<PAGE>
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 MARCH 31, 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 April 30, 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/
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Balance Sheets as of March 31, 1999 (unaudited) and December 31, 1998 ...........................................3
Statements of Operations for the three months ended March 31, 1999 and 1998 (unaudited) .........................4
Statement of Stockholders' Equity (Deficiency) for the three months ended March 31, 1999 (unaudited)
and for the year ended December 31, 1998 ......................................................................5
Statements of Cash Flows for the three months ended March 31, 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................................................................................................12
Item 2. Changes in Securities and Use of Proceeds........................................................................12
Item 3. Defaults Upon Senior Securities..................................................................................12
Item 4. Submission of Matters to a Vote of Security Holders..............................................................12
Item 5. Other Information................................................................................................12
Item 6. Exhibits and Reports on Form 8-K.................................................................................12
SIGNATURES................................................................................................................13
</TABLE>
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
(Unaudited) (Audited)
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $4,590,000 $6,423,000
Accounts receivable - net of allowance for doubtful accounts
of $171,000 and $151,000 respectively 337,000 249,000
Prepaid expenses and other current assets 268,000 119,000
---------- ----------
Total current assets 5,195,000 6,791,000
Equipment and fixtures 650,000 415,000
Capitalized software costs - net 890,000 925,000
Security deposits 117,000 37,000
---------- ----------
$6,852,000 $8,168,000
---------- ----------
---------- ----------
LIABILITIES
Current liabilities:
Accounts payable $618,000 $420,000
Accrued expenses and other current liabilities 537,000 406,000
Deferred revenue 144,000 103,000
---------- ----------
Total current liabilities 1,299,000 929,000
---------- ----------
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 20,868,000 20,819,000
Unearned portion of compensatory stock options (288,000) (383,000)
Accumulated deficit (15,077,000) (13,247,000)
---------- ----------
5,553,000 7,239,000
---------- ----------
$6,852,000 $8,168,000
---------- ----------
---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-3
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------
1999 1998
------------ ----------
<S> <C> <C>
Revenues:
Licenses $ 70,000 $ 195,000
Services 313,000 144,000
------------ ----------
Total revenues 383,000 339,000
Cost of revenues:
Amortization of software development costs 135,000 133,000
Cost of licenses 17,000 44,000
Cost of services 314,000 75,000
------------ ----------
Total cost of revenues 466,000 252,000
------------ ----------
Gross (loss) profit (83,000) 87,000
Operating expenses:
Product development 392,000 208,000
Selling and marketing 891,000 140,000
General and administrative 529,000 212,000
------------ ----------
Total operating expenses 1,812,000 560,000
------------ ----------
Loss from operations (1,895,000) (473,000)
Interest income (expense) - net 65,000 (224,000)
------------ ----------
Net loss $ (1,830,000) $ (697,000)
------------ ----------
------------ ----------
Loss per share - basic and diluted $ (0.42) $ (0.41)
------------ ----------
------------ ----------
Weighted average number of shares outstanding
outstanding - basic and diluted 4,371,529 1,706,037
------------ ----------
------------ ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-4
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
---------------- --------------- Paid-in Accumulated Compensatory
Shares Amount Shares Amount Capital Deficit Stock Options Total
------ ------ ------ ------ ------- ------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1997 1,706,037 $ 17,000 500,000 $5,000 $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 562,836 6,000 2,949,000 2,955,000
Issuance of common stock, warrants and
options for services rendered and payment
of liability 51,256 1,000 499,000 500,000
Warrants issued in connection with debt
financing 766,000 766,000
Repurchase and retirement of common shares (62,080) (1,000) (1,000)
Conversion of warrants to stock at discount
as part of debt re-financing 596,741 6,000 (6,000) 0
Conversion of Series B Preferred Stock 310,399 3,000 (500,000) (5,000) 2,000 0
Acquisition of CommHome 64,167 385,000 385,000
Issuance of common stock for cash - initial
public offering 1,700,000 17,000 7,914,000 7,931,000
Net loss (5,777,000) (5,777,000)
--------- -------- ------- ------ ------------ ------------- --------- -----------
Balance - December 31, 1998 4,366,520 44,000 562,836 6,000 20,819,000 (13,247,000) (383,000) 7,239,000
Amortization of compensatory stock options 95,000 95,000
Issuance of common stock and options for
services rendered 5,855 49,000 49,000
Net Loss (1,830,000) (1,830,000)
--------- -------- ------- ------ ----------- ------------- --------- ----------
Balance - March 31, 1999 (Unaudited) 4,372,375 $ 44,000 562,836 $6,000 $20,868,000 $(15,077,000) $(288,000) $5,553,000
--------- -------- ------- ------ ----------- ------------- --------- ----------
--------- -------- ------- ------ ----------- ------------- --------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-5
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS FOR THE QUARTER ENDED
<TABLE>
<CAPTION>
March 31,
-----------------------------------
1999 1998
(Unaudited) (Unaudited)
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,830,000) $ (697,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of debt discount 164,000
Issuance of common stock, options and
warrants for services rendered 144,000 25,000
Provision for doubtful accounts 20,000 (10,000)
Depreciation and amortization 191,000 171,000
Changes in:
Accounts receivable (109,000) 159,000
Prepaid expenses and other current assets (152,000)
Accounts payable, accrued expenses and
other current liabilities 332,000 (208,000)
Deferred revenue 41,000 13,000
------------ ----------
Net cash used in operating activities (1,363,000) (383,000)
------------ ----------
Cash flows from investing activities:
Acquisitions of equipment and fixtures (292,000) (3,000)
Capitalized software costs (100,000)
Security deposit (78,000) (1,000)
------------ ----------
Net cash used in investing activities (470,000) (4,000)
------------ ----------
Cash flows from financing activities:
Proceeds from issuance of notes payable and
warrants 400,000
Repayment of capital lease obligations (6,000)
------------ ----------
Net cash provided by financing activities 0 394,000
------------ ----------
Net increase (decrease) in cash and cash equivalents (1,833,000) 7,000
Cash and cash equivalents - beginning of period 6,423,000 60,000
------------ ----------
Cash and cash equivalents - end of period $ 4,590,000 $ 67,000
------------ ----------
------------ ----------
Supplemental disclosures of cash flow information:
Cash paid during the period for Interest $ - $ 1,000
------------ ----------
------------ ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-6
<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 three months ended March 31, 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 March 31,
1999, had an accumulated deficit of $ 15,077,000. In addition, since March 31,
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 up-front 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.
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 Product
Management, Murray P. Fish, Chief Financial Officer, Joseph A. Donohue, Vice
President of Engineering, Joseph D. Harris, Vice President of International
Sales and Lance Westbrook, Vice President of North American Sales. In addition,
the Company intends to hire additional software engineers and developers and
additional sales and marketing personnel during 1999, as well as expand its
finance and administrative staff and increase expenses for employee benefits,
facilities, consulting, insurance, and other general operating needs.
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 which
was only first shipped in March 1999. While the Company believes that its
CYBERWALLPLUS-TM- family of software products offer advantages over competing
products for network security, license revenue from predecessor network
security software products offered by the Company since their introduction
(June 1995) through March 31, 1999 has only been $2,732,000, including a
non-refundable pre-paid royalty of $500,000 in 1997. In addition, during the
three month
-8-
<PAGE>
period ended March 31, 1999 and the year ended December 31,1998 license revenues
from software products decreased as compared to the three month period ended
March 31, 1998 and the year ended December 31,1997, respectively. 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. During the year ended
December 31, 1999 the Company will significantly increase its product
development expenditures.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Revenues increased by $44,000 or 13%, from $339,000 for the three
months ended March 31, 1998 to $383,000 for the three months ended March 31,
1999, primarily as a result of one large consulting project serviced during the
three months ended March 31, 1999.
License revenues decreased by $125,000 or 64%, from $195,000 for the
three months ended March 31, 1998 to $70,000 for the three months ended March
31, 1999, primarily due to lower product licensing revenue from two major
resellers during the three months ended March 31, 1999 as well as the
introduction of its successor product line, CyberwallPLUS which commenced
shipping in March 1999.
Service revenues increased by $169,000 or 117%, from $144,000 for the
three months ended March 31, 1998 to $313,000 for the three months ended March
31, 1999. Service revenues from consulting increased by $161,000 or 136%, from
$118,000 for the three months ended March 31, 1998 to $279,000 for the three
months ended March 31, 1999. The increase in service revenues was attributable
to one large consulting project serviced during the three months ended March 31,
1999.
The Company's two largest customers, ARINC and Fluor Daniel, Inc.
accounted for 57% and 11% of the Company's revenues, respectively, during the
three months ended March 31, 1999. The Company's three largest customers during
the three months ended March 31, 1998 were The City of Hope, Sabre, Inc. and
OmniComm Systems, Inc. which accounted for 33%, 26% and 15% of the Company's
revenues, respectively. The Company's revenues from customers in the United
States represented 97% of its revenues during the three months ended March 31,
1998 and 1999.
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 $27,000 or 61%, from $44,000 for
the three months ended March 31, 1998 to $17,000 for the three months ended
March 31, 1999, representing 23% and 24% of license revenues, respectively. The
decrease in cost of licenses in dollar amount was due to the decrease in license
revenue. 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 $2,000 or 2%,
from $133,000 for the three months ended March 31, 1998 to $135,000 for the
three months ended March 31, 1999, representing 68% and 193% of license
revenues, respectively.
Cost of services consist of salaries, benefits and overhead associated
with consulting services and maintenance. Cost of services increased by $239,000
or 319%, from $75,000 for the three months ended March 31, 1998 to $314,000 for
-9-
<PAGE>
the three months ended March 31, 1999, representing 52% and 100% 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 $87,000 for the three months ended
March 31, 1998 to ($83,000) for the three months ended March 31, 1999,
representing 26% and (22%) of revenues, 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 $184,000 or 89%, from $208,000 for the three months ended March 31,
1998 to $392,000 for the three months ended March 31, 1999, representing 61% and
102% of revenues, respectively. Total product developments costs, including
capitalized costs of $0 and $100,000, were $208,000 and $492,000 for the three
months ended March 31, 1998 and March 31, 1999, respectively. The increase in
total product development costs was due to the salaries and related employment
costs of the new development team in Waltham, MA. The Company currently
anticipates that product development costs will continue to increase as the
Company hires additional software engineers and developers to support the
Company's growth.
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
$751,000 or 536%, from $140,000 for the three months ended March 31, 1998 to
$891,000 for the three months ended March 31, 1999, representing 41% and 233% 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, 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 increased by
$317,000 or 150%, from $212,000 for the three months ended March 31, 1998 to
$529,000 for the three months ended March 31, 1999, representing 63% and 138% of
revenues, respectively. The increase in general and administrative expenses was
due primarily to increased salaries related to the hiring of two (2) executive
officers of the Company in May 1998, increased professional fees and
recruiting fees, non-cash charges of $113,000 during the three months ended
March 31, 1999 related to the value of stock options issued to the Company's
Chief Executive Officer, and the value of other securities issued to third
parties for services, as compared to non-cash charges of $38,000 during the
three months ended March 31, 1998 related to consulting services. The Company
currently anticipates that general and administrative expenses will continue
to increase as the Company hires additional personnel to support its growth
in future periods.
Interest expense decreased by $289,000 or 129%, from $224,000 for the
three months ended March 31, 1998 to interest income of $65,000 for the three
months ended March 31, 1999, representing 66% and 17% of revenues, respectively.
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 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 three months ended March 31, 1998 or the three months ended
March 31, 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 $1,133,000 or
163%, from $697,000 for the three months ended March 31, 1998 to $1,830,000 for
the three months ended March 31, 1999.
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 March 31, 1999, the Company had $4,590,000 of cash and cash
equivalents and a working capital of $3,896,000. The Company has financed its
operations primarily through net proceeds from the
-10-
<PAGE>
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 $383,000 and $1,363,000 during the three months ended March 31,
1998 and 1999, respectively. Net cash used in operating activities for the three
months ended March 31, 1998 was primarily attributable to a net loss of $697,000
and by decreases in accounts payable, accrued expenses and other current
liabilities of $208,000 which was partially offset by a decrease in accounts
receivable of $159,000, and by amortization of debt discount of $164,000,
issuance of Common Stock and warrants for services rendered of $25,000 and
depreciation and amortization of $171,000. Net cash used in operating activities
for the three months ended March 31, 1999 was primarily attributable to a net
loss of $1,830,000 and an increase in accounts receivable of $109,000 which was
partially offset by increases in accounts payable, accrued expenses and other
current liabilities of $332,000, and depreciation and amortization of $191,000.
The Company's operating activities during the three months ended March
31, 1998 were financed primarily with $400,000 of net proceeds from the issuance
of $400,000 principal amount of notes and warrants to purchase 74,795 shares of
Common Stock. The Company's operating activities for the three months ended
March 31, 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 January 2000. 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
required to seek additional financing sooner than currently anticipated. The
Company has no current arrangements 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.
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.
-11-
<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 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 March 31, 1999,
the Company used the net proceeds of the Offering as follows: $998,000 for
sales and marketing, $584,000 for software development, $532,000 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) $143,000 for purchase
of office, telecommunications and computer equipment, $146,000 for expenses
related to establishing new executive offices and $767,000 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.
None.
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
-------------- ----------------------
27 Financial data schedule for
three month period ended
March 31, 1999
No reports on Form-8-K were filed during the three months ended March 31, 1999.
-12-
<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)
By: /S/ MURRAY P. FISH
------------------
Murray P. Fish
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 13, 1999
-13-
<PAGE>
EXHIBIT INDEX
Exhibit Number Description of Exhibit
-------------- ----------------------
27 Financial data schedule for
three month period ended
March 31, 1999
-14-
<TABLE> <S> <C>
<PAGE>
<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 MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,590,000
<SECURITIES> 0
<RECEIVABLES> 508,000
<ALLOWANCES> (171,000)
<INVENTORY> 15,000
<CURRENT-ASSETS> 5,195,000
<PP&E> 1,194,000
<DEPRECIATION> (544,000)
<TOTAL-ASSETS> 6,852,000
<CURRENT-LIABILITIES> 1,299,000
<BONDS> 0
0
6,000
<COMMON> 44,000
<OTHER-SE> 5,503,000
<TOTAL-LIABILITY-AND-EQUITY> 6,852,000
<SALES> 70,000
<TOTAL-REVENUES> 383,000
<CGS> 152,000
<TOTAL-COSTS> 466,000
<OTHER-EXPENSES> 1,812,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,830,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,830,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,830,000)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
</TABLE>
