UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-21511
V-ONE CORPORATION
-----------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1953278
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
20300 CENTURY BLVD., SUITE 200, GERMANTOWN, MARYLAND 20874
----------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(301) 515-5200
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate 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 MAY 8, 2003
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COMMON STOCK, $0.001 PAR VALUE PER SHARE 26,961,801
EXPLANATORY NOTE
This quarterly report on Form 10-Q was previously filed with financial
statements that had not been reviewed by V-ONE Corporation's auditors. Aronson &
Company, an independent public accounting firm, has completed its review of
V-ONE Corporation's financial statements for the period covered in this report.
V-ONE Corporation is amending this quarterly report on Form 10-Q to include
financial statements that have been reviewed by its independent auditors. The
amended Form 10-Q includes certain revised financial information for the period
covered in this quarterly report, as well as additional financial statement
footnote disclosures.
2
V-ONE Corporation
Quarterly Report on Form 10-Q
INDEX
Page No.
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PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements 4
Condensed Balance Sheets as of March 31, 4
2003 (unaudited) and December 31, 2002
Condensed Statements of Operations for the 5
three months ended March 31, 2003
(unaudited) and March 31, 2002 (unaudited)
Condensed Statements of Cash Flows for the 6
three months ended March 31, 2003
(unaudited) and March 31, 2002 (unaudited)
Notes to the Condensed Financial Statements 7
(unaudited)
Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures 14
About
Market Risk
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION 14
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 14
Holders
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
3
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
V-ONE CORPORATION
CONDENSED BALANCE SHEETS
March 31, 2003 December 31,
ASSETS (Unaudited) 2002
-------------- --------------
Current assets:
Cash and cash equivalents $ 107,980 $ 93,985
Certificate of deposit - restricted 26,500 35,000
Accounts receivable, less allowances
of $36,414 and $97,135 respectively 339,597 237,695
Finished goods inventory, less allowances
of $31,613 and $44,738 respectively 2,850 5,478
Deferred financing costs, net - 68,974
Prepaid expenses and other assets 118,720 121,460
------------- --------------
Total current assets 595,647 562,592
Property and equipment, net 189,052 319,294
Deposits 95,141 90,196
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Total assets $ 879,840 $ 972,082
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,241,205 $ 1,235,574
Deferred revenue 713,865 784,185
Convertible notes payable, net 578,000 591,242
Notes payable, other 166,134 20,000
------------- --------------
Total current liabilities 2,699,204 2,631,001
Deferred rent 18,148 32,831
Notes payable other-long term 141,849 -
------------- --------------
Total liabilities 2,859,201 2,663,832
Commitments and contingencies
Shareholders' equity:
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 $1,126,388) 43 43
Series D convertible preferred stock
3,675,000 shares designated,
3,021,000 and 3,021,000 issued and
outstanding, respectively 3,021 3,021
(liquidation preference of $5,770,110 )
Common stock, $0.001 par value; 50,000,000
shares authorized; 26,761,801 and
26,649,301 shares issued and outstanding,
respectively 26,762 26,649
Accrued dividends payable 1,745,756 1,575,709
Additional paid-in capital 61,889,940 61,825,066
Accumulated deficit (65,644,883) (65,122,238)
------------- --------------
Total shareholders' equity (deficiency) (1,979,361) (1,691,750)
------------- --------------
Total liabilities and shareholders'
equity (deficiency) $ 879,840 $ 972,082
============= ==============
The accompanying notes are an integral part of these financial statements.
4
V-ONE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
Three months Three months
ended ended
March 31, 2003 March 31, 2002
(unaudited) (unaudited)
-------------- -------------
Revenue:
Products $ 641,102 $ 443,952
Consulting and services 364,168 408,267
-------------- -------------
Total revenue 1,005,270 852,219
Cost of revenue:
Products 15,405 49,313
Consulting and services 25,775 116,420
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Total cost of revenue 41,180 165,733
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Gross profit 964,090 686,486
Operating expenses:
Research and development 322,113 968,255
Sales and marketing 383,588 1,003,974
General and administrative 474,318 737,485
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Total operating expenses 1,180,019 2,709,714
------------- -------------
Operating loss (215,929) (2,023,228)
Other (expense) income:
Interest expense (132,731) (1,396)
Interest income 5,032 11,006
Other (expense) income (8,970) -
------------- -------------
Total other (expense) income (136,669) 9,610
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Net loss (352,598) (2,013,618)
Dividend on preferred stock 170,047 180,313
------------- -------------
Loss attributable to holders of
common stock $(522,645) $ (2,193,931)
============= =============
Basic and diluted loss per share
attributable to holders of
common stock $ (0.02) $ (0.09)
============= =============
Weighted average number of common
shares outstanding 26,718,329 24,038,801
============= =============
The accompanying notes are an integral part of these financial statements.
5
V-ONE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
Three months Three months
ended ended
March 31, 2003 March 31, 2002
(unaudited) (unaudited)
--------------- --------------
Cash flows from operating activities:
Net loss $ (352,598) $ (2,013,618)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 123,994 146,667
Stock compensation 609 -
Amortization of debt discount 35,648 -
Interest expense-beneficial conversion feature 14,000 -
Amortization of deferred financing costs 68,974 -
Changes in assets and liabilities:
Accounts receivable, net (101,902) 176,853
Inventory, net 2,628 11,621
Deferred financing costs 68,974 -
Prepaid expenses and other assets (71,179) 101,240
Accounts payable and accrued expenses 293,614 156,805
Deferred revenue (70,320) (204,067)
Deferred rent (14,683) (10,503)
--------------- --------------
Net cash used in operating activities (2,241) (1,635,002)
Cash flows from investing activities:
Redemption of Certificate of deposit 8,500 -
Net purchases of property and equipment 6,248 (6,915)
Collection of subscription - -
Proceeds from sale of investment - -
--------------- --------------
Net cash provided by (used in)
investing activities 14,748 (6,915)
Cash flows from financing activities:
Exercise of options and warrants 1,488 9,640
Issuance of common stock - -
Issuance of preferred stock - -
Redemption of preferred stock - -
Payments of stock issuance costs - -
Payment of preferred stock dividends - -
Principal payments on capitalized lease
obligations - (19,140)
-------------- --------------
Net cash provided by financing activities 1,488 (9,500)
-------------- --------------
Net increase in cash and cash equivalents 13,995 (1,651,417)
Cash and cash equivalents at beginning of period 93,985 2,608,690
-------------- --------------
Cash and cash equivalents at end of period $ 107,980 $ 957,273
============== ==============
The accompanying notes are an integral part of these financial statements.
6
V-ONE CORPORATION
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
1. Nature of the Business
V-ONE Corporation ("Company") 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 months ended March 31, 2003 and
March 31, 2002 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, 2002 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, 2002 and 2001 and for the three years in the
period ended December 31, 2002, which are included in the Company's amended 2002
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 period ended March 31, 2003 are
not necessarily indicative of the results expected for the full year ending
December 31, 2003.
Certain prior year amounts have been reclassified to conform to the 2003
presentation. These changes had no impact on previously reported results of
operations.
3. Common and Preferred Stock
On March 31, 2003, the Company sold 12,500 shares of common stock at a price of
$.119 per share as part of its Employee Stock Purchase Plan.
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. As of March 31, 2003, holders had
converted $610,000, or 51%, of the notes into shares of common stock at $.25 per
share.
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 $5,635,191,
$6,237,278, and $8,862,015 for the years ended December 31, 2002, 2001 and 2000,
respectively, and a further net loss of $352,598 for the three months ended
March 31, 2003. In addition, the Company expects to continue to incur losses
during 2003. 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 2003.
The Company has taken steps to reduce expenses by implementing a reduced
workweek designed to ensure that customers' requirements are met without
jeopardizing the Company's workforce. Additional staff reductions were effected
on January 10, 2003, approximating 20% of the Company's employees. For the
immediate future, the Company will focus on existing and potential customers in
7
the government sector, targeted marketing operations to commercial accounts
through its distribution and reseller channel partners, and minimizing general
and administrative expenditures and all possible capital expenditures. The
Company may not be successful in further reducing operating levels or, even at
reduced operating levels, the Company may not be able to maintain operations for
any extended period of time without generating revenue from existing and new
customers, additional capital or a significant strategic transformative event.
The Company's ability to continue as a going concern is dependent on its ability
to generate sufficient cash flow to meet its obligations on a timely basis or to
obtain additional funding.
The Company is seeking to expand its current banking relationships to explore
alternatives to preserve its operations and maximize shareholder value,
including potential strategic partnering relationships, a business combination
with a strategically placed partner, or a sale of the Company.
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 connection with its efforts
to raise capital, the Company agreed in January 2003 to adjust the exercise
price of the warrants from $0.50 per share to $0.15 per share. As of March 31,
2003, holders had converted $610,000, or 51%, of the notes into shares of common
stock at $.25 per share.
Upon issuance of the notes, the Company recorded a debt discount of
approximately $184,980 in accordance with the accounting requirements for a
beneficial conversion feature on the notes. During the three months ended March
31, 2003, the Company amortized approximately $11,758 of the discount to
interest expense. Additionally, the Company recorded $14,000 in accrued interest
expense for the first quarter of 2003. Interest expense is payable upon
conversion of the notes. The Company elected to extend the notes for an
additional 180 days in January 2003 and paid the interest accrued under the
initial term of the notes. In July 2003, the Company requested and received an
extension of the 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 the Company's agreement to adjust the exercise price of the
warrants, the Company recorded a debt discount of approximately $23,890 in
accordance with the accounting requirements for a beneficial conversion feature
on the notes. The Company used the Black-Scholes model to determine the fair
value of the warrant repricing with the following assumptions" volatility of 0%,
risk free interest rate of 3.43% and expected term of 5 years. During the three
months ended March 31, 2003, the Company amortized $23,890 of the discount to
interest expense.
6. 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
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:
8
Three months ended March 31,
-------------------------------------
2003 2002
----------------- ----------------
Net Income, as reported $ (522,645) $ (2,193,931)
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects $ - $ -
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, 8(1) net or related tax effects $ (66,407) $ (44,280)
Pro forma net income $ (589,052) $ (2,238,211)
Earnings per share:
Basic - as reported $ (0.02) $ (0.09)
Basic - pro forma $ (0.02) $ (0.09)
Diluted - as reported $ (0.02) $ (0.09)
Diluted - pro forma $ (0.02) $ (0.09)
26,718,329 24,038,801
=================== ================
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.
9
7. Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per
share:
Three Months ended March 31,
--------------------------------
2003 2002
-------------- --------------
Numerator:
Loss before extraordinary item $ (352,598) $ (2,013,618)
Less: Dividend on preferred stock (170,047) (180,313)
Deemed dividend on preferred stock - -
-------------- --------------
Net loss before extraordinary item (522,645) (2,193,931)
Extraordinary item-early extinguishments
of debt - -
-------------- --------------
Net loss attributable to holders of
common stock $ (522,645) $ (2,193,931)
============== ==============
Denominator:
Denominator for basic and diluted net
loss per share
- weighted average shares 26,718,329 24,038,801
Effect of dilutive securities:
Preferred Stock - -
Stock Options - -
Warrants - -
-------------- --------------
Dilutive potential common shares - -
-------------- --------------
Denominator for diluted net loss per
share-adjusted weighted average shares
26,718,329 24,038,801
============== ==============
Basic and diluted loss per share -
Loss before extraordinary item
$ (0.02) $ (0.09)
Extraordinary item-early extinguishment
of debt - -
Net loss attributable to holders of
common stock $ (0.02) $ (0.09)
============== ==============
Due to their anti-dilutive effect, outstanding shares of preferred stock, stock
options and warrants to purchase shares of common stock were excluded from the
computation of diluted earnings per share for all periods presented.
10
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, 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 increased from approximately $852,000 for the three months ended
March 31, 2002 to approximately $1,005,000 for the three months ended March 31,
2003. This increase of approximately $153,000 or 18% is due primarily to a
$197,000 increase in product revenue while consulting and services revenue for
the three months ended March 31, 2003 was down approximately $44,000 or 11%
compared to the first quarter of 2002. Product revenues are derived principally
from software licenses and the sale of hardware products. Product revenues
increased from approximately $444,000 for the three months ended March 31, 2002
to approximately $641,000 for the three months ended March 31, 2003. 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 $408,000 for the three months ended March 31, 2002 to
approximately $364,000 for the three months ended March 31, 2003. This was due
principally to a lower cost of maintenance for new international distribution
customers and a lower number of new and renewing maintenance contracts provided
to customers in the first quarter of fiscal 2003.
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 decreased from
approximately 19% for the three months ended March 31, 2002 to approximately 4%
for the three months ended March 31, 2003. The percentage decrease was primarily
due to higher sales of software licenses and lower sales of Smartwall and
turnkey hardware systems sales in the current year. Total cost of revenues is
comprised of cost of product revenues and cost of consulting and services
revenues.
Cost of product revenues consists principally of the costs of computer hardware,
licensed technology, manuals and labor associated with the distribution and
support of the Company's products. Cost of product revenues decreased from
approximately $49,000 for the three months ended March 31, 2002 to approximately
$15,000 for the three months ended March 31, 2002. The decrease in cost of
product revenues for the three months ended March 31, 2003 was primarily
attributable to higher sales of software licenses and lower sales of Smartwall
and turnkey hardware systems sales in the current year. Cost of product revenues
as a percentage of product revenues was approximately 11% for the three months
11
ended March 31, 2002 and approximately 2% for the three months ended March 31,
2003. The percentage decrease was primarily attributable to higher sales of
software licenses and lower sales of Smartwall and turnkey hardware systems
sales in the current year.
Cost of consulting and services revenues 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 $116,000 for the three months
ended March 31, 2002 to approximately $26,000 for the three months ended March
31, 2003. Cost of consulting and services revenues as a percentage of consulting
and services revenue was approximately 28% for the three months ended March 31,
2002 and approximately 7% for the three months ended March 31, 2003. The
decrease was due mainly to lower salary expense in the first quarter of fiscal
2003.
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 $968,000 for the three months ended March 31, 2002 to
approximately $322,000 for the three months ended March 31, 2002. The dollar
decrease of approximately $646,000 was primarily due to lower salary and
consulting expenses of $457,000 and $73,000, respectively. Research and
development expense as a percentage of total revenue was approximately 114% for
the three months ended March 31, 2002 and approximately 32% for the three months
ended March 31, 2003.
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 expenses decreased from approximately $1,004,000 for the
three months ended March 31, 2002 to approximately $384,000 for the three months
ended March 31, 2003. The dollar decrease for the three months ended March 31,
2003 of $620,000 relates to primarily to lower salary expense of $324,000, lower
consulting costs of $62,000, lower tradeshow expense of $52,000, lower
advertising expense of $27,000, lower travel expense of $24,000 and lower direct
mail expense of $22,000. Sales and marketing expenses as a percentage of total
revenues were approximately 118% for the three months ended March 31, 2002 and
approximately 38% for the three months ended March 31, 2003. The percentage
decrease is due to lower expense for fiscal 2003 when compared to similar
periods for fiscal 2002 as well as higher revenue.
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 expenses decreased from approximately $737,000 for the three
months ended March 31, 2002 to approximately $474,000 for the three months ended
March 31, 2003. The decrease in expense of approximately $263,000 was due
principally to lower salary expense of $128,000, reduced cost of D&O insurance
of $53,000, lower legal expense of $25,000 and lower consulting expense of
$25,000. General and administrative expenses as a percentage of total revenues
were approximately 87% for the three months ended March 31, 2002 and 47% for the
three months ended March 31, 2003.
Other (Expense) Income -- Other (expense) income represents the income or
expense resulting from non-operational activities that are of an infrequently
occurring nature. Other (expense) income decreased from approximately zero for
the three months ended March 31, 2002 to $(9,000) for the three months ended
March 31, 2003 due primarily to early retirement of certain fixed assets.
Interest Income and Expense -- Interest income represents interest earned on
cash and cash equivalents. Interest income decreased from approximately $11,000
for the three months ended March 31, 2002 to approximately $5,000 for the three
months ended March 31, 2003. 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 $1,000 for the three months ended March 31,
2002 to approximately $133,000 for the three months ended March 31, 2003,
substantially all of which was for recognition of a beneficial conversion
feature on the 8% Secured Convertible Notes.
Income Taxes -- The Company did not incur income tax expenses as a result of the
net loss incurred during the three months ended March 31, 2002 and 2003.
Dividend on Preferred Stock -- The Company provided for dividends on preferred
stock of approximately $180,000 during the three months ended March 31, 2002 and
approximately $170,000 for the three months ended March 31, 2003. Under the
12
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 $1,635,000 for the
three months ended March 31, 2002 and used cash of approximately $2,000 for the
three months ended March 31, 2003. Cash used in operating activities resulted
principally from net operating losses in the periods offset in part by an
increase in accounts payable. The decrease in cash used in operating activities
of approximately $1,641,000 was attributable primarily to a reduction in net
operating loss of $1,661,000.
The Company's investing activities used cash of approximately $7,000 in the
three months ended March 31, 2002 and provided cash of approximately $15,000 in
the three months ended March 31, 2003. Net capital expenditures for property and
equipment were approximately $7,000 and $6,000 during the three months ended
March 31, 2002 and 2003, 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 used cash of approximately $9,500 during the
three months ended March 31, 2002 and provided cash of approximately $1,500 for
the three months ended March 31, 2003. In fiscal 2002, the cash was used
primarily by principal payments on capitalized lease obligations.
The Company had net tangible assets of ($1,692,000) and ($1,979,000) at December
31, 2002 and March 31, 2003, respectively. As of March 31, 2003, the Company had
an accumulated deficit of approximately $65,645,000.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company reported a net loss of $5,635,191,
$6,237,278, and $8,862,015 for the years ended December 31, 2002, 2001 and 2000,
respectively, and a further net loss of $352,598 for the three months ended
March 31, 2003. In addition, the Company expects to continue to incur losses
during 2003. 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 2003.
The Company has taken steps to reduce expenses by implementing a reduced
workweek designed to ensure that customers' requirements are met without
jeopardizing the Company's workforce. Additional staff reductions were effected
on January 10, 2003, approximating 20% of the Company's employees. For the
immediate future, the Company will focus on existing and potential customers in
the government sector, limited and targeted marketing operations to commercial
accounts, and minimizing general and administrative expenditures and all
possible capital expenditures. The Company may not be successful in further
reducing operating levels or, even at reduced operating levels, the Company may
not be able to maintain operations for any extended period of time without
generating revenue from existing and new customers, additional capital or a
significant strategic transformative event. The Company's ability to continue as
a going concern is dependent on its ability to generate sufficient cash flow to
meet its obligations on a timely basis or to obtain additional funding.
The Company is seeking to expand its current banking relationships to explore
alternatives to preserve its operations and maximize shareholder value,
including potential strategic partnering relationships, a business combination
with a strategically placed partner, or a sale of the Company.
CONTRACTUAL OBLIGATIONS
The following table discloses aggregate information about the Company's
contractual obligations as of March 31, 2003 and the periods in which payments
are due:
Payments Due By Period
----------------------------------------------------------------
Remainder 2004 2006 Thereafter Total
of 2003 and 2005 and 2007
----------------------------------------------------------------
Long-term debt obligations $270,908 $624,828 $466,681 $59,486 $1,421,903
Operating leases 10,782 26,357 0 0 37,140
------------ --------- ---------- ------------ ------------
$281,690 $651,185 $466,681 $59,486 $1,459,043
============ ========= ========== ============ ============
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OFF-BALANCE SHEET ARRANGEMENTS
The Company had no material off-balance sheet arrangements during the first
three months of fiscal 2003 or 2002.
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
Within the ninety-day period prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the 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-14 promulgated under the Securities Exchange Act of 1934, as amended. Based
upon that evaluation, the Company's President, Chief Executive Officer and
Principal Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting management to material information
relating to the Company required to be included in the Company's periodic
filings with the SEC. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date the Company carried out its evaluation.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
The Company entered into a new lease agreement effective March 1, 2003 for 9,396
square feet of office space at 20300 Century Boulevard, Suite 200, Germantown,
Maryland that terminates on March 31, 2008. The Company expects that this space
will be sufficient for its needs through expiration of the lease. In 2002, the
Company leased approximately 28,312 square feet of office space at 20250 Century
Boulevard, Suite 300, Germantown, Maryland. The termination of the old lease
included a full release of occupancy obligations of the Company for the premises
from the date of the lease termination. Amounts due for unpaid rents during the
term of occupancy under the old lease in the amount of $325,000, recorded as
notes payable other, will be paid in equal installments over two years beginning
March 1, 2003.
The cost to complete the Company's annual audit is approximately $100,000. The
Company's cash position during the fourth quarter of 2002 and the first quarter
of 2003 was not sufficient to prepay these fees in addition to meeting
operational expenses for development and equipment purchases required to deliver
products to the Company's customers. The Company decided to meet its customer's
requirements first, believing that it is in the best interest of the Company's
shareholders to do so. This decision resulted in a delay in completing the 2002
year-end audit and the auditor's review of results of operations for the first
quarter of 2003. The Company's shares, traded on the OTC Bulletin Board, were
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assigned an "E" status and removed from active listing until such time as the
Company demonstrates compliance with the OTC Bulletin Board listing regulations.
The Company completed the 2002 year-end audit and 2003 quarterly reviews in
December 2003.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this quarterly report on Form
10-Q for the period ended March 31, 2003:
Exhibit Description
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
(b) Reports on Form 8-K
None.
15
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: January 13, 2004 By: /s/ Margaret E. Grayson
------------------------------------
Name: Margaret E. Grayson
Title: President, Chief Executive Officer
and Principal Financial Officer
16