U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
[ ] 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 1-14896
NETWORK-1 SECURITY SOLUTIONS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS
SPECIFIED IN ITS CHARTER)
DELAWARE 11-3027591
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1601 TRAPELO ROAD, RESERVOIR PLACE, WALTHAM, MASSACHUSETTS 02451
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
781-522-3400
(ISSUER'S TELEPHONE NUMBER)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes /X/ No / /
As of July 31, 1999 there were 4,372,375 shares of Common Stock, $.01 par value
per share, and 562,836 shares of Series C Convertible Preferred Stock, $.01 par
value per share, outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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NETWORK-1 SECURITY SOLUTIONS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Balance Sheets as of June 30, 1999 (unaudited) and December 31, 1998 ...............................................3
Statements of Operations for the three and six months ended June 30, 1999 and 1998 (unaudited) .....................4
Statement of Stockholders' Equity (Deficiency) for the six months ended June 30, 1999 (unaudited)
and for the year ended December 31, 1998 ...........................................................................5
Statements of Cash Flows for the six months ended June 30, 1999 and 1998 (unaudited) ...............................6
Notes to Financial Statements.......................................................................................7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...........................................................8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................................14
Item 2. Changes in Securities and Use of Proceeds..........................................................................14
Item 3. Defaults Upon Senior Securities....................................................................................14
Item 4. Submission of Matters to a Vote of Security Holders................................................................14
Item 5. Other Information..................................................................................................15
Item 6. Exhibits and Reports on Form 8-K...................................................................................15
SIGNATURES..................................................................................................................16
</TABLE>
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NETWORK-1 SECURITY SOLUTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
(Unaudited) (Audited)
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $2,667,000 $6,423,000
Accounts receivable - net of allowance for doubtful accounts
of $160,000 and $151,000 respectively 492,000 249,000
Prepaid expenses and other current assets 234,000 119,000
---------- ----------
Total current assets 3,393,000 6,791,000
Equipment and fixtures 697,000 415,000
Capitalized software costs - net 855,000 925,000
Security deposits 82,000 37,000
---------- ----------
$5,027,000 $8,168,000
========== ==========
LIABILITIES
Current liabilities:
Accounts payable $494,000 $420,000
Accrued expenses and other current liabilities 683,000 406,000
Deferred revenue 78,000 103,000
---------- ----------
Total current liabilities 1,255,000 929,000
---------- ----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock - $.01 par value; authorized 5,000,000 shares;
Series A -10% cumulative, none issued and outstanding
Series B - 500,000 shares, none issued and outstanding
Series C - 562,836 shares issued and outstanding 6,000 6,000
Common stock - $.01 par value; authorized 25,000,000 shares;
4,372,375 and 4,366,520 shares issued and outstanding 44,000 44,000
Additional paid-in capital 20,896,000 20,819,000
Unearned portion of compensatory stock options (220,000) (383,000)
Accumulated deficit (16,954,000) (13,247,000)
---------- ----------
3,772,000 7,239,000
---------- ----------
$5,027,000 $8,168,000
========== ==========
</TABLE>
See notes to financial statements
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<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Licenses $ 43,000 $ 217,000 $ 113,000 $ 412,000
Services 477,000 346,000 790,000 490,000
------------ ------------ ------------ ------------
Total revenues 520,000 563,000 903,000 902,000
Cost of revenues:
Amortization of software development costs 135,000 134,000 270,000 267,000
Cost of licenses 13,000 84,000 30,000 128,000
Cost of services 460,000 197,000 774,000 272,000
------------ ------------ ------------ ------------
Total cost of revenues 608,000 415,000 1,074,000 667,000
------------ ------------ ------------ ------------
Gross (loss) profit (88,000) 148,000 (171,000) 235,000
Operating expenses:
Product development 384,000 75,000 776,000 283,000
Selling and marketing 933,000 211,000 1,824,000 351,000
General and administrative 501,000 941,000 1,030,000 1,153,000
------------ ------------ ------------ ------------
Total operating expenses 1,818,000 1,227,000 3,630,000 1,787,000
------------ ------------ ------------ ------------
Loss from operations (1,906,000) (1,079,000) (3,801,000) (1,552,000)
Interest income (expense) - net 29,000 (214,000) 94,000 (438,000)
============ ============ ============ ============
Net loss $(1,877,000) $(1,293,000) $(3,707,000) $(1,990,000)
============ ============ ============ ============
Loss per share - basic and diluted $ (0.43) $ (0.76) $ (0.85) $ (1.17)
============ ============ ============ ============
Weighted average number of shares
outstanding - basic and diluted 4,372,375 1,706,037 4,371,957 1,699,120
============ ============ ============ ============
</TABLE>
See notes to financial statements
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NETWORK-1 SECURITY SOLUTIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------------- -----------------
Shares Amount Shares Amount
--------- -------- ------- ------
<S> <C> <C> <C> <C>
Balance - December 31, 1997 1,706,037 $ 17,000 500,000 $5,000
Common stock options issued to Chief
Executive Officer
Amortization of compensatory stock options
Issuance of Series C preferred stock 562,836 6,000
Issuance of common stock, warrants and
options for services rendered and payment
of liability 51,256 1,000
Warrants issued in connection with debt
financing
Repurchase and retirement of common shares (62,080)
Conversion of warrants to stock at discount
as part of debt re-financing 596,741 6,000
Conversion of Series B Preferred Stock 310,399 3,000 (500,000) (5,000)
Acquisition of CommHome 64,167
Issuance of common stock for cash - initial
public offering 1,700,000 17,000
Net loss
--------- -------- ------- ------
Balance - December 31, 1998 4,366,520 44,000 562,836 6,000
Amortization of compensatory stock options
Issuance of common stock and options for
services rendered 5,855
Net Loss
--------- -------- ------- ------
Balance - June 30, 1999 (Unaudited) 4,372,375 $ 44,000 562,836 $6,000
========= ======== ======= ======
</TABLE>
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)(CONTINUED)
<TABLE>
<CAPTION>
Unearned
Additional Portion of
Paid-in Accumulated Compensatory
Capital Deficit Stock Options Total
----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Balance - December 31, 1997 $ 7,373,000 $ (7,470,000) $ (75,000)
Common stock options issued to Chief
Executive Officer 938,000 (938,000) 0
Amortization of compensatory stock options 555,000 555,000
Issuance of Series C preferred stock 2,949,000 2,955,000
Issuance of common stock, warrants and
options for services rendered and payment
of liability 499,000 500,000
Warrants issued in connection with debt
financing 766,000 766,000
Repurchase and retirement of common shares (1,000) (1,000)
Conversion of warrants to stock at discount
as part of debt re-financing (6,000) 0
Conversion of Series B Preferred Stock 2,000 0
Acquisition of CommHome 385,000 385,000
Issuance of common stock for cash - initial
public offering 7,914,000 7,931,000
0
Net loss (5,777,000) (5,777,000)
----------- ------------ ---------- -----------
Balance - December 31, 1998 20,819,000 (13,247,000) (383,000) 7,239,000
Amortization of compensatory stock options 163,000 163,000
Issuance of common stock and options for
services rendered 77,000 77,000
Net Loss (3,707,000) (3,707,000)
----------- ------------ ---------- -----------
Balance - June 30, 1999 (Unaudited) $20,896,000 $(16,954,000) $ (220,000) $ 3,772,000
=========== ============ ========== ===========
</TABLE>
See notes to financial statements
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<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
<TABLE>
<CAPTION>
June 30,
-----------------------------------
1999 1998
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,707,000) $ (1,990,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of debt discount 364,000
Issuance of common stock, options and
warrants for services rendered 240,000 583,000
Provision for doubtful accounts 9,000 18,000
Depreciation and amortization 367,000 346,000
Changes in:
Accounts receivable (252,000) (192,000)
Prepaid expenses and other current assets (115,000) (5,000)
Accounts payable, accrued expenses and
other current liabilities 351,000 (1,000)
Deferred revenue (25,000) 29,000
------------ ------------
Net cash used in operating activities (3,132,000) (848,000)
------------ ------------
Cash flows from investing activities:
Acquisitions of equipment and fixtures (379,000) (3,000)
Capitalized software costs (200,000) (50,000)
Security deposit (45,000) (5,000)
------------ ------------
Net cash used in investing activities (624,000) (58,000)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable and
warrants 1,750,000
Repayment of capital lease obligations (8,000)
Purchase of Treasury Shares (1,000)
Deferred Offering Costs (261,000)
------------ ------------
Net cash provided by financing activities 0 1,480,000
------------ ------------
Net increase (decrease) in cash and cash equivalents (3,756,000) 574,000
Cash and cash equivalents - beginning of period 6,423,000 60,000
------------ ------------
Cash and cash equivalents - end of period $ 2,667,000 $ 634,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for Interest $ - $ 1,000
============ ============
</TABLE>
See notes to financial statements
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<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. FINANCIAL STATEMENT PRESENTATION
a. The financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission with respect to Form 10-QSB.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the
disclosures made herein are adequate to make the information contained
herein not misleading. These interim financial statements and the notes
thereto should be read in conjunction with the financial statements
included in the Company's 10-KSB for the year ended December 31, 1998.
In the Company's opinion, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the
information shown have been included.
b. The results of operations for the six months ended June 30,
1999 presented herein are not necessarily indicative of the results of
operations that may be expected for the year ending December 31, 1999.
c. Basic loss per share is calculated by dividing net loss by
the weighted average number of outstanding common shares during the
year. Diluted per share data includes the dilutive effects of options,
warrants and convertible securities. As all potential common shares are
anti-dilutive, they are not included in the calculation of diluted loss
per share.
-7-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT").
ACTUAL RESULTS, EVENTS AND CIRCUMSTANCES (INCLUDING FUTURE PERFORMANCE,
RESULTS AND TRENDS) COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN
SUCH STATEMENTS DUE TO VARIOUS FACTORS, RISKS AND UNCERTAINTIES,
INCLUDING BUT NOT LIMITED TO RISKS ASSOCIATED WITH THE COMPANY'S FUTURE
GROWTH AND OPERATING RESULTS, THE UNCERTAINTY OF MARKET ACCEPTANCE OF
THE COMPANY'S PRODUCTS, TECHNOLOGICAL CHANGE, COMPETITIVE FACTORS AND
GENERAL ECONOMIC CONDITIONS.
Overview
The Company develops, markets, licenses and supports a family
of network security software products designed to provide comprehensive
security to computer networks, including Internet based systems and
internal networks and computing resources. The Company also offers to
its customers a full range of consulting services in network security,
network design and support. From inception (July 1990) through December
31, 1994, the Company was primarily engaged in providing consulting and
training services. In 1995, the Company began to shift its focus from
consulting and training to the development and marketing of network
security software products. The Company introduced its first network
software product (Firewall/Plus) in June 1995. In January 1999, the
Company introduced its CyberwallPLUS(TM) family of network security
products. Accordingly, the Company has a limited relevant operating
history as a software developer upon which an evaluation of its
prospects and future performance can be made. Such prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered in the operation and expansion of a new business and the
shift from research and product development to commercialization of
products based on rapidly changing technologies in a highly specialized
and emerging market. The Company will be required to significantly
expand its product and development capabilities, introduce new
products, introduce enhanced features to existing products, expand its
in-house sales force, establish and maintain distribution channels
through third-party vendors, increase marketing expenditures, and
attract additional qualified personnel. In addition, the Company must
adapt to the demands of an emerging and rapidly changing computer
network security market, intense competition and rapidly changing
technology and industry standards. There can be no assurance that the
Company can successfully address such risks, and the failure to do so
would have a material adverse effect on the Company's business, results
of operations and financial condition.
To date, the Company has incurred significant losses and, at
June 30, 1999, had an accumulated deficit of $ 16,954,000. In addition,
since June 30, 1999, the Company has continued to incur significant
losses. Inasmuch as the Company has increased its level of activities
following the consummation of its initial public offering in November
1998 and will be required to make significant expenditures in
connection with its sales and marketing and continuing research and
product development efforts, the Company anticipates that losses will
continue until such time, if ever, as the Company is able to attain
sales levels sufficient to support its operations. There can be no
assurance that the Company will ever achieve profitable operations.
-8-
<PAGE>
During the period May 1998 through November 1998, the Company
first employed certain members of senior management, including Avi A.
Fogel, President and Chief Executive Officer, Robert P. Olsen, Vice
President of Marketing, Murray P. Fish, Chief Financial Officer and
Secretary, Joseph A. Donohue, Vice President of Engineering, and Lance
Westbrook, Vice President of Sales.
The Company's software products have not yet achieved market
acceptance. The future success of the Company is largely dependent upon
market acceptance of its CyberwallPLUS(TM) family of software products.
While the Company believes that its CyberwallPLUS(TM) family of
software products offer advantages over competing products for network
security, license revenue from network security software products since
their introduction (June 1995) through June 30, 1999 has only been
$2,775,000, including a non-refundable pre-paid royalty of $500,000 in
1997. In addition, during the three and six month periods ended June
30, 1999 and the year ended December 31,1998 license revenues from
software products decreased as compared to the three and six month
periods ended June 30, 1998 and the year ended December 31,1997,
respectively. Since its introduction in March 1999, license revenue
from CyberwallPLUS(TM) has been only $54,000. Service revenues from
product maintenance were $63,000 for the six months ended June 30,
1999.
There can be no assurance that CyberwallPLUS(TM) will gain
significant market acceptance. Revenue from such commercial products
depend on a number of factors, including the influence of market
competition, technological changes in the network security market, the
Company's ability to design, develop and introduce enhancements on a
timely basis, and the ability of the Company to successfully establish
and maintain distribution channels. The failure of CyberwallPLUS(TM) to
achieve significant market acceptance, as a result of competition,
technological change or other factors, would have a material adverse
effect on the Company's business, operating results and financial
condition.
The Company has committed significant product and development
resources to its CyberwallPLUS(TM) family of products. The Company's
anticipated levels of expenditures for product development are based on
its plans for product enhancements and new product development. The
Company capitalizes and amortizes software development costs in
accordance with Statement of Financial Accounting Standards No. 86.
These costs consist of salaries, consulting fees and applicable
overhead. The Company has used a portion of the proceeds from its
public offering to significantly increase its product development
expenditures.
During the three month period ended June 30, 1999 the Company
completed several strategic alliances:
o A co-marketing agreement with Entrust(R) Technologies,
that will use Network-1's CyberwallPLUS technology to
enhance the security of the Entrust/ PKI(TM) Server
products running on Windows NT;
o A partnership with EnerNet Associates, Inc. to provide
secure networking solutions for the power industry; and
o A strategic relationship with Microsoft through
Microsoft's Security Partners Program to enhance the
security of Windows NT.
The Company also continued to expand its Professional Services
team to meet its customers needs. Professional services revenues
increased 52% for the quarter ended June 30, 1999 as compared to the
quarter ended March 31, 1999 and increased 61% for the six months ended
June 30, 1999 as compared to the six months ended June 30, 1998.
-9-
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30,
1998
Revenues increased by $1,000, from $902,000 for the six months
ended June 30, 1998 to $903,000 for the six months ended June 30, 1999,
primarily as a result of an increase in consulting revenues during the
six months ended June 30, 1999 which were offset by lower product
revenues.
License revenues decreased by $299,000 or 73%, from $412,000
for the six months ended June 30, 1998 to $113,000 for the six months
ended June 30, 1999, primarily due to lower product licensing revenue
from FireWallPlus which was replaced by its successor product line,
CyberwallPLUS which was announced in January 1999 and commenced
shipping in March 1999.
Service revenues increased by $300,000 or 61%, from $490,000
for the six months ended June 30, 1998 to $790,000 for the six months
ended June 30, 1999. Service revenues from consulting increased by
$303,000 or 71%, from $424,000 for the six months ended June 30, 1998
to $727,000 for the six months ended June 30, 1999. The increase in
service revenues was attributable to three large consulting projects
serviced during the six months ended June 30, 1999. Service revenues
from product maintenance decreased by $3,000 or 5%, from $66,000 for
the six months ended June 30, 1998 to $63,000 for the six months ended
June 30, 1999.
The Company's revenues from customers in the United States
represented 98% and 99% of the Company's revenues during the six months
ended June 30, 1998 and 1999, respectively.
Cost of revenues consists of cost of licenses, amortization of
software development costs and cost of services. Cost of licenses
consist of software media (disks), documentation, product packaging,
production costs, product royalties and the cost of hardware associated
with sales of FireWall/Plus Premier Version. Cost of licenses decreased
by $98,000 or 77%, from $128,000 for the six months ended June 30, 1998
to $30,000 for the six months ended June 30, 1999, representing 31% and
27% of license revenues, respectively. The decrease in cost of licenses
in dollar amount was due to the decrease in license revenue and a
decrease in royalties due on third party product sales. Cost of
licenses as a percentage of license revenues may fluctuate from period
to period due to changes in product mix, changes in the number or size
of transactions recorded in a given period or an increase or decrease
in licenses of products which would require the Company to pay
royalties to third parties.
Amortization of software development costs increased by $3,000
from $267,000 for the six months ended June 30, 1998 to $270,000 for
the six months ended June 30, 1999, representing 65% and 239% of
license revenues, respectively.
Cost of services consist of salaries, benefits and overhead
associated with consulting services and maintenance. Cost of services
increased by $502,000 or 185%, from $272,000 for the six months ended
June 30, 1998 to $774,000 for the six months ended June 30, 1999,
representing 56% and 98% of service revenues, respectively. The
increase in cost of services in dollar amount resulted primarily from
hiring and travelling costs related to increases in employees and
consulting time expended which was not billable to the customer. Cost
of services as a percentage of license revenues may fluctuate from
period to period due to changes in consultant headcount, costs relating
to hiring new consultants or an increase or decrease in number of
projects being worked.
Gross profit (loss) decreased from $235,000 for the six months
ended June 30, 1998 to ($171,000) for the six months ended June 30,
1999, representing 26% and (19%) of revenues,
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<PAGE>
respectively. The decrease in gross profit was due to decreased license
revenues and the increase in cost of services as a result of increased
hiring costs.
Product development consists of salaries, benefits, bonuses,
travel and related costs of the Company's product development
personnel, including consulting fees, the costs of computer equipment
used in product and technology development and third-party development
contracts. Product development expenses increased $493,000 or 174%,
from $283,000 for the six months ended June 30, 1998 to $776,000 for
the six months ended June 30, 1999, representing 31% and 86% of
revenues, respectively. Total product developments costs, including
capitalized costs of $50,000 and $200,000, were $333,000 and $976,000
for the six months ended June 30, 1998 and June 30, 1999, respectively.
The increase in total product development costs was due to the
salaries, related employment costs and operational costs of
establishing the new development team in Waltham, MA.
Sales and marketing expenses consist primarily of salaries,
including commissions, benefits, bonuses, travel, advertising, public
relations, consultants and trade shows. Selling and marketing expenses
increased by $1,473,000 or 420%, from $351,000 for the six months ended
June 30, 1998 to $1,824,000 for the six months ended June 30, 1999,
representing 39% and 202% of revenues, respectively. The increase in
selling and marketing expenses was due primarily to available funding
for marketing as a result of the Company's completion of its initial
public offering and the release of its new product line, CyberwallPLUS.
General and administrative expenses include employee costs,
including salary, benefits, bonuses, travel and other related expenses
associated with management, finance and accounting operations, and
legal and other professional services provided to the Company. General
and administrative expenses decreased by $123,000 or 11%, from
$1,153,000 for the six months ended June 30, 1998 to $1,030,000 for the
six months ended June 30, 1999, representing 128% and 114% of revenues,
respectively. The decrease in general and administrative expenses was
due primarily to decreases in non-cash compensation for services of
$343,000 which was offset by increased salaries and expenses related to
the hiring of the executive officers of the Company in May 1998,
increased professional fees and recruiting fees, telephone and the
costs associated with moving and setting up the new corporate
headquarters.
Interest expense was $438,000 for the six months ended June
30, 1998 and the Company had interest income of $94,000 for the six
months ended June 30, 1999. The decrease in interest expense and the
increase in interest income was due to the conversion of the majority
of the Company's debt to equity concurrent with the consumation of the
Company's initial public offering and the utilization of a portion of
the proceeds of the offering to pay the remaining debt.
No provision for or benefit from federal, state or foreign
income taxes was recorded for the six months ended June 30, 1998 or the
six months ended June 30, 1999 because the Company incurred net
operating losses during each period and fully reserved its deferred tax
assets as their future realization could not be determined.
As a result of the foregoing, the net loss increased by
$1,717,000 or 86%, from $1,990,000 for the six months ended June 30,
1998 to $3,707,000 for the six months ended June 30, 1999.
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<PAGE>
Liquidity and Capital Resources
The Company's capital requirements have been and will continue
to be significant, and its cash requirements have been exceeding its
cash flow from operations. At June 30, 1999, the Company had $2,667,000
of cash and cash equivalents and a working capital of $2,138,000. The
Company has financed its operations primarily through net proceeds from
the consummation of its initial public offering in November 1998, and
prior thereto by private sales of equity and debt securities. Net cash
used in operating activities was $848,000 and $3,132,000 during the six
months ended June 30, 1998 and 1999, respectively. Net cash used in
operating activities for the six months ended June 30, 1998 was
primarily attributable to a net loss of $1,990,000 and an increase in
accounts receivable of $192,000 which was partially offset by
amortization of debt discount of $364,000, issuance of Common Stock and
warrants for services rendered of $583,000 and depreciation and
amortization of $346,000. Net cash used in operating activities for the
six months ended June 30, 1999 was primarily attributable to a net loss
of $3,707,000 and an increase in accounts receivable of $252,000 which
was partially offset by increases in accounts payable, accrued expenses
and other current liabilities of $351,000, issuance of Common Stock and
warrants for services rendered of $240,000 and depreciation and
amortization of $367,000.
The Company's operating activities during the six months ended
June 30, 1998 were financed primarily with $1,750,000 of proceeds from
the issuance of $1,750,000 principal amount of notes and warrants to
purchase 325,919 shares of Common Stock. The Company's operating
activities for the six months ended June 30, 1999 were primarily
financed with the proceeds from the initial public offering consummated
in November 1998. The Company does not currently have a line of credit
from a commercial bank or other institution.
The Company anticipates, based on currently proposed plans and
assumptions relating to the implementation of its business plan
(including the timetable of, costs and expenses associated with, and
success of, its marketing efforts), that the net proceeds of its public
offering, together with projected revenues from operations, will be
sufficient to satisfy the Company's operations and capital requirements
through November 1999. There can be no assurance, however, that such
funds will not be expended prior thereto due to unanticipated changes
in economic conditions or other unforeseen circumstances. In the event
the Company's plans change or its assumptions change or prove to be
inaccurate (due to unanticipated expenses, difficulties, delays or
otherwise) or projected revenues otherwise prove to be insufficient to
fund the implementation of the Company's business plan or working
capital requirements, the Company could be in need of additional
financing sooner than currently anticipated. The Company is currently
seeking additional financing but the Company has no current commitment
with respect to any additional financing. Consequently, there can be no
assurance that any additional financing will be available to the
Company when needed, on commercially reasonable terms or at all. Any
inability to obtain additional financing when needed would have a
material adverse effect on the Company, requiring it to curtail and
possibly cease its operations. In addition, any additional equity
financing may involve substantial dilution to the interests of the
Company's then existing stockholders.
In June and July 1999, the Company took certain steps to
reorganize its operations in order to reduce expenses. Such
reorganization included the closing of its Texas office and
consolidation of its operations in Massachusetts, closing of certain
sales offices and the reduction of the number of employees from 46 to
34 or a 26 percent reduction.
-12-
<PAGE>
Year 2000 Issue
The Company has assessed the potential software issues
associated with the Year 2000 and believes its software products are
Year 2000 compliant and, therefore, does not expect to incur material
costs related thereto. With regard to internal computing resources
utilized in its operations, the Company does not expect to incur
material costs to make such resources year 2000 compliant.
Fluctuations in Operating Results
The Company anticipates significant quarterly fluctuations in
its operating results in the future. The Company generally ships orders
for commercial products as they are received and, as a result, does not
have any material backlog. As a result, quarterly revenues and
operating results depend on the volume and timing of orders received
during the quarter, which are difficult to forecast. Operating results
may fluctuate on a quarterly basis due to factors such as the demand
for the Company's products, purchasing patterns and budgeting cycles of
customers, the introduction of new products and product enhancements by
the Company or its competitors, market acceptance of new products
introduced by the Company or its competitors and the size, timing,
cancellation or delay of customer orders, including cancellation or
delay in anticipation of new product introduction or enhancement. In
addition, the Company's consulting revenues tend to fluctuate as
projects, which may continue over several quarters, are undertaken or
completed. Therefore, comparisons of quarterly operating results may
not be meaningful and should not be relied upon, nor will they
necessarily reflect the Company's future performance. Because of the
foregoing factors, it is likely that in some future quarters the
Company's operating results will be below the expectations of public
market analysts and investors. In such event, the price of the Common
Stock would likely be materially adversely affected.
-13-
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
None
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Use of Proceeds.
On November 12, 1998, the Company's registration statement on
Form SB-2, as amended (file number 333-59617), relating to its initial
public offering (the "Offering") was declared effective by the
Securities and Exchange Commission. Whale Securities Co., L.P. acted as
the underwriter in connection with the Offering which was consummated
on November 17, 1998. In connection with the Offering, the Company
registered, issued and sold 1,700,000 shares of Common Stock (excluding
255,000 shares of Common Stock subject to the underwriter's
over-allotment option which was not exercised), at an initial public
offering price of $6.00 per share resulting in net proceeds of
$7,931,000, after payment of underwriting discounts and commissions and
offering expenses of $2,269,000. Additionally, the Company registered
170,000 shares of Common Stock underlying warrants to purchase Common
Stock sold by the Company to the underwriter for $100. The warrants are
exercisable for a four-year period commencing on November 12, 1999 at a
price of $9.30 per share. Since November 17, 1998 (the date of
consummation of the Offering) through June 30, 1999, the Company used
the net proceeds of the Offering as follows: $2,247,000 for sales and
marketing, $1,160,000 for software development, $546,000 for payment of
past due trade payables, $585,000 for repayment of outstanding
indebtedness (including $132,000 for repayment of indebtedness to
officers, directors and 10% or more stockholders and affiliates)
$200,000 for purchase of office, telecommunications and computer
equipment, $158,000 for expenses related to establishing new executive
offices and $1,692,000 for working capital and general corporate
purposes.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 25, 1999, the Company's annual meeting of stockholders
was held. At the annual meeting, the stockholders approved the
following matters:
1. The following individuals listed below were elected
directors of the Company to serve until the next annual meeting of
stockholders and the election and qualification of their successors.
The number of votes cast for or withheld were as follows:
Nominee For Withheld
------- --- --------
Avi A. Fogel 4,322,173 20,470
William Hancock 4,336,643 6,000
Corey M. Horowitz 4,336,643 6,000
Barry Rubenstein 4,336,643 6,000
Irwin Lieber 4,336,643 6,000
Marcus J. Ranum 4,336,643 6,000
-14-
<PAGE>
2. An amendment to the Company's 1996 Stock Option Plan to
increase the number of shares available for issuance thereunder by
750,000 shares to an aggregate of 1,800,000 shares. 3,205,871 shares
were voted in favor of the amendment, 44,220 shares were voted against
the amendment, and 4,454 shares abstained from voting.
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits
The exhibits in the following table have been filed as part of
this Quarterly Report on Form 10-QSB:
Exhibit Number Description of Exhibit
--------------------- -------------------------------
10.28 Employment Agreement, dated May 15,
1999, between the Company and
Robert Russo.
27 Financial data schedule for six
month period ended June 30, 1999.
No reports on Form-8-K were filed during the six months ended
June 30, 1999.
-15-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NETWORK-1 SECURITY SOLUTIONS, INC.
By: /s/ Avi A. Fogel
-------------------------------
Avi A. Fogel, President and Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 1999
By: /s/ Murray P. Fish
-------------------------------
Murray P. Fish
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: August 12, 1999
-16-
<PAGE>
EXHIBIT INDEX
Exhibit Number Description of Exhibit
--------------------- -------------------------------
10.28 Employment Agreement, dated May 15,
1999, between the Company and
Robert Russo.
27 Financial data schedule for six
month period ended June 30, 1999.
-17-
EXHIBIT 10.28
EMPLOYMENT AGREEMENT dated as of May 15, 1999, between
NETWORK-1 SECURITY SOLUTIONS, INC., a Delaware corporation with its principal
office located at 1601 Trapelo Road, Waltham, Massachusetts 02451 (the
"Company"), and ROBERT RUSSO residing at 33-20 28th Street, Long Island City,
New York 11106 (the "Executive").
The Company desires to enter into this Agreement in order to
assure itself of the service of Executive, and Executive desires to accept
employment with the Company, upon the terms and conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations hereinafter set forth, the parties agree as follows:
SECTION 1. EMPLOYMENT. The Company hereby employs Executive,
and Executive hereby accepts employment by the Company, upon the terms and
conditions hereinafter set forth.
SECTION 2. TERM. The employment of Executive hereunder shall
be for a period commencing on the date hereof (the "Commencement Date") and
ending on May 15, 2001 (the "Term") or such earlier date upon which the
employment of the Executive shall terminate in accordance with the provisions
hereof. The period commencing on the Commencement Date and ending on the date of
termination of the Executive's employment hereunder shall be called the "Term of
Employment" for Executive, and the date on which the Executive's employment
hereunder shall terminate shall be called the "Termination Date.".
SECTION 3. DUTIES. During the Term of Employment, Executive
shall be employed as the Vice President of Professional Services of the Company
and shall perform such duties as are consistent therewith as the Board of
Directors of the Company (the "Board") shall designate. Executive shall use his
best efforts to perform well and faithfully the foregoing duties and
responsibilities.
SECTION 4. TIME TO BE DEVOTED TO EMPLOYMENT. During the Term
of Employment, Executive shall devote all of his business time, attention and
energies to the business of the Company (except for vacations to which he is
entitled pursuant to Section 6(b) and periods of illness or incapacity). During
the Term of Employment, Executive shall not engage in any business activity
which, in the reasonable judgment of the Board, conflicts with the duties of
Executive hereunder, whether or not such activity is pursued for gain, profit or
other pecuniary advantage.
<PAGE>
SECTION 5. COMPENSATION.
The Company shall pay to Executive an annual base
salary (the "Base Salary") during the Term of Employment of $120,000 per annum,
payable in such installments (but not less often than monthly) as is generally
the policy of the Company with respect to its executive officers, which Base
Salary shall be subject to such increases as the Board, in its sole discretion,
may from time to time determine. Executive's Base Salary and performance shall
be reviewed at least annually by the Compensation Committee.
SECTION 6. BUSINESS EXPENSES; BENEFITS.
(a) The Company shall reimburse Executive, in
accordance with the practice from time to time for executive officers of the
Company, for all reasonable and necessary expenses and other disbursements
incurred by Executive for or on behalf of the Company in the performance of
Executive's duties hereunder. Executive shall provide such appropriate
documentation of expenses and disbursements as may from time to time be required
by the Company.
(b) During the Term of Employment, Executive shall be
entitled to four (4) weeks vacation per year.
(c) During the Term of Employment, Executive shall be
entitled to participate in the group health, life and disability insurance
benefits, and retirement plan benefits made available from time to time for its
employees generally.
SECTION 7. INVOLUNTARY TERMINATION.
(a) If Executive is incapacitated or disabled (such
condition being hereinafter referred to as a "Disability") in a manner that
would qualify Executive for benefits under the disability policy of the Company
(the "Disability Policy"), the Term of Employment and employment of the
Executive under this Agreement shall cease (such termination, as well as a
termination under Section 7(b), being hereinafter referred to as an "Involuntary
Termination") and Executive shall be entitled to receive the benefits payable
under the Disability Policy and in accordance with Section 9 hereof.
(b) If Executive dies during the Term of Employment,
the Term of Employment and Executive's employment hereunder shall cease as of
the date of the Executive's death and Executive shall be entitled to receive the
benefits payable in accordance with Section 9 hereof.
2
<PAGE>
SECTION 8. TERMINATION BY THE COMPANY.
(a) TERMINATION FOR CAUSE. The Company may terminate
the Term of Employment and the employment of the Executive hereunder at any time
for Cause (as hereinafter defined) (such termination being referred to herein as
a "Termination For Cause") by giving Executive written notice of such
termination, effective immediately upon the giving of such notice to the
Executive. As used in this Agreement, "Cause" means the Executive's (a)
commission of an act (i) constituting a felony or (ii) involving fraud, moral
turpitude, theft or dishonesty which is not a felony and which materially
adversely affects the Company or could reasonably be expected to materially
adversely affect the Company, (b) repeated failure to be reasonably available to
perform his duties, which, if curable, shall not have been cured within 10
business days of written notice thereof from the Company, (c) repeated failure
to follow the lawful directions of the Company's Chief Executive Officer, which,
if curable, shall not have been cured within 30 business days of written notice
thereof from the Company, (d) material breach of any agreement with the Company
(including any provisions of this or any agreement between Executive and the
Company) which, if curable, shall not have been cured within 30 business days of
written notice thereof from the Company or (e) voluntary resignation (except as
set forth in paragraph 9(d) hereof).
(b) TERMINATION OTHER THAN FOR CAUSE. The Company may
terminate this Agreement and the employment of Executive other than for cause as
defined in Section 8(a) above (such termination shall be defined as a
"Termination Other Than for Cause") by giving Executive written notice of such
termination, which notice shall be effective upon the giving of such notice or
such later date set forth therein.
SECTION 9. EFFECT OF TERMINATION.
(a) Upon the termination of the Term of Employment
and Executive's employment hereunder due to Termination for Cause (as defined in
Section 8(a) above), neither Executive nor his beneficiary or estate shall have
any further rights or claims against the Company under this Agreement, except to
receive (i) the unpaid portion, if any, of the Base Salary provided for in
Section 5, computed on a pro rata basis to the Termination Date (based on the
actual number of days elapsed over the actual number of days elapsed over the
year in which such termination occurs), (ii) any unpaid accrued benefits of
Executive, (iii) reimbursement for any expenses for which Executive shall not
have been reimbursed as provided in Section 6(a), and (iv) Executive's rights
under the vested portion of any stock options granted by the Company.
(b) Upon the termination of Executive's employment
hereunder due to an Involuntary Termination, neither Executive nor his
beneficiary or estate shall have any further rights or claims against the
Company under this Agreement except the right to receive (i) the amounts set
forth in Section 9 (a), and (ii) the vesting of all stock options granted to
Executive (the "Options") that would have vested in the year of Involuntary
Termination and one-half of the Options that would have vested in the year
following the year of Involuntary Termination.
3
<PAGE>
(c) Upon the termination of Executive's employment
upon a Termination Other Than for Cause (as defined in Section 8(b) above),
neither Executive nor his beneficiary nor his estate shall have any rights or
claims against the Company except to receive (i) the amounts set forth in 9(b)
(including Options), and (ii) the lesser of (A) six months Base Salary as in
effect at the time of the Termination Other Than for Cause or (B) Executive's
Base Salary for the balance of the term of this Agreement.
(d) For purposes of this Section 9, if Executive is
asked to assume any duties or the material reduction of duties, either of which
is substantially inconsistent with the position of Vice President of
Professional Services of the Company, Executive, upon 30 days notice to the
Board of Directors setting forth in reasonable detail the respects in which
Executive believes such assignment or duties are substantially inconsistent with
the level of Executive's position, may resign from the Company and such
resignation will be treated as a Termination Other Than For Cause pursuant to
this Section 9.
SECTION 10. INSURANCE. The Company may, for its own benefit,
in its sole discretion, maintain "key-man" life and disability insurance
policies covering Executive. Executive will cooperate with the Company and
provide such information or other assistance as the Company may reasonably
request in connection with the Company's obtaining and maintaining such
policies.
SECTION 11. DISCLOSURE OF INFORMATION. Executive will not,
either during the Term of Employment or at any time thereafter, divulge,
publish, communicate, furnish or make accessible to anyone any knowledge or
information with respect to the Company's confidential, secret or proprietary
products, technology, methods, plans, materials and processes, or with respect
to any other confidential, secret or proprietary aspects of the business,
activities or products of the Company including, without limitation, (a)
software programs, source code, object code, product development information,
research and development projects or other technical data pertaining to the
Company's products (whether or not subject to patent, trademark or copyright
protection) or (b) any customer or client lists, telephone leads, prospects
lists, sales figures and forecasts, purchase costs, financial projections,
advertising and marketing plans and business strategies and plans; except as
such items set forth in clauses (a) and (b) above may already be in the public
domain through no fault of Employee (all of the foregoing items set forth in
clauses (a) and (b) being referred to herein collectively as "Confidential
Property"). Upon the termination of the Term of Employment, Executive shall
return to the Company all property (including Confidential Property) of the
Company (or any subsidiary or affiliate thereof) then in the possession of
Executive and all books, records, computer tapes or discs and all other material
containing non-public information concerning the business, clients or affairs of
the Company or any subsidiary or affiliate thereof.
4
<PAGE>
SECTION 12. RIGHT TO INVENTIONS. Executive shall promptly
disclose, grant and assign to the Company for its sole use and benefit any and
all marks, designs, logos, inventions, improvements, technical information and
suggestions relating in any way to the business conducted by the Company, which
he may develop or which may be acquired by Executive during the Term of
Employment (whether or not during usual working hours), together with all
trademarks, patent applications, letters, patent, copyrights and reissues
thereof that may at any time be granted for or upon any such mark, design, logo,
invention, improvement or technical information (collectively, "Inventions"). In
connection therewith, Executive shall (at the Company's sole cost and expense)
take all actions reasonably necessary or desirable to assign and/or confirm the
assignment of any Invention to the Company.
SECTION 13. RESTRICTIVE COVENANT.
(a) The Company is in the business of developing,
marketing, licensing and supporting network software security products and also
provides consulting in network security, network design, troubleshooting and
engineering. Executive acknowledges and recognizes that the Business has been
conducted, and sales of its products have been made, throughout the United
States, and Executive further acknowledges and recognizes the highly competitive
nature of the industry in which the Business is involved. Accordingly, in
consideration of the premises contained herein, and the consideration to be
received hereunder, Executive shall not, during the Non-Competition Period (as
defined below): (i) directly or indirectly engage, whether or not such
engagement shall be as a partner, stockholder, affiliate or other participant,
in any Competitive Business (as defined below), or represent in any way any
Competitive Business, whether or not such engagement or representation shall be
for profit, (ii) interfere with, disrupt or attempt to disrupt the relationship,
contractual or otherwise, between the Company and any other person or entity,
including, without limitation, any customer, supplier, employee or consultant of
the Company, (iii) induce any employee of the Company to terminate his
employment with the Company or to engage in any Competitive Business in any
manner described in the foregoing clause (i) (as well as an officer or director
of any Competitive Business), or (iv) affirmatively assist or induce any other
person or entity to engage in any Competitive Business in any manner described
in the foregoing clause (i) (as well as an officer or director of any
Competitive Business). Anything contained in this Section 13 to the contrary
notwithstanding, an investment by Executive in any publicly traded company in
which Executive and his affiliates exercise no operational or strategic control
and which constitutes less than 5% of the capital of such entity shall not
constitute a breach of this Section 13.
(b) As used herein, "Non-Competition Period" shall
mean the period commencing on the date hereof and terminating on the Termination
Date; provided, however, that if the Term of Employment shall have been
terminated pursuant to Section 8 (a) for cause, then "Non-Competition Period"
shall mean the period commencing on the date hereof and ending on the second
anniversary of the Termination Date. "Competitive Business" shall mean any
business in any State of the United States engaged in the development, marketing
and licensing of network software security products, or in any other line of
business in which the
5
<PAGE>
Company was engaged or had a formal plan to enter as of the Termination Date,
provided, however, during the period beginning on the Termination Date and
ending on the second anniversary thereof, Executive shall not be precluded from
engaging in consulting services in the computer industry, including, but not
limited to, network design, trouble shooting and engineering.
(c) Executive understands that the foregoing
restrictions may limit his ability to earn a livelihood in a business similar to
the business of the Company, but he nevertheless believes that he has received
and will receive sufficient consideration and other benefits as an employee of
the Company and as otherwise provided hereunder and pursuant to other agreements
between the Company and Executive to justify clearly such restrictions which, in
any event (given his education, skills and ability), Executive does not believe
would prevent him from earning a living.
SECTION 14. ENFORCEMENT; SEVERABILITY; ETC. It is the desire
and intent of the parties that the provisions of this Agreement shall be
enforced to the fullest extent permissible under the laws and public policies
applied in each jurisdiction in which enforcement is sought. Accordingly, if any
particular provision of this Agreement shall be adjudicated to be invalid or
unenforceable, such provision shall be deemed amended to (a) delete therefrom
the portion thus adjudicated to be invalid or unenforceable, such deletion to
apply only with respect to the operation of such provision in the particular
jurisdiction in which such adjudication is made or (b) otherwise to render it
enforceable in such jurisdiction.
SECTION 15. REMEDIES. Executive acknowledges and understands
that the provisions of this Agreement are of a special and unique nature, the
loss of which cannot be adequately compensated for in damages by an action at
law, and that the breach or threatened breach of the provisions of this
Agreement would cause the Company irreparable harm. In the event of a breach or
threatened breach by Executive of the provisions of this Agreement, the Company
shall be entitled to an injunction restraining him from such breach. Nothing
contained in this Agreement shall be construed as prohibiting the Company from
or limiting the Company in pursuing any other remedies available for any breach
or threatened breach of this Agreement.
SECTION 16. NOTICES. All notices, claims, certificates,
requests, demands and other communications hereunder shall be in writing and
shall be deemed to have been duly given and delivered if personally delivered or
if sent by a nationally-recognized overnight courier, by telecopy, or by
registered or certified mail, return receipt requested and postage prepaid,
addressed as follows:
if to the Company, to: Network-1 Security Solutions, Inc.
1601 Trapelo Road
Reservoir Place
Waltham, MA 02451
Attention: Avi Fogel, President and
Chief Executive Officer
6
<PAGE>
with copies to: Solovay Edlin & Eiseman
845 Third Avenue
New York, NY 10022
Telecopier: (212) 355-4608
Telephone: (212) 752-1000
Attention: Sam Schwartz, Esq.
if to Executive, to: Robert Russo
33-20 28th Street
Long Island City
New York, NY 11106
or to such other address as the party to whom notice is to be given may have
furnished to the other party or parties in writing in accordance herewith. Any
such notice or communication shall be deemed to have been received (a) in the
case of personal delivery, on the date of such delivery, (b) in the case of
nationally-recognized overnight courier, on the next business day after the date
when sent, (c) in the case of telecopy transmission, when received, and (d) in
the case of mailing, on the third business day following that on which the piece
of mail containing such communication is posted.
SECTION 17. BINDING AGREEMENT; BENEFIT. The provisions of this
Agreement will be binding upon, and will inure to the benefit of, the respective
heirs, legal representatives, successors and assigns of the parties.
SECTION 18. GOVERNING LAW. This Agreement will be governed by,
construed and enforced in accordance with, the laws of the State of
Massachusetts (without giving effect to principles of conflicts of laws).
SECTION 19. WAIVER OF BREACH. The waiver by either party of a
breach of any provision of this Agreement must be in writing and shall not
operate or be construed as a waiver of any other breach.
SECTION 20. ENTIRE AGREEMENT; AMENDMENTS. This Agreement
contains the entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior agreements or understandings between the
parties with respect thereto. This Agreement may be amended only by an agreement
in writing signed by the parties.
SECTION 21. HEADINGS. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
7
<PAGE>
SECTION 22. ASSIGNMENT. This Agreement is personal in its
nature and the parties shall not, without the consent of the other, assign or
transfer this Agreement or any rights or obligations hereunder; provided,
however, that the Company may assign this Agreement to any of its subsidiaries
and affiliates.
SECTION 23. GENDER. Any reference to the masculine gender
shall be deemed to include the feminine and neuter genders unless the context
otherwise requires.
SECTION 24. COUNTERPARTS. This Agreement may be executed in
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Employment Agreement as of the date first written above.
NETWORK-1 SECURITY SOLUTIONS, INC.
By: /s/ Avi A. Fogel
---------------------------
Avi A. Fogel, President and
Chief Executive Officer
/s/ Robert Russo
---------------------------
Robert Russo
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF NETWORK-1 SECURITY SOLUTIONS, INC. FOR THE
PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,667,000
<SECURITIES> 0
<RECEIVABLES> 652,000
<ALLOWANCES> 160,000
<INVENTORY> 2,000
<CURRENT-ASSETS> 3,393,000
<PP&E> 1,282,000
<DEPRECIATION> 585,000
<TOTAL-ASSETS> 5,027,000
<CURRENT-LIABILITIES> 1,255,000
<BONDS> 0
0
6,000
<COMMON> 44,000
<OTHER-SE> 3,722,000
<TOTAL-LIABILITY-AND-EQUITY> 5,027,000
<SALES> 113,000
<TOTAL-REVENUES> 903,000
<CGS> 300,000
<TOTAL-COSTS> 1,074,000
<OTHER-EXPENSES> 3,630,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,707,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,707,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,707,000)
<EPS-BASIC> (0.85)
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