UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 0-21511
V-ONE CORPORATION
-----------------
(Exact name of registrant as specified in its charter)
Delaware 52-1953278
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20300 Century Blvd., Suite 200, Germantown, Maryland 20874
----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(301) 515-5200
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 26, 2004
----- -------------------------------
Common Stock, $0.001 par value per share 15,642,555
V-ONE Corporation
Quarterly Report on Form 10-Q
INDEX
Page No.
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PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Condensed Balance Sheets as of September 30, 2004 3
(unaudited) and December 31, 2003
Condensed Statements of Operations for the three and 4
nine months ended September 30, 2004 (unaudited) and
September 30, 2003 (unaudited)
Condensed Statements of Cash Flows for the nine months 5
ended September 30, 2004 (unaudited) and September 30,
2003 (unaudited)
Notes to the Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 14
Market Risk
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION 15
Item 1. Legal Proceedings 15
Item 2. Unregistered Sales of Equity Securities and Use of 15
Proceeds
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits 15
SIGNATURE 16
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
V-ONE CORPORATION
CONDENSED BALANCE SHEETS
September 30, 2004 December 31, 2003
ASSETS (Unaudited)
-------------------- -------------------
Current assets:
Cash and cash equivalents $ 272,934 $ 27,755
Certificate of deposit - restricted - 26,500
Accounts receivable, less allowances of $20,000 and $15,500 respectively 188,302 606,426
Finished goods inventory, less allowances of $9,226 and $8,901 respectively 1,881 3,636
Prepaid expenses and other assets 80,920 61,875
---------------- ----------------
Total current assets 544,037 726,192
Property and equipment, net 74,884 64,138
Deferred financing costs, net 316,346 -
Deposits 95,141 95,141
---------------- ----------------
Total assets $ 1,030,408 $ 885,471
================ ================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 1,694,250 $ 1,320,361
Deferred revenue 1,032,821 692,914
Convertible notes payable - 493,000
Notes payable, other 78,279 151,248
---------------- ---------------
Total current liabilities 2,805,350 2,657,523
Convertible notes payable, noncurrent, net of debt
discount of $1,058,302 141,698 -
Notes payable, other - noncurrent - 45,287
Deferred rent 41,605 40,535
---------------- ---------------
Total liabilities 2,988,653 2,743,345
Commitments and contingencies
Shareholders' deficiency:
Preferred stock, $.001 par value,13,333,333 shares authorized:
Series C redeemable preferred stock, 500,000 designated; 42,904
shares issued and outstanding
(liquidation preference of $1,126,000) 43 43
Series D convertible preferred stock 3,675,000 shares designated,
3,021,000 shares issued and outstanding 3,021 3,021
(liquidation preference of $5,770,110 )
Common stock, $0.001 par value; 75,000,000 shares authorized;
15,642,555 and 13,950,284 shares issued and outstanding, respectively 15,643 13,950
Accrued dividends payable 3,213,058 2,517,765
Additional paid-in capital 64,483,268 62,121,291
Accumulated deficit (69,673,278) (66,513,944)
---------------- ---------------
Total shareholders' deficiency (1,958,245) (1,857,874)
---------------- ---------------
Total liabilities and shareholders' deficiency $ 1,030,408 $ 885,471
================ ===============
The accompanying notes are an integral part of these financial statements.
3
V-ONE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
Three months Three months Nine months Nine months
ended ended ended ended
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
(unaudited) (unaudited) (unaudited) (unaudited)
-------------------- -------------------- -------------------- --------------------
Revenues:
Products $ 205,966 $ 489,907 $ 606,223 $ 1,902,127
Consulting and services 385,312 388,859 1,152,786 1,137,131
-------------------- -------------------- -------------------- --------------------
Total revenues 591,278 878,766 1,759,009 3,039,258
Cost of revenues:
Products 56,282 9,443 70,140 152,544
Consulting and services 16,983 27,284 65,776 67,710
-------------------- -------------------- -------------------- --------------------
Total cost of revenues 73,265 36,727 135,916 220,254
-------------------- -------------------- -------------------- --------------------
Gross profit 518,013 842,039 1,623,093 2,819,004
Operating expenses:
Research and development 244,814 263,096 710,415 857,535
Sales and marketing 417,759 321,680 1,225,619 1,069,533
General and administrative 313,680 315,116 1,142,008 1,163,046
-------------------- -------------------- -------------------- --------------------
Total operating expenses 976,253 899,892 3,078,042 3,090,114
-------------------- -------------------- -------------------- --------------------
Operating profit (loss) (458,240) (57,853) (1,454,949) (271,110)
Other (expense) income:
Interest expense (111,265) (22,363) (767,342) (183,838)
Interest income 197 103 2,200 5,154
Business combination costs (244,158) - (244,158) -
Other (expense) income - - 207 (9,153)
-------------------- -------------------- -------------------- --------------------
Total other (expense) income (355,226) (22,260) (1,009,093) (187,837)
-------------------- -------------------- -------------------- --------------------
Net loss (813,466) (80,113) (2,464,042) (458,947)
Dividends on preferred stock 238,712 173,826 695,293 515,808
-------------------- -------------------- -------------------- --------------------
Loss attributable to holders of
common stock $ (1,052,178) $ (253,939) $ (3,159,335) $ (974,755)
==================== ==================== ==================== ====================
Basic and diluted loss per share
attributable to holders of
common stock $ (0.07) $ (0.02) $ (0.21) $ 0.07)
==================== ==================== ==================== ====================
Weighted average number of
common shares outstanding 15,642,555 13,618,346 15,391,321 13,486,595
==================== ==================== ==================== ====================
The accompanying notes are an integral part of these financial statements.
4
V-ONE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
Nine months Nine months
ended ended
September 30, 2004 September 30, 2003
(unaudited) (unaudited)
-------------------- --------------------
Cash flows from operating activities:
Net loss $ (2,464,042) $ (458,947)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 36,878 231,893
Amortization of debt discount 141,698 11,758
Interest expense-beneficial conversion feature 434,888 22,000
Interest expense on repricing of warrants - 23,890
Amortization of deferred financing costs 111,652 68,974
Noncash charge related to issuance of warrants,
options and stock as compensation 3,123 51,757
Changes in operating assets and liabilities:
Accounts receivable 418,124 (469,958)
Inventory 1,755 2,250
Deferred financing costs - 68,974
Prepaid expenses and other assets (19,045) 26,234
Accounts payable and accrued expenses 310,318 356,746
Deferred revenue 339,907 (45,600)
Deferred rent 1,070 6,114
-------------------- --------------------
Net cash used in operating activities (683,674) (103,915)
Cash flows from investing activities:
Net purchase of property and equipment (47,624) 6,586
Certificate of deposit redemption 26,500 8,500
-------------------- --------------------
Net cash provided by (used in) investing activities (21,124) 15,086
Cash flows from financing activities:
Exercise of options and warrants 900 3,750
Payment of fractional shares (9) -
Issuance of common stock under employee stock plans 4,072 4,356
Proceeds of notes payable 1,200,000 -
Payments of deferred financing costs (200,301) -
Payments on notes payable-other (24,068) -
Payments of notes payable (30,617) -
-------------------- --------------------
Net cash provided by financing activities 949,977 8,106
-------------------- --------------------
Net increase (decrease) in cash and cash equivalents 245,179 (80,723)
Cash and cash equivalents at beginning of period 27,755 93,985
-------------------- --------------------
Cash and cash equivalents at end of period $ 272,934 $ 13,262
==================== ====================
The accompanying notes are an integral part of these financial statements.
5
V-ONE CORPORATION
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of the Business
V-ONE Corporation ("Company" or "V-ONE") develops, markets and licenses a
comprehensive suite of network security products that enables organizations to
conduct secured electronic transactions and information exchange using private
enterprise networks and public networks, such as the Internet. The Company's
principal market is the United States, with headquarters in Maryland, with
secondary markets in Europe and Asia.
2. Basis of Presentation
The condensed financial statements for the three and nine months ended September
30, 2004 and September 30, 2003 are unaudited and reflect all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of
management, necessary to present fairly the results for the interim periods. The
balance sheet at December 31, 2003 is as presented in the financial statements
at that date, but does not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
These financial statements should be read in conjunction with the audited
financial statements as of December 31, 2003 and 2002 and for the three years
ended December 31, 2003, which are included in the Company's 2003 Annual Report
on Form 10-K ("Form 10-K").
The preparation of financial statements to be in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates
and would affect future results of operations and cash flows.
The results of operations for the three-month and nine month period ended
September 30, 2004 are not necessarily indicative of the results expected for
the full year ending December 31, 2004.
Certain prior year amounts have been reclassified to conform to the 2004
presentation. These changes had no impact on previously reported results of
operations.
3. Common and Preferred Stock
As of September 30, 2004 holders had converted all of the 8% Secured Convertible
Notes ("8% Notes) into shares of common stock.
4. Management's Plans
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company reported a net loss of $449,650,
$5,635,191 and $6,237,278 for the years ended December 31, 2003, 2002 and 2001,
respectively, and further net losses of $813,466 and $2,464,042 for the three
and nine months ended September 30, 2004, respectively. Notwithstanding
acceptance of the Company's security concepts and critical acclaim for its
products, there can be no assurance that the consummation of sales of the
Company's products to existing customers or proposed agreements with potential
customers will generate timely or sufficient revenue for the Company to cover
its costs of operations and meet its cash flow requirements. Accordingly, the
Company may not have the funds needed to sustain operations during 2004.
For the immediate future, V-ONE will focus on existing and potential customers
in the government sector, targeted marketing operations to commercial accounts
and continued minimization of general and administrative expenditures. V-ONE may
not be successful in further reducing operating levels without jeopardizing the
ability to serve existing customers or grow its business base. In February 2004,
the Company completed a private placement of 7% Subordinated Convertible Notes
with detachable warrants for an aggregate of $1,200,000, which resulted in net
proceeds to the Company of $1,065,690. The Company believes that to maintain
operations for any extended period of time it must generate revenue from
existing and new customers, raise additional capital or undergo a significant
strategic transformative event. The Company's ability to reach sustainable
profitability is dependent on its ability to generate sufficient cash flow to
meet its obligations and needs on a timely basis or to obtain additional
funding.
6
On May 19, 2004, the Company signed a letter of intent with SteelCloud Inc.
("SteelCloud"), for SteelCloud to acquire V-ONE in an all stock transaction. On
August 11, 2004, the parties signed a definitive agreement for the transaction.
On September 28, 2004, the Company and SteelCloud mutually agreed to terminate
the definitive agreement. For further information, refer to Part II, Item 5 of
this Quarterly Report on Form 10-Q, V-ONE's Current Report on Form 8-K filed
with the SEC on August 11, 2004 and V-ONE's Current Report on Form 8-K filed
with the SEC on September 29, 2004.
5. 8% Secured Convertible Notes with Detachable Warrants
In July and August 2002, the Company closed on approximately $1,188,000 in a
private placement of 8% Secured Convertible Notes with detachable warrants, due
180 days after issuance with an additional 180-day extension available at the
option of the Company or the holders. Detachable five year warrants, exercisable
at $0.50 per share, are included to provide one warrant share for every dollar
invested as warrant coverage to the note holders. In January 2003, the Company
elected to extend the 8% Notes for an additional 180 days, paid the interest
accrued under the initial term of the 8% Notes and agreed to adjust the exercise
price of the warrants from $0.50 per share to $0.15 per share. In July 2003, the
Company requested and received an extension of the 8% Notes for an additional
180 days and agreed to an increase in the interest rate from 10% to 12% during
the extension period. In connection with a restructuring of the 8% Notes, the
Company agreed in January 2004 to adjust the conversion price of certain 8%
Notes constituting $150,000 in principal to $.18 per share in exchange for an
extension of the term of such 8% Notes to July 15, 2004 at an interest rate of
10%. Also in connection with the January 2004 restructuring, the Company
adjusted the conversion price of the remaining 8% Notes outstanding, which
constituted $343,000 in principal, to $.15 per share and granted warrants to
purchase a total of 250,000 shares of Common Stock at an exercise price of $0.18
per share to Joseph Gunnar & Co., LLC, placement agent for the 8% Notes
offering.
As of September 30, 2004, holders had converted $1,188,000, or 100% of the 8%
Notes, into shares of Common Stock.
6. 7% Subordinated Convertible Notes
In a closing on February 27, 2004, V-ONE issued 7% Subordinated Convertible
Notes ("7% Notes") with warrants for an aggregate principal amount of
$1,200,000, resulting in net proceeds to V-ONE of $1,065,690. The 7% Notes
mature on February 27, 2009. Interest at the rate of 7% per annum is payable
semi-annually at the option of V-ONE in cash or in shares of Common Stock. The
7% Notes rank senior to the Common Stock and junior to the Series C Shares and
Series D Shares as to the payment of dividends and as to distribution of assets
upon liquidation, dissolution or winding up of V-ONE. So long as at least
$500,000 of the principal amount of the 7% Notes is outstanding, the affirmative
vote of the holders of at least 75% of the principal amount of the 7% Notes
outstanding is required to issue any securities that rank senior to or on parity
with the 7% Notes.
Under the original terms of the 7% Notes, the holders could convert the
principal amount of their 7% Notes, in whole or in part, at any time into shares
of Common Stock at a conversion price of $0.20 per share. On May 14, 2004, V-ONE
effected a 1:2 reverse stock split modifying the original conversion price of
the 7% Notes to $0.40 per share. In addition, subject to certain terms, the
principal amount of the 7% Notes plus all accrued and unpaid interest shall
automatically convert into shares of Common Stock at the then current conversion
price on the earlier of (i) February 27, 2009 and (ii) the first date which is
at least 180 days following the effective date of the Registration Statement
providing for the resale of the shares of Common Stock issuable upon conversion
of the 7% Notes that the closing bid price of V-ONE Common Stock exceeds $1.00
for a period of 20 consecutive trading days. On May 14, 2004, V-ONE effected a
1:2 reverse stock split modifying the closing bid price to $2.00 per share.
An event of default will occur if V-ONE fails to make any principal payment
under the 7% Notes, V-ONE fails to make any interest payment for a period of
five days after such payment is due, V-ONE fails to timely file the Registration
Statement providing for the resale of the shares of Common Stock issuable upon
conversion of the 7% Notes or the Registration Statement is not declared
effective by the SEC within 180 days of February 27, 2004, the effectiveness of
the Registration Statement lapses for a period of 20 consecutive trading days,
or upon the occurrence of other default events, including, but not limited to,
an assignment for the benefit of creditors, an application for the appointment
of a trustee or receiver or the commencement of a bankruptcy proceeding. If an
event of default occurs, the Notes will bear interest at the lesser of 12% and
the maximum applicable legal rate per annum from the date of the event of
default until such default is cured.
Upon the occurrence of certain events of default and other triggering events, a
7% Note holder shall have the right to require V-ONE to prepay in cash all or a
portion of the holder's 7% Note at 120% of the aggregate principal amount of the
7% Note, plus all accrued and unpaid interest. Similar provisions apply if V-ONE
cannot fully convert a 7% Note into shares of registered Common Stock upon the
7
receipt of a proper conversion notice from the holder. In addition, in the event
of a major corporate transaction such as the consolidation, merger or other
business combination of V-ONE into another entity or a sale or transfer of more
than 50% of V-ONE's assets, the 7% Note holder shall have the right to require
V-ONE to prepay in cash all or a portion of the holder's 7% Note at 100% of the
aggregate principal amount of the 7% Note, plus all accrued and unpaid interest.
If the major corporate transaction is consummated within six months of the
issuance of the 7% Note, then the prepayment shall be at 110% of the aggregate
principal amount of the 7% Note, plus all accrued and unpaid interest. Also,
beginning one year after the issuance of the 7% Notes, V-ONE may prepay any
portion or all of the outstanding principal balance of the 7% Notes together
with all accrued and unpaid interest at 110% of the aggregate principal amount
of the 7% Notes plus any accrued and unpaid interest.
For twelve months after the issuance of the 7% Notes, each holder shall have a
right of first refusal to purchase its pro rata portion of V-ONE Common Stock
(or any securities convertible, exercisable or exchangeable into Common Stock)
offered to a third party in a private transaction on the same terms as those
offered to the third party, other than in certain permitted financings. If a
holder elects not to exercise its right of first refusal, the other holders may
participate on a pro rata basis. If the holders do not participate, V-ONE may
proceed with the transaction with the third party.
In connection with the 7% Notes offering, V-ONE issued detachable warrants to
purchase 6,000,000 shares of Common Stock to the holders of the 7% Notes. The
warrants are exercisable beginning on August 27, 2004 at an exercise price of
$0.25 per share and expire on August 27, 2008. On May 14, 2004, V-ONE effected a
1:2 reverse stock split reducing the number of shares purchasable under the
warrants to 3,000,000 and increasing the exercise price to $0.50. Beginning 180
days after the effective date of a Registration Statement providing for the
resale of the shares of Common Stock issuable upon conversion of the 7% Notes
and exercise of the warrants, V-ONE may call up to 100% of the warrants if the
per share market value of its Common Stock has been greater than $0.75 for a
period of 20 consecutive trading days by issuing a call notice to the warrant
holders. On May 14, 2004, V-ONE effected a 1:2 reverse stock split modifying the
per share market value required for a call of the warrants to $1.50. The rights
and privileges granted to a warrant holder with respect to the shares subject to
the call notice shall expire on the twentieth day after the holder receives the
call notice if the holder does not exercise the warrant. If the holder does not
exercise the warrant, V-ONE shall remit to the warrant holder (i) $0.01 per
share subject to the call notice and (ii) a new warrant representing the number
of shares of Common Stock, if any, which were not subject to the call notice.
The exercise price and number of shares of Common Stock to be issued upon
conversion of the 7% Notes and exercise of the warrants are subject to equitable
adjustment in the event of stock dividends, stock splits and similar events
affecting the Common Stock. In addition, if V-ONE issues any shares of Common
Stock or equivalents at a purchase price less than the then current conversion
price for the 7% Notes or warrant exercise price, the conversion price and
warrant exercise price will be equitably reduced, and number of shares of Common
Stock to be issued upon conversion of the 7% Notes and exercise of the warrants
adjusted accordingly. However, in no event shall the conversion price, or
exercise price in the event of the issuance of V-ONE securities at less than the
current warrant exercise price, be less than $0.15 per share. On May 14, 2004,
V-ONE effected a 1:2 reverse stock split modifying the minimum warrant exercise
price to $0.30 per share.
In connection with the 7% Notes offering, V-ONE granted warrants to purchase up
to a total of 1,260,000 shares of Common Stock to H.C. Wainwright & Co., Inc.,
placement agent for the 7% Notes offering. As a result of the stock split
effected in May 2004, the shares that may be purchased under warrants issued to
H.C. Wainwright & Co., Inc. have been reduced to 630,000. The placement agent
warrants include a cashless exercise provision. The remaining terms of the
placement agent warrants mirror those of the warrants granted in connection with
the 7% Notes offering.
Upon issuance of the 7% Notes, the Company recorded a debt discount of
approximately $1,200,000 in accordance with the accounting requirements for a
beneficial conversion feature on the 7% Notes. The debt discount will be
amortized over the 5 year term of the notes. During the three and nine months
ended September 30, 2004, the Company amortized $60,000 and $141,698 of the
discount to interest expense, respectively. Additionally, the Company recorded
$21,467 in accrued interest expense for the third quarter of 2004.
7. Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), allows companies to account for stock-based
compensation either under the provisions of SFAS 123 or under the provisions of
Accounting Principles Bulletin No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), as amended by FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation (an Interpretation of APB
Opinion No. 25)," but requires pro forma disclosure in the footnotes to the
financial statements as if the measurement provisions of SFAS 123 had been
adopted. The Company has elected to account for its stock-based compensation in
8
accordance with the provisions of APB 25. The following table illustrates the
effect on net income (loss) and earnings per share if the Company had applied
the fair value recognition provisions of SFAS 123:
Three months ended September 30, Nine months ended September 30,
-------------------------------- -----------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net Loss, as reported $ (1,052,178) $ (253,939) $ (3,159,335) $ (974,755)
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects
Deduct: Total stock-based employee
compensation income (expense) determined
under fair value based method for all
awards, net of related tax effects $ 37,181 $ (66,407) $ 56,262 $ (199,221)
------------- ------------ ------------- ------------
Pro forma net loss $ (1,014,997) $ (320,346) $ (3,103,073) $(1,173,976)
============== ============ ============== ============
Earnings per share:
Basic - as reported $ (0.07) $ (0.02) $ (0.21) $ (0.07)
Basic - pro forma $ (0.06) $ (0.02) $ (0.20) $ (0.09)
Diluted - as reported $ (0.07) $ (0.02) $ (0.21) $ (0.03)
Diluted - pro forma $ (0.06) $ (0.01) $ (0.20) $ (0.04)
Denominator for basic and diluted net
loss per share-adjusted weighted
average shares l15,642,555 13,618,346 (1) 15,391,321 13,486,595 (1)
============== ============ ============== ============
(1) reflects 1:2 reverse stock split effected May 14, 2004
This disclosure is in accordance with Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," that the Company has adopted in these financial statements.
Stock options and warrants granted to non-employees are accounted for in
accordance with SFAS 123 and the Emerging Issues Task Force Consensus No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services," which requires
the value of the options to be periodically re-measured as they vest over a
performance period. The fair value of the options and warrants is determined
using the Black-Scholes model.
8. Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per
share:
9
Three Months ended September 30, Nine Months ended September 30,
--------------------------------- -------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Numerator:
Net Loss $ (813,466) $ (80,113) $ (2,464,042) $ (458,947)
Less: Dividend on preferred stock (238,712) (173,826) (695,293) (515,808)
-------------- --------------- ------------- --------------
Net loss attributable to holders
of common stock $ (1,052,178) $ (253,939) $ (3,159,335) $ (974,755)
============== =============== ============= ==============
Denominator:
Denominator for basic and diluted
net loss per share
- weighted average shares 15,642,555 13,618,346 15,391,321 13,486,595
Effect of dilutive securities:
Preferred Stock - - - -
Stock Options - - - -
Warrants - - - -
-------------- --------------- ------------- --------------
Dilutive potential common shares - - - -
-------------- --------------- ------------- --------------
Denominator for diluted net loss
per share - adjusted weighted
average shares 15,642,555 13,618,346 (1) 15,391,321 13,486,595
============== =============== ============= ==============
Net loss attributable to holders
of common stock $ (0.07) $ (0.02) $ (0.21) $ (0.07)
============== =============== ============= ==============
(1) reflects 1:2 reverse stock split effected May 14, 2004
The following equity instruments were not included in the diluted net loss per
share calculation because their effect would be anti-dilutive:
Nine Months ended September 30,
2004 2003
-------------- --------------
Preferred stock:
Series D 1,510,500 1,510,500 (1)
Stock options 2,331,068 2,485,577 (1)
Warrants 4,693,662 1,153,352 (1)
(1) reflects 1:2 reverse stock split effected May 14, 2004
9. Supplemental Cash Flow Disclosure
Three Months Ended Nine Months Ended
Sept. 30, 2004 Sept. 30, 2003 Sept. 30, 2004 Sept. 30, 2003
-------------- -------------- -------------- --------------
Cash paid for interest 3,838 25,157 56,138 52,859
Non-cash investing and financing activities:
Beneficial conversion feature on 7% Convertible 0 0 1,200,000 0
Notes
Issuance of warrants for financing costs 0 0 227,696 0
Debt converted to common stock 0 0 343,000 25,000
10
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
These statements may differ in a material way from actual future events. For
instance, factors that could cause results to differ from future events include
rapid rates of technological change and intense competition, among others. The
Company's total revenues and operating results have varied substantially from
quarter to quarter and should not be relied upon as an indication of future
results. Several factors may affect the ability to forecast the Company's
quarterly operating results, including the size and timing of individual
software and hardware sales; the length of the Company's sales cycle; the level
of sales and marketing, research and development and administrative expenses;
and general economic conditions.
Operating results for a given period could be disproportionately affected by any
shortfall in expected revenues. In addition, fluctuation in revenues from
quarter to quarter will likely have an increasingly significant impact on the
Company's results of operations. The Company's performance in recent periods may
not be an accurate indication of future results of operations in light of the
evolving nature of the network security market and the uncertainty of the demand
for Internet and intranet products in general and the Company's products in
particular. Because the Company's operating expenses are based on anticipated
revenue levels, a small variation in the timing of recognition of revenues can
cause significant variations in operating results from quarter to quarter.
Readers are also referred to the documents filed by the Company with the SEC,
specifically the Company's latest Annual Report on Form 10-K that identifies
important risk factors for the Company.
RESULTS OF OPERATIONS
REVENUES
Total revenues decreased from approximately $879,000 and $3,039,000 for the
three and nine months ended September 30, 2003, respectively, to approximately
$591,000 and $1,759,000 for the three and nine months ended September 30, 2004,
respectively. This decrease of approximately $287,000 or 33% and $1,280,000 or
42% is due primarily to a decrease in product revenue of $284,000 and $1,296,000
for the three and nine months ended September 30, 2004, respectively, offset in
part by an increase in consulting and services revenues for the nine months
ended September 30, 2004. Product revenues are derived principally from software
licenses and the sale of hardware products. Product revenues decreased from
approximately $490,000 and $1,902,000 for the three and nine months ended
September 30, 2003, respectively, to approximately $206,000 and $606,000 for the
three and nine months ended September 30, 2004, respectively. Consulting and
services revenues are derived principally from fees for services complementary
to the Company's products, including consulting, maintenance, installation and
training. Consulting and services revenues decreased from approximately $389,000
for the three months ended September 30, 2003 to approximately $385,000 for the
three months ended September 30, 2004. Consulting and services revenues
increased from approximately $1,137,000,000 for the nine months ended September
30, 2003 to approximately $1,153,000 for the nine months ended September 30,
2004. This was due principally to an increase in the number of renewing
maintenance contracts provided to customers in the first quarter of fiscal 2004.
The Company cannot be certain that revenue will, in fact, become more
predictable or certain of the relative levels of software, hardware, consulting
and services revenues to be generated in future periods.
COST OF REVENUES
Total cost of revenues as a percentage of total revenues increased from
approximately 4% and 7% for the three and nine months ended September 30, 2003,
respectively, to approximately 12% and 8% for the three and nine months ended
September 30, 2004, respectively. The percentage increase was primarily due to
the purchase of SmartGuard hardware for immediate fulfillment of an order for
the U.S. Army in the third quarter of 2004 and lower sales of software licenses
in the current year. Total cost of revenues is comprised of cost of product
revenues and cost of consulting and services revenues.
11
Cost of product revenues consists principally of the costs of computer hardware,
licensed technology, manuals and labor associated with the distribution and
support of the Company's products. Cost of product revenues increased from
approximately $9,000 for the three months ended September 30, 2003 to
approximately $56,000 for the three months ended September 30, 2004 and
decreased from approximately $153,000 for the nine months ended September 30,
2003 to approximately to $70,000 for the nine months ended September 30, 2004.
The increase in cost of product revenues for the three months ended September
30, 2004 was primarily attributable to greater purchases of SmartGuard appliance
hardware in the current quarter. The decrease in cost of product revenues for
the nine months ended September 30, 2004 was attributable to lower sales of
turnkey hardware solutions in the current year. Cost of product revenues as a
percentage of product revenues was approximately 2% and 8% for the three and
nine months ended September 30, 2003, respectively, and approximately 27% and
11% for the three and nine month periods ended September 30, 2004, respectively.
Cost of consulting and services revenue consists principally of personnel and
related costs incurred in providing consulting, support and training services to
customers and costs of third-party product support. Cost of consulting and
services revenues decreased from approximately $27,000 and $68,000 for the three
and nine months ended September 30, 2003, respectively, to approximately $17,000
and $66,000 for the three and nine months ended September 30, 2004,
respectively. Cost of consulting and services revenues as a percentage of
consulting and services revenue was approximately 7% and 6% for the three and
nine months ended September 30, 2003, respectively, and 4% and 6% for the three
and nine months ended September 30, 2004, respectively.
OPERATING EXPENSES
Research and Development -- Research and development expense consists
principally of the costs of research and development personnel and other
expenses associated with the development of new products and enhancement of
existing products. Research and development expenses decreased from
approximately $263,000 and $858,000 for the three and nine months ended
September 30, 2003, respectively, to approximately $245,000 and $710,000 for the
three and nine months ended September 30, 2004, respectively. The dollar
decrease of approximately $18,000 and $147,000 was primarily due to lower
consulting expense of $22,000 and $431,000, lower depreciation expense of
$27,000 and $107,000 and lower rent expense of $8,000 and $34,000, partially
offset by higher salary expense of $45,000 and $50,000, respectively. Research
and development expense as a percentage of total revenue was approximately 30%
and 28% for the three and nine months ended September 30, 2003, respectively,
and approximately 41% and 40% for the three and nine months ended September 30,
2004, respectively. The percentage increase was primarily due to lower revenues
for the three and nine months ended September 30, 2004.
Sales and Marketing -- Sales and marketing expense consists principally of the
costs of sales and marketing personnel, advertising, promotions and trade shows.
Sales and marketing expense increased from approximately $322,000 and $1,070,000
for the three and nine months ended September 30, 2003, respectively, to
approximately $418,000 and $1,226,000 for the three and nine months ended
September 30, 2004, respectively. The dollar increase of $96,000 for the three
months ended September 30, 2004 relates primarily to higher salary expense of
$42,000, higher marketing expense of $7,000, higher consulting expense of
$15,000, higher travel expense of $2,000, higher public relations expense of
$20,000, higher commission expense of $8,000 and higher relocation expense of
$3,000, partially offset by lower telephone expense of $8,000 and lower
depreciation expense of $3,000. The dollar increase of $156,000 for the nine
months ended September 30, 2004 is primarily attributable to higher salary
expense of $116,000, higher marketing expense of $54,000, higher consulting
expense of $37,000, higher travel expense of $18,000 and higher public relations
expense of $41,000, partially offset by lower commission expense of $58,000 and
lower depreciation expense of $60,000. Sales and marketing expense as a
percentage of total revenues were approximately 32% and 35% for the three and
nine months ended September 30, 2003, respectively, and approximately 84% and
69% for the three and nine months ended September 30, 2004, respectively. The
percentage increase is due primarily to lower revenue for fiscal 2004 when
compared to the same period for fiscal 2003.
General and Administrative -- General and administrative expense consists
principally of the costs of accounting and finance, legal and human resources
management, administrative personnel and facilities expenses. General and
administrative expense decreased from approximately $315,000 and $1,163,000 for
the three and nine months ended September 30, 2003, respectively, to
approximately $314,000 and $1,142,000 for the three and nine months ended
September 30, 2004. The decrease in expense of approximately $21,000 for the
nine months ended September 30, 2004 was due principally to higher salary
expense of $42,000, higher consulting expense of $61,000, higher annual report
expense of $13,000, higher travel expense of $2,000, higher membership expense
of $4,000 and higher legal expense of $30,000, partially offset by lower
accounting and audit fees of $86,000, lower D&O insurance expense of $7,000,
lower depreciation expense of $28,000, lower miscellaneous expense of $16,000
and lower commission expense of $26,000. General and administrative expenses as
a percentage of total revenues were approximately 36% and 38% for the three and
12
nine months ended September 30, 2003, respectively, and 53% and 65% for the
three and nine months ended September 30, 2004, respectively.
Business Combination Costs - Business combination costs associated with the
contemplated merger with SteelCloud, Inc. were approximately $244,000
attributable primarily to legal fees. On September 28, 2004, the Company and
SteelCloud mutually agreed to terminate the definitive agreement and recorded
the related expenses as business combination costs.
Interest Income and Expense -- Interest income represents interest earned on
cash and cash equivalents. Interest income decreased from approximately zero and
$5,000 for the three and nine months ended September 30, 2003, respectively, to
approximately zero and $2,000 for the three and nine months ended September 30,
2004, respectively. The decrease was attributable to lower levels of cash and
cash equivalents in the current period. Interest expense represents interest
paid or payable on loans and capitalized lease obligations. Interest expense
increased from approximately $22,000 and $183,000 for the three and nine months
ended September 30, 2003, respectively, to approximately $111,000 and $767,000
for the three and nine months ended September 30, 2004, respectively,
substantially all of which was for interest payable on the 7% Subordinated
Convertible Notes and recognition of a beneficial conversion feature on the 7%
Subordinated Convertible Notes.
Income Taxes -- The Company did not incur income tax expenses as a result of the
net loss incurred during the three and nine months ended September 30, 2003 and
2004.
Dividend on Preferred Stock -- The Company provided for dividends on preferred
stock of approximately $239,000 and $695,000 during the three and nine months
ended September 30, 2004, respectively, and approximately $174,000 and $516,000
for the three and nine months ended September 30, 2003, respectively. Under the
terms of the purchase agreements for the Series C and Series D Preferred Stock,
the Company may elect to pay these dividends in cash or stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used cash of approximately $104,000 for the
nine months ended September 30, 2003 and approximately $684,000 for the nine
months ended September 30, 2004. Cash used in operating activities resulted
principally from net operating losses in the periods offset in part by an
increase in accounts payable in 2003 and interest expense, accounts receivable,
accounts payable and deferred rent in 2004. The increase in cash used in
operating activities of approximately $580,000 in the first nine months of 2004
was attributable primarily to an increase in net operating loss of $2,005,000.
The Company's investing activities provided cash of approximately $15,000 in the
nine months ended September 30, 2003 and used approximately $21,000 in the nine
months ended September 30, 2004. Net capital expenditures for property and
equipment were approximately $7,000 and ($48,000) during the nine months ended
September 30, 2003 and 2004, respectively. These expenditures have generally
been for computer workstations and personal computers, office furniture and
equipment, and leasehold additions and improvements.
The Company's financing activities provided cash of approximately $8,000 during
the nine months ended September 30, 2003 and provided cash of approximately
$950,000 during the nine months ended September 30, 2004. In fiscal 2004, the
cash was provided primarily by the 7% Notes.
The Company had a working capital deficiency of ($1,931,000) and ($2,261,000) at
December 31, 2003 and September 30, 2004, respectively. As of September 30,
2004, the Company had an accumulated deficit of approximately $69,673,000.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company reported a net loss of $449,650,
$5,635,191 and $6,237,278 for the years ended December 31, 2003, 2002 and 2001,
respectively, and a further net losses of $813,466 and $2,464,042 for the three
and nine months ended September 30, 2004, respectively. Notwithstanding
acceptance of the Company's security concepts and critical acclaim for its
products, there can be no assurance that the consummation of sales of the
Company's products to existing customers or proposed agreements with potential
customers will generate timely or sufficient revenue for the Company to cover
its costs of operations and meet its cash flow requirements. Accordingly, the
Company may not have the funds needed to sustain operations during 2004.
13
For the immediate future, V-ONE will focus on existing and potential customers
in the government sector, targeted marketing operations to commercial accounts
and continued minimization of general and administrative expenditures. V-ONE may
not be successful in further reducing operating levels without jeopardizing the
ability to serve existing customers or grow its business base. In February 2004,
the Company completed a private placement of 7% Subordinated Convertible Notes
with detachable warrants for an aggregate of $1,200,000, which resulted in net
proceeds to the Company of $1,065,690. The Company believes that to maintain
operations for any extended period of time it must generate revenue from
existing and new customers, raise additional capital or undergo a significant
strategic transformative event. The Company's ability to reach sustainable
profitability is dependent on its ability to generate sufficient cash flow to
meet its obligations and needs on a timely basis or to obtain additional
funding.
On May 19, 2004, the Company signed a letter of intent with SteelCloud Inc.
("SteelCloud"), for SteelCloud to acquire V-ONE in an all stock transaction. On
August 11, 2004, the parties signed a definitive agreement for the transaction.
On September 28, 2004, the Company and SteelCloud mutually agreed to terminate
the definitive agreement. For further information, refer to Part II, Item 5 of
this Quarterly Report on Form 10-Q, V-ONE's Current Report on Form 8-K filed
with the SEC on August 11, 2004 and V-ONE's Current Report on Form 8-K filed
with the SEC on September 29, 2004.
CONTRACTUAL OBLIGATIONS
The following table discloses aggregate information about the Company's
contractual obligations as of September 30, 2004 and the periods in which
payments are due:
Payments Due By Period
-----------------------------------------------------------------------------
Remainder 2005 2007 Thereafter Total
of 2004 and 2006 and 2008
-----------------------------------------------------------------------------
Long-term debt obligation $34,676 $46,234 $0 $0 $80,910
Convertible debt 0 0 0 1,200,000 1,200,000
------------- ------------ ------------ -------------- --------------
Operating leases 116,064 465,069 296,275 0 877,408
------------- ------------ ------------ -------------- --------------
$185,415 $511,303 $296,275 $1,200,000 $2,158,318
============= ============ ============ ============== ==============
OFF-BALANCE SHEET ARRANGEMENTS
The Company had no material off-balance sheet arrangements during the first
three and nine months of fiscal 2004 or 2003.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is not materially exposed to fluctuations in currency exchange rates
as all of its products are invoiced in U.S. dollars. The Company does not hold
any derivatives or marketable securities. However, the Company is exposed to
interest rate risk. The Company believes that the market risk arising from
holdings of its financial instruments is not material.
Item 4. Controls and Procedures
The Company carried out an evaluation under the supervision and with
participation of the Company's management, including the Company's President,
Chief Executive Officer and Principal Financial Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the
period covered by this report. Based on that evaluation, the Company's
President, Chief Executive Officer and Principal Financial Officer have
concluded that disclosure controls and procedures were effective as of the end
of the period covered by this report to ensure that information required to be
disclosed by the Company in its reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commissions
rules and forms. There was no change in the Company's internal controls over
financial reporting that occurred during the period covered by this report that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
The Merger Agreement for the Company's anticipated merger with SteelCloud, Inc.
required that the Company's outstanding 7% Subordinated Convertible Notes be
cancelled and converted into the right to receive specified merger consideration
and that all related note instruments be terminated without any obligation of
note holders or the Company. In contemplation of the merger, the Company and the
note holders executed agreements effecting the note cancellation, which
agreements provided that the note cancellation would be void if the merger was
not consummated. On September 28, 2004, the Company and SteelCloud terminated
the Merger Agreement and consequently, the Company's 7% Subordinated Convertible
Notes remain outstanding.
As of September 30, 2004, the Company is in default on the interest payable on
the 7% Subordinated Convertible Notes in the amount of $42,000. The holders have
not made any formal claims for payment and the Company currently is seeking an
extension of time for the payment of interest.
The 7% Subordinated Convertible Notes also provide that the Company will be in
default if the Registration Statement providing for the resale of shares of
Common Stock issuable upon conversion of the notes is not declared effective by
the SEC within 180 days of February 27, 2004. The Company timely filed the
Registration Statement and is currently responding to comments from the SEC.
However, due to unanticipated circumstances, the Registration Statement has not
yet been declared effective by the SEC.
In such events of default, the note holders may demand that the Company pay
interest on the outstanding principal balance of the notes at the lesser of 12%
and the maximum applicable legal rate per annum from the date of the event of
default until such default is cured. If such events of default continue, the
note holders may at their option, (i) declare the entire unpaid principal
balance of the notes, together with accrued and unpaid interest, due and
payable, (ii) demand that the principal amount of the notes then outstanding and
all accrued and unpaid interest thereon be converted into shares of Common
Stock, or (iii) exercise or otherwise enforce any one or more of their rights
under the notes and related agreements. The note holders have not made any such
demands or declarations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On May 19, 2004, the Company signed a letter of intent with SteelCloud Inc.
("SteelCloud"), for SteelCloud to acquire V-ONE in an all stock transaction. The
letter of intent contemplated that V-ONE common shareholders would receive one
share of SteelCloud Common Stock in exchange for approximately 8.5 shares of
V-ONE Common Stock. Because of continuing delays in the governmental programs
underlying V-ONE's revenue plan and the resulting adverse effect on V-ONE's
financial position, the parties renegotiated the transaction valuation, taking
into consideration the risks associated with possible additional delays in
V-ONE's government programs. The parties signed a definitive agreement, a copy
of which was filed with the Securities and Exchange Commission on August 11,
2004 as an exhibit to V-ONE's Current Report on Form 8-K. The definitive
agreement contemplated that V-ONE common shareholders would receive one share of
SteelCloud Common Stock in exchange for approximately 21 shares of V-ONE Common
Stock, plus warrants to purchase an aggregate of 750,000 shares of SteelCloud
Common Stock. On September 28, 2004, the Company and SteelCloud mutually agreed
to terminate the definitive agreement. For further information, refer to V-ONE's
Current Report on Form 8-K filed with the SEC on August 11, 2004, V-ONE's
Current Report on Form 8-K filed with the SEC on September 29, 2004.
15
Item 6. Exhibits
The following exhibits are filed as part of this quarterly report on
Form 10-Q for the period ended September 30, 2004:
Exhibit Description
------- ------------
2.1 Agreement and Plan of Merger dated August 11, 2004 (the information
required by this exhibit is incorporated herein by reference to V-ONE's
Form 8-K dated August 11, 2004).
10.1 Termination Agreement dated September 28, 2004 (the information required
by this exhibit is incorporated herein by reference to V-ONE's Form 8-K
dated September 29, 2004).
31 Certification of Chief Executive Officer and Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Principal Financial Officer
Pursuant to Title 18, United States Code, Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
V-ONE CORPORATION
Registrant
Date: November 11, 2004 By: /s/ Margaret E. Grayson
-------------------------
Name: Margaret E. Grayson
Title: President, Chief Executive
Officer and Principal
Financial Officer
17