,101) (7,010,014) (6,910,026)
Deemed dividend on preferred
stock - 13,701 - 13,701
Dividend on preferred stock 50,594 30,775 50,594 110,879
---------- --------------- -------------- --------------
Loss attributable to holders
Of common stock $ (2,688,645) $ (1,560,577) $ (7,060,608) $ (7,034,606)
============ =============== ============== ==============
Basic and diluted loss per share
attributable to holders of
Common stock $ (0.16) $ (0.11) $ (0.42) $ (0.52)
============ =============== ============== ==============
Weighted average number of
Common shares outstanding 16,847,796 13,907,408 16,777,492 13,559,314
============ =============== ============== ==============
The accompanying notes are an integral part of these financial statements.
</TABLE>
4
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V-ONE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
Nine months Nine months
ended ended
September 30, September 30,
1999 1998
(unaudited) (unaudited)
------------- ------------
Cash flows from operating activities:
Net loss $ (7,010,014) $ (6,910,026)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 504,775 466,446
Amortization of deferred financing costs 405,000 -
Noncash charge related to issuance of
warrants - 394,000
Changes in assets and liabilities:
Accounts receivable, net (61,428) (314,953)
Inventory, net 176,029 (25,474)
Prepaid expenses and other assets 258,014 (34,151)
Deferred income (320,309) 30,560
Deferred rent - (36,879)
Accounts payable and accrued expenses (474,779) 922,899
------------ ------------
Net cash used in operating activities (6,522,712) (5,507,578)
------------ ------------
Cash flows from investing activities:
Net purchase of property and equipment (131,938) (150,172)
Collection of note receivable 678 -
------------ ------------
Net cash used in investing activities (131,260) (150,172)
------------ ------------
Cash flows from financing activities:
Exercise of options and warrants 1,037,243 200,791
Payment of debt financing costs (210,000) -
Issuance of preferred stock, net of
notes receivable 11,793,750 -
Payment of stock issuance costs (933,232) (49,413)
Payment of preferred stock dividends - (110,879)
Principal payments on capitalized lease
obligations (51,760) (43,820)
Repayment of notes payable (5,259) (12,797)
Issuance of notes payable 2,900,000
------------ ------------
Net cash provided by (used in)
financing activities 14,530,742 (16,118)
------------ ------------
Net increase (decrease) in cash and cash 7,876,770 (5,673,868)
equivalents
Cash and cash equivalents at beginning of
period 635,959 6,203,525
------------ ------------
Cash and cash equivalents at end of period $ 8,512,729 $ 529,657
============ ============
The accompanying notes are an integral part of these financial statements.
5
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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, 1999 and September 30, 1998 are unaudited and reflect all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of
management, necessary to present fairly the results for the interim periods.
These financial statements should be read in conjunction with the audited
financial statements as of December 31, 1996, 1997 and 1998 and for the three
years then ended, which are included in the Company's 1998 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates and could impact future
results of operations and cash flows.
The results of operations for the three and nine month periods ended September
30, 1999 are not necessarily indicative of the results expected for the full
year ending December 31, 1999.
2. Computation of Net Loss Per Common Share
Basic loss per share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding. Diluted earnings per share is
computed by dividing net 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 quarters presented;
therefore, basic and diluted loss per share are the same.
3. Note Payable
On September 30, 1999, the Company entered into a Revolving Credit Promissory
Note (the "Note") with Citibank,F.S.B., a federal savings bank ("Citibank").
Under the terms of the Note, the Company may be advanced funds up to an amount
of $3.0 million under a revolving loan agreement with a maturity date of October
1, 2000 with the ability to renew for additional terms. The Note bears interest
at a rate equal to the sum of the interest rate paid on the automatically
renewable one-year certificate of deposit plus a margin of two percentage
points. Interest is payable monthly in arrears. The initial rate of interest is
6.78%. Advances of $2,900,000 were made at September 30, 1999 which were used to
pay off the remaining principal on the Transamerica note payable.
4. Preferred Stock
On June 11, 1999, the Company issued 1,287,554 shares of Series B Convertible
Preferred Stock (the "Series B Stock") in the aggregate to two investors (the
"Purchasers"), in equal amounts, for $2.33 per share, or $3 million in the
aggregate. Each share of Series B Stock is convertible into one share of Common
Stock, $.001 par value per share, of the Company. For the terms and conditions
of the Series B Stock refer to the Company's Form 8-K filed on June 23, 1999.
On September 9, 1999, the Company issued 335,000 shares of Series C Preferred
Stock (the "Series C Stock") and 3,350,000 non-detachable warrants to purchase
shares of the Company's Common Stock (the "Warrants") to certain accredited
investors (the "Purchasers") listed in the Series C Preferred Stock and
Non-Detachable Warrants Purchase Agreement dated September 9, 1999 (the
"Purchase Agreement"). Each share of Series C Stock was issued with ten Warrants
(collectively a "Unit") for a price of $26.25 per Unit. The Warrants are
immediately exercisable at a price of $2.625 per share and will remain
6
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outstanding until 90 days after all of the Series C Stock has been redeemed and
the shares of the Common Stock underlying the Warrants have been registered for
resale. The Series C Stock bears cumulative compounding dividends at an annual
rate of 10% for the first five years, 12.5% for the sixth year and 15% in and
after the seventh year. For the terms and conditions of the Series C Stock refer
to the Company's Form 8-K filed on September 15, 1999.
As a result of the issuance of the Series B and the Series C Stock, the exercise
price per share of the warrants isssued to Transamerica Funding Trust II on
March 31, 1999 and June 30, 1999 to purchase 100,000 shares and 50,000 shares,
respectively, of the Company's common stock, has been reduced from $3.25 and
$3.75, respectively, to $2.33 and $2.625, respectively.
5. Other Events
At December 31, 1998, the Company was in receipt of a "going concern" opinion
from its independent auditors and the Company did not meet the $4 million net
tangible assets and other requirements for continued listing on the Nasdaq
National Market. The Company has completed two equity private placements
described in Note 4 and has raised approximately $11.8 million in additional
equity capital which the Company believes is sufficient to sustain operations.
In a letter dated August 31, 1999, the Company was advised that a determination
had been made by the Nasdaq Listing Qualifications Panel to transfer the listing
of the Company's securities to the Nasdaq SmallCap Market effective with the
opening of business on September 3, 1999. Additionally, the Company was advised
that continued listing on the Nasdaq SmallCap Market was contingent upon making
a public filing, on or before September 15, 1999 with the Securities and
Exchange Commission (the "SEC") and Nasdaq evidencing a minimum of $6,350,000 in
net tangible assets. The filing was to contain a July 31, 1999 pro forma balance
sheet giving effect to completion of the financing for the Series C Stock. On
September 15, 1999, the Company filed a Form 8-K evidencing compliance. On
September 22, 1999, the Company received a letter from the Nasdaq Qualifications
Panel stating that the Company has complied with the terms of its exception,
that the Company will continue to be listed on The Nasdaq SmallCap Market and
that the hearing file will be closed.
7
<PAGE>
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. 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 revenue 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 revenue. In addition, fluctuation in revenue 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 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, a small variation in the timing of
recognition of revenue can cause significant variations in operating results
from quarter to quarter.
Readers also are 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
REVENUE
Total revenue decreased 53% to approximately $933,000 for the three months ended
September 30, 1999 from approximately $1,999,000 for the three months ended
September 30, 1998. This decrease was principally attributable to lower sales of
the Company's network security products, offset in part by higher maintenance
and consulting revenue. Until the completion of the financing late in the third
quarter of 1999 the Company was in a strained financial position. V-ONE lacked
resources needed to grow the business, limiting the Company's ability to retain
employees and attract new talent. During the second and third quarters of 1999,
V-ONE experienced significant turnover in the sales force resulting in a decline
in revenue during this period. Additionally, roll out of the 4.0 release of the
Company's SmartGate software was delayed, deferring sales of the product
expected in the third quarter. At the end of the third quarter the Company
successfully filled three key management positions; vice president of sales,
vice president of marketing and vice president of engineering and has filled
eleven sales positions between June and October 1999. The Company expects that
training and product orientation of this new sales and marketing team will
result in lower than normal sales through the fourth quarter. The 4.0 release of
SmartGate went into beta testing in November and is expected to be released
before the end of 1999. Additionally the fourth quarter sales are expected to be
lower than normal because of industry wide customer concerns associated with
sales and installation of new software prior to the start of Y2K. For the nine
months ended September 30, 1999, total revenue decreased 20% to approximately
$3,636,000 from $4,538,000 for the same period in 1998. Product revenue is
derived principally from software licenses and the sale of V-ONE's stand alone
VPN software and bundled VPN software products that include both V-ONE's VPN
software and a third party firewall or a bundled turnkey hardware product.
Product revenue was approximately $638,000 and $2,727,000 for the three and nine
months ended September 30, 1999, respectively, a decrease of 66% and 33%,
respectively, from the same periods in 1998. Consulting and services revenue is
derived principally from fees for services complementary to the Company's
products, including consulting, maintenance and training. Consulting and
services revenue increased to approximately $295,000 and $909,000 for the
quarter and nine months ended September 30, 1999, respectively, representing an
increase of 111% and 108%, respectively, over the same periods in 1998.
8
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COST OF REVENUE
Total cost of revenue decreased to approximately $145,000 for the third quarter
of 1999 from $330,000 for the same quarter last year. Total cost of revenue
decreased as a percentage of total revenue to 15.6% for the three months ended
September 30, 1999 from 16.5% for the third quarter of 1998. For the nine months
ended September 30, 1999, total cost of revenue dropped to approximately
$558,000 as compared to approximately $1,325,000 for the same period last year,
which represents a decrease in percentage of total revenue to 15.4% for 1999
from 29.2% for 1998. Total cost of revenue is comprised of cost of product
revenue and cost of consulting and services revenue. The dollar and percentage
decreases were primarily attributable to a higher proportion of software
licenses of the Company's principal product, SmartGate, as compared to turnkey
hardware sales, primarily of sales of SmartWall.
Cost of product revenue 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 revenue decreased to
approximately $128,000 for the three months ended September 30, 1999 from
approximately $285,000 for the three months ended September 30, 1998. Cost of
product revenue as a percentage of product revenue was approximately 20.0% and
15.3% for the three months ended September 30, 1999 and 1998, respectively. Cost
of product revenue decreased to approximately $508,000 for the nine months ended
September 30, 1999 from $1,257,000 for the same period last year. Total cost of
product revenue as a percentage of total product revenue decreased to 18.6% for
the nine months of 1999 from 30.6% for the same period last year.
Cost of consulting and services revenue consists principally of personnel and
related costs incurred in providing consulting, support and training services to
customers. Cost of consulting and services revenue decreased to approximately
$18,000 for the three months ended September 30, 1999 from approximately $45,000
for the three months ended September 30, 1998. Cost of consulting and services
revenue decreased slightly to approximately $50,000 for the nine months ended
September 30, 1999 from approximately $68,000 for the nine months ended
September 30, 1998. Cost of consulting and services revenue as a percentage of
consulting and services revenue was approximately 6.0% for the third quarter of
1999 and 32.3% for the three months ended September 30, 1998. For the nine
months ending September 30, 1999, costs of consulting and services revenue was
5.5%, down from 15.6% for the same period last year. The dollar decrease for the
three and nine months of 1999 was principally due to a higher proportion of
software to hardware installations of hardware systems than last year.
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 to approximately $1,221,000 for the three
months ended September 30, 1999 from approximately $1,261,000 for the three
months ended September 30, 1998. Expenses for the nine months of 1999 decreased
to $4,095,000 from $4,358,000 for the same period last year. Sales and marketing
expenses as a percentage of total revenue were approximately 130.9% for the
three months ended September 30, 1999 compared to 63.1% for the third quarter of
1998, while the nine months of 1999 increased to 112.6% from 96.0% for the same
period last year. Sales and marketing expenses during the third quarter of 1999
decreased when compared to the third quarter of 1998, but increased as a
percentage of lower revenue.
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 decreased to
approximately $785,000 for the three months ended September 30, 1999 from
approximately $880,000 for the same period last year. For the nine months ended
September 30, 1999, general and administrative expenses were down to
approximately $2,378,000 when compared to $2,903,000 for the nine months ended
September 30, 1998. The nine months ended September 30, 1998 included a noncash
charge of $394,000 attributable to an anti-dilution adjustment to the terms of
the warrants issued to JMI Equity Fund II, LP, which was triggered by the
conversion of the Company's Series A Convertible Preferred Stock ("Series A
Stock"). General and administrative expenses as a percentage of total revenue
were approximately 84.1% and 44.0% for the three months ended September 30, 1999
and 1998, respectively. Similarly, for the nine months ended September 30, 1999,
General and administrative expenses as a percentage of revenue was 65.4%, up
slightly from 64.0% for the nine month period last year. The dollar decrease in
1999 was principally due to the noncash charge in 1998 partially offset by
increased professional service fees and recruiting expense.
9
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Research and Development - Research and development expenses consist principally
of the costs of research and development personnel and other expenses associated
with the development of new products and enhancement of existing products.
Research and development expenses decreased to approximately $842,000 for the
current quarter from approximately $1,051,000 for the same period last year,
while the nine months expense decreased slightly to approximately $2,777,000 for
1999 from $2,933,000 for the nine months ended September 30, 1998. Research and
development expenses as a percentage of total revenue were approximately 90.29%
for the three months ended September 30, 1999 compared to 52.5% for the same
period last year. This compares to the nine months of 1999 at 76.4% up from
64.6% for the nine months ended September 30, 1998. The expense decrease in the
current quarter is in part due to lower consulting expenses compared to the same
quarter last year, while the decrease for the nine months this year compared to
last year can be attributed to lower salaries and wage related expenses. The
percentage increases were primarily due to lower revenues in this year combined
with expense control. The Company is preparing to release several new products
and believes that a continuing commitment to research and development is
required to remain competitive. Accordingly, the Company intends to allocate
significant resources to research and development, but research and development
expenses may vary as a percentage of total revenue. 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.
Interest Income and Expenses - Interest income represents interest earned on
cash and cash equivalents. Interest income was approximately $15,000 for the
three months ended September 30, 1999 and 1998, while the nine months interest
income dropped to $55,000 from $122,000 for the same period last year. For the
three months ended September 30, 1999 interest expense rose sharply to
approximately $593,000 from $8,000 for the same period last year. The large
increase was attributable to costs associated with the Company's secured loan
(see Note 4 to the Condensed Financial Statements) to Transamerica Business
Credit Corporation (TBCC) which were expensed when the loan was paid off. These
interest costs were being amortized over the life of the loan, which was
expected to be paid at the February 29, 2000 maturity date, and were in addition
to the interest expense on the loan. Interest expense increased to approximately
$894,000 from approximately $52,000 for the nine months ended September 30, 1999
and 1998, respectively.
Income Taxes -- The Company did not incur income tax expenses as a result of the
net loss incurred during the three and nine months ended September 30, 1999 and
1998, respectively.
Dividend on Preferred Stock -- The Company provided approximately $51,000 for a
dividend on the Series C Stock during the third quarter of 1999, which compares
to the approximately $31,000 provided for in the same quarter last year for the
Series A Stock. All of the Series A Stock was retired in November 1998. The
Series B Stock bears no dividend.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used cash of approximately $6,523,000 and
$5,508,000 for the nine months ended September 30, 1999 and 1998, respectively.
Cash used in operating activities for the nine months ended September 30, 1999
resulted principally from net losses, increases in accounts receivable,
decreases in accounts payable and deferred income, offset in part by decreases
in inventory and prepaid expenses and other assets. Other significant favorable
adjustments to reconcile net loss to net cash used in operating activities were
depreciation and amortization costs of approximately $505,000 and the
amortization of deferred financing costs of $405,000, which results from payoff
of the TBCC loan.
Net capital expenditures for property and equipment were approximately $132,000
and $150,000 for the nine months ended September 30, 1999 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's financing activities provided cash of approximately $14,531,000
for the nine months of this year, mainly from issuance of Series B Preferred
Stock of $3,000,000 and Series C Preferred Stock of $8,793,750, these two items
partially offset by stock issuance costs of approximately $1,143,000. Other
positive cash items of note are the funds generated by exercise of options and
10
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warrants of approximately $1,037,000 and the issuance of notes payable to
Citibank of $2,900,000 under a revolving credit line which is described in Note
3 to the Condensed Financial Statements.
At December 31, 1998, the Company was in receipt of a "going concern" opinion
from its independent auditors and the Company did not meet the $4 million net
tangible assets and other requirements for continued listing on the Nasdaq
National Market. The Company has completed two equity private placements
described in Note 4 and has raised approximately $11.8 million in additional
equity capital which the Company believes is sufficient to sustain operations.
In a letter dated August 31, 1999, the Company was advised that a determination
had been made by the Nasdaq Listing Qualifications Panel to transfer the listing
of the Company's securities to the Nasdaq SmallCap Market effective with the
opening of business on September 3, 1999. Additionally, the Company was advised
that continued listing on the Nasdaq SmallCap Market was contingent upon making
a public filing, on or before September 15, 1999 with the Securities and
Exchange Commission (the "SEC") and Nasdaq evidencing a minimum of $6,350,000 in
net tangible assets. The filing was to contain a July 31, 1999 pro forma balance
sheet giving effect to completion of the financing for the Series C Stock. On
September 15, 1999, the Company filed a Form 8-K evidencing compliance. On
September 22, 1999, the Company received a letter from the Nasdaq Qualifications
Panel stating that the Company has complied with the terms of its exception,
that the Company will continue to be listed on The Nasdaq SmallCap Market and
that the hearing file will be closed.
As of September 30, 1999, the Company had an accumulated deficit of
approximately $36,753,000. The Company currently expects to incur net losses
through mid fiscal year 2000. This statement is based on current expectations.
The Company believes that the funds raised through September 30, 1999 and cash
flow from operations will be adequate to fund on-going operations and to
maintain compliance with the listing requirements of the Nasdaq SmallCap Market
into the foreseeable future. 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.
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.
The Company has completed the identification and assessment of most of its
information technology ("IT") systems, and the suppliers of those systems, to
the Company, have modified those systems to address Year 2000 problems. In
addition to its internal systems, the Company has assessed the level of Year
2000 problems associated with most of its suppliers of software incorporated or
bundled with its products, other suppliers, customers and creditors. The Company
also has identified and assessed most of its non-IT systems, which include its
telephone systems, heating and air-conditioning, elevators, and other business
equipment. All of these suppliers have indicated that their software and other
products are Year 2000 compliant. In addition, most of the Company's non-IT
systems appear to be Year 2000 compliant.
The Company's own software products are Year 2000 compliant.
The Company's costs to date for its Year 2000 compliance program, excluding the
salaries of its employees, have not been material. In fact, most of the
Company'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 the Company 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.
The Company cannot determine currently its most likely worst case Year 2000
scenario, although it has identified and assessed the majority of its systems
including its non-IT systems. The Company is completing its identification and
assessment of all internal and third party systems, and is developing
contingency plans for various worst-case scenarios. The Company expects to
11
<PAGE>
complete such contingency planning by November 30, 1999 and does not believe
that remaining evaluations will have a material adverse effect on the Company or
its operations. However, a failure to address Year 2000 issues successfully
could have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.
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. However, the Company
invests in short-term equity securities rated no less than A1/P1, Federal
government agency paper, and U.S. Treasury instruments in accordance with the
investment policies approved by the Board of Directors. The Company believes
that the market risk associated with these instruments is not material.
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
On September 9, 1999, the Company issued, pursuant to Rule 506 of Regulation D
promulgated under the Securities Act of 1933, 335,000 shares of Series C
Preferred Stock ("Series C Stock") and 3,350,000 non-detachable warrants to
purchase shares of the Company's Common Stock ("Warrants") to certain accredited
investors (the "Purchasers") listed in the Series C Preferred Stock and
Non-Detachable Warrants Purchase Agreement dated September 9, 1999 ("Purchase
Agreement"). Each share of Series C Stock was issued with ten Warrants
(collectively a "Unit") for a price of $26.25 per Unit. The Warrants are
immediately exercisable at a price of $2.625 per share and will remain
outstanding until 90 days after all of the Series C Stock has been redeemed and
the shares of the common stock underlying the Warrants have been registered for
resale. The Series C Stock bears cumulative compounding dividends at an annual
rate of 10% for the first five years, 12.5% for the sixth year and 15% in and
after the seventh year. For the terms and conditions of the Series C Stock refer
to the Company's Form 8-K filed on September 9, 1999.
As a result of the issuance of the Series B and the Series C Stock, the exercise
price per share of the warrants issued to TBCC Funding Trust II on March 31,
1999 and June 30, 1999 to purchase 100,000 shares and 50,000 shares,
respectively, of the Company's common stock, has been reduced from $3.25 and
$3.75, respectively, to $2.33 and $2.625, respectively.
The description of the above agreements are qualified in their entirety by
reference to the exhibits filed with the Company's Form 8-K dated September 15,
1999.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On October 7, 1999, V-ONE Corporation filed a Form 8-K, "Changes in Registrant's
Certifying Public Accountant" in which it noted that the Company dismissed the
accounting firm of PriceWaterhouseCoopers LLP ("PWC") and appointed the
accounting firm of Ernst & Young LLP to succeed PWC as its certifying public
accountant and to act as its auditors for the fiscal year ended December 31,
1999. The description of the above change information is qualified in its
entirety by reference to the Company's Form 8-K dated October 7, 1999 and the
exhibits filed therewith.
12
<PAGE>
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, 1999.
Exhibit Index:
Exhibit Description
- ------- -----------
10.1 Certificate of Designations of Series C Preferred Stock (1)
10.2 Form of Warrant (1)
10.3 Form of Series C Preferred Stock and Non-Detachable Warrants
Purchase Agreement (1)
27 Financial Data Schedule
- -------------------
(1) Incorporated by reference to the Company's Current Report on Form 8-K
dated September 15, 1999.
(b) Reports on Form 8-K
Current Report on Form 8-K/A dated July 2, 1999 reporting under Item 5.
Current Report on Form 8-K dated September 15, 1999 reporting under Item 5.
Current Report on Form 8-K dated October 7, 1999 reporting under Item 4.
13
<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: November 12, 1999 By: /s/ Margaret E. Grayson
------------------------------
Name: Margaret E. Grayson
Title: Senior Vice President, Chief Financial
Officer and Director
(Duly authorized officer and principal
financial officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-Q FOR THE NINE
MONTH PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,512,729
<SECURITIES> 0
<RECEIVABLES> 574,649
<ALLOWANCES> 260,542
<INVENTORY> 209,452
<CURRENT-ASSETS> 9,382,727
<PP&E> 1,530,401
<DEPRECIATION> 816,393
<TOTAL-ASSETS> 11,053,509
<CURRENT-LIABILITIES> 5,244,822
<BONDS> 0
0
1,623
<COMMON> 17,049
<OTHER-SE> 5,649,883
<TOTAL-LIABILITY-AND-EQUITY> 11,053,509
<SALES> 3,636,034
<TOTAL-REVENUES> 3,636,034
<CGS> 558,157
<TOTAL-COSTS> 9,249,687
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (893,616)
<INCOME-PRETAX> (7,060,608)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,060,608)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,060,608)
<EPS-BASIC> (.42)
<EPS-DILUTED> (.42)
</TABLE>
