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: JUNE 30, 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 July 31, 2003
----- ----------------------------
Common Stock, $0.001 Par Value Per Share 27,103,125
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 June 4
30, 2003 (unaudited) and December 31,
2002 (unaudited)
Condensed Statements of Operations 5
for the three and six months ended
June 30, 2003 (unaudited) and June
30, 2002 (unaudited)
Condensed Statements of Cash Flows 6
for the three and six months ended
June 30, 2003 (unaudited) and June
30, 2002 (unaudited)
Notes to the Condensed Financial 7
Statements (unaudited)
Item 2. Management's Discussion and Analysis 9
of Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative 12
Disclosures About
Market Risk
Item 4. Controls and Procedures 12
PART II. OTHER INFORMATION 12
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of 12
Proceeds
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of 12
Security Holders
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURE 14
2
The review of the Company's financial statements at June 30, 2003 by the
Company's auditors has not been completed and reviewed financial statements are
not included in this Quarterly Report on Form 10-Q. When the review is
completed, the Company intends to file an amended Quarterly Report on Form 10-Q
containing such reviewed financial statements.
3
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
V-ONE CORPORATION
CONDENSED BALANCE SHEETS
June 30, 2003 December 31, 2002
ASSETS (Unaudited) (Unaudited)
-------------------- -----------------------
Current assets:
Cash and cash equivalents $ 65,205 $ 128,985
Accounts receivable, net 567,220 237,695
Finished goods inventory, net 2,526 5,478
Prepaid expenses and other current assets 72,605 280,630
-------------------- -----------------------
Total current assets 707,556 652,788
Property and equipment, net 123,675 319,294
Other assets 95,141 -
-------------------- -----------------------
Total assets $ 926,372 $ 972,082
==================== =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,627,965 $ 1,235,574
Deferred revenue 638,683 784,185
Capital lease obligations - current 528,000 591,242
-------------------- -----------------------
Total current liabilities 2,794,648 2,611,001
Deferred rent 37,355 32,831
Capital lease obligations - noncurrent - -
-------------------- -----------------------
Total liabilities 2,832,003 2,643,832
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.001 par value,13,333,333 shares authorized:
Series C redeemable preferred stock, 500,000 shares 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 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;
27,103,125 and 26,649,301 shares issued and outstanding, respectively 27,103 26,649
Accrued dividends payable 1,917,692 1,575,709
Additional paid-in capital 61,881,764 61,737,266
Accumulated deficit (65,735,254) (65,014,438)
-------------------- -----------------------
Total shareholders' equity (1,905,631) (1,671,750)
-------------------- -----------------------
Total liabilities and shareholders' equity $ 926,372 $ 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 Six months Six months
ended ended ended ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
(unaudited) (unaudited) (unaudited) (unaudited)
------------------ ----------------- ----------------- -----------------
Revenue:
Products $ 771,117 $ 520,633 $ 1,412,219 $ 964,585
Consulting and services 384,103 366,366 748,272 774,633
------------------ ----------------- ----------------- -----------------
Total revenue 1,155,220 886,999 2,160,491 1,739,218
Cost of revenue:
Products 127,695 41,597 143,100 90,910
Consulting and services 14,651 85,349 40,426 201,769
------------------ ----------------- ----------------- -----------------
Total cost of revenue 142,346 126,946 183,526 292,679
------------------ ----------------- ----------------- -----------------
Gross profit 1,012,874 760,053 1,976,965 1,446,539
Operating expenses:
Research and development 272,326 788,142 594,439 1,756,397
Sales and marketing 364,265 760,998 747,853 1,764,973
General and administrative 373,611 640,751 847,930 1,378,236
------------------ ----------------- ----------------- -----------------
Total operating expenses 1,010,202 2,189,891 2,190,222 4,899,606
------------------ ----------------- ----------------- -----------------
Operating profit (loss) 2,672 (1,429,838) (213,257) (3,453,067)
Other (expense) income:
Interest expense (28,744) (949) (161,475) (2,344)
Interest income 20 3,238 5,052 14,243
Other (expense) income (183) (2,910) (9,153) (2,910)
------------------ ----------------- ----------------- -----------------
Total other (expense) income (28,907) (621) (165,576) 8,989
------------------ ----------------- ----------------- -----------------
Net loss (26,235) (1,430,459) (378,833) (3,444,078)
Dividend on preferred stock 171,936 171,936 341,983 352,250
------------------ ----------------- ----------------- -----------------
Loss attributable to holders of common stock $ (198,171) $ (1,602,395) $ (720,816) $ (3,796,328)
================== ================= ================= =================
Basic and diluted loss per share attributable
to holders of common stock $ (0.01) $ (0.07) $ (0.03) $ (0.16)
================== ================= ================= =================
Weighted average number of common
shares outstanding 26,958,849 24,263,355 25,839,253 24,151,698
================== ================= ================= =================
The accompanying notes are an integral part of these financial statements.
5
V-ONE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
Six months Six months
ended ended
June 30, 2003 June 30, 2002
(unaudited) (unaudited)
------------------- -------------------
Cash flows from operating activities:
Net loss $ (378,833) $ (3,444,078)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 189,032 275,862
Stock compensation 1,193 83,372
Amortization of deferred financing costs 126,622 -
Changes in assets and liabilities:
Accounts receivable, net (329,524) 181,893
Inventory, net 2,952 (3,011)
Prepaid expenses and other assets 43,910 199,406
Accounts payable and accrued expenses 392,391 471,368
Deferred revenue (145,502) (88,386)
Deferred rent 4,524 (21,007)
------------------- -------------------
Net cash used in operating activities (93,235) (2,344,581)
Cash flows from investing activities:
Net purchases of property and equipment 6,586 (3,645)
------------------- -------------------
Net cash provided by (used in) investing activities 6,586 (3,645)
Cash flows from financing activities:
Exercise of options and warrants - -
Issuance of common stock 22,869 13,716
Payment of debt financing costs - (105,460)
Principal payments on capitalized lease obligations - (38,922)
------------------- -------------------
Net cash provided by financing activities 22,869 (130,666)
------------------- -------------------
Net increase in cash and cash equivalents (63,780) (2,478,892)
Cash and cash equivalents at beginning of period 128,985 2,608,690
------------------- -------------------
Cash and cash equivalents at end of period $ 65,205 $ 129,798
=================== ===================
The accompanying notes are an integral part of these financial statements.
6
V-ONE CORPORATION
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 and six months ended June 30,
2003 and June 30, 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 financial statements
as of December 31, 2002 (unaudited) and 2001 (audited) and for the three years
in the period ended December 31, 2002, which are included in the Company's 2002
Annual Report on 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 and six month periods ended June 30,
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 June 30, 2003, the Company sold 12,500 shares of common stock at a price of
$.111 per share as part of its Employee Stock Purchase Plan. 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.
On June 13, 2003, the Company issued 128,824 shares of common stock in exchange
for governmental consulting services.
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 June 30, 2003, holders had converted
$660,000, or 56%, 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 $5,527,391,
$6,237,278, and $8,862,015 for the years ended December 31, 2002, 2001 and 2000,
respectively, and a further net loss of $26,235 for the six months ended June
30, 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
7
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, 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 June 30,
2003, holders had converted $660,000, or 56%, 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 $233,900 in accordance with the accounting requirements for a
beneficial conversion feature on the notes. During the six months ended June 30,
2003, the Company amortized approximately $11,758 of the discount to interest
expense. 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. During the six months ended June 30, 2003, the Company
amortized all of the discount to interest expense. Additionally, the Company
records interest expense upon conversion of the notes as a result of the
embedded conversion feature. The additional interest expense is not recorded
until conversion because the notes contain a contingency that does not permit
the number of shares to be received upon conversion to be calculated until
conversion occurs. Upon conversion of $25,000 and $50,000 of notes during the
three and six months ended June 30, 2003, respectively, the Company recorded
$8,000 and $11,000 in interest expense, respectively. Additionally, the Company
recorded $15,839 in accrued interest expense for the second quarter of 2003.
Accrued interest expense is payable upon the earlier of maturity or conversion
of the notes.
In January 2003, the Company elected to extend the notes for an additional 180
days 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.
6. Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per
share:
Three Months ended June Six Months ended June 30,
30,
--------------------------- ----------------------------
2003 2002 2003 2002
------------ ----------- ------------ ------------
Numerator:
Net loss $ (26,235) $(1,430,459) $(378,833) $ (3,44,078)
Less: Dividend on preferred stock (171,936) (171,936) (341,983) (352,250)
------------ ------------ ------------ ------------
Net loss attributable to holders of common stock $(198,171) $(1,602,395) $(720,816) $(3,796,328)
============ ============ ============ ============
Denominator:
Denominator for basic and diluted net loss per
share
- - weighted average shares 26,958,849 24,263,355 25,839,253 24,151,698
============ ============ ============ ============
Basic and diluted loss per share -
Net loss attributable to holders of common stock $ (0.01) $ (0.07) $ (0.03) $ (0.16)
============ ============ ============ ============
8
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.
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 $887,000 and $1,739,000 for the
three and six months ended June 30, 2002 to approximately $1,155,000 and
$2,160,000 for the three and six months ended June 30, 2003, respectively. This
increase of approximately $268,000 and $421,000, or 30% and 24%, is due
primarily to an increase in product revenue of $250,000 and $448,000,
respectively. Product revenues are derived principally from software licenses
and the sale of hardware products. Product revenues increased from approximately
$521,000 and $965,000 for the three and six months ended June 30, 2002,
respectively, to approximately $771,000 and $1,412,000 for the three and six
months ended June 30, 2003, 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 increased slightly from approximately $366,000
for the three months ended June 30, 2002 to approximately $384,000 for the three
months ended June 30, 2003. Consulting and services revenues decreased slightly
from approximately $775,000 for the six months ended June 30, 2002 to
approximately $748,000 for the six months ended June 30, 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 14% and 17% for the three and six months ended June 30, 2002,
respectively, to approximately 12% and 8% for the three and six months ended
June 30, 2003, respectively. 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
9
support of the Company's products. Cost of product revenues increased from
approximately $42,000 and $91,000 for the three and six months ended June 30,
2002, respectively, to approximately $128,000 and $143,000 for the three and six
months ended June 30, 2003, respectively. The increase in cost of product
revenues for the three and six months ended June 30, 2003 was primarily
attributable to higher sales of SmartWall and turnkey hardware systems sales and
lower sales of software licenses in the current year. Cost of product revenues
as a percentage of product revenues was approximately 5% for both the three and
six months ended June 30, 2002, and approximately 11% and 7% for the three and
six months ended June 30, 2003, respectively. The percentage increase was
primarily attributable to higher sales of SmartWall and turnkey hardware systems
sales and lower sales of software licenses 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 $85,000 and $208,000 for the
three and six months ended June 30, 2002, respectively, to approximately $15,000
and $40,000 for the three and six months ended June 30, 2003, respectively. Cost
of consulting and services revenues as a percentage of consulting and services
revenues was approximately 10% and 12% for the three and six months ended June
30, 2002, respectively, and approximately 1% and 2% for the three and six months
ended June 30, 2003, respectively. The decrease was due mainly to lower salary
expense in 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 $788,000 and $1,756,000 for the three and six months ended June
30, 2002, respectively, to approximately $272,000 and $594,000 for the three and
six months ended June 30, 2003, respectively. Research and development expense
as a percentage of total revenue was approximately 89% and 101% for the three
and six months ended June 30, 2002, respectively, and approximately 24% and 28%
for the three and six months ended June 30, 2003, respectively. The dollar and
percentage decreases for the first six months of 2003 were primarily due to
lower salary expenses of $954,000, lower consulting expenses of $127,000 and
lower rent expenses of $31,000.
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 $761,000 and
$1,764,000 for the three and six months ended June 30, 2002, respectively, to
approximately $364,000 and $748,000 for the three and six months ended June 30,
2003, respectively. Sales and marketing expenses as a percentage of total
revenues were approximately 86% and 102% for the three and six months ended June
30, 2002, respectively, and approximately 32% and 35% for the three and six
months ended June 30, 2003, respectively. The dollar and percentage decreases
for the three and six months ended June 30, 2003 of approximately $397,000 and
$1,017,000, or 52% and 58%, respectively, relate primarily to lower salary
expense of $232,000 and $611,000, lower consulting costs of $53,000 and
$115,000, lower tradeshow expense of $14,000 and $66,000, lower market research
expense of $22,000 and $29,000, lower travel expense of $22,000 and $46,000, and
lower rent expense of $12,000 and $25,000, respectively. In addition, sales and
marketing expenses decreased during the first six months of 2003 by lower
advertising expense of $26,000 and lower direct mail expense of $22,000.
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 $641,000 and $1,378,000 for
the three and six months ended June 30, 2002, respectively, to approximately
$374,000 and $848,000 for the three and six months ended June 30, 2003,
respectively. General and administrative expenses as a percentage of total
revenues were approximately 72% and 79% for the three and six months ended June
30, 2002, respectively, and approximately 32% and 39% for the three and six
months ended June 30, 2003, respectively. The decrease in expense and percentage
of total revenues of approximately $267,000 and $530,000, or 42% and 39%,
respectively, was due principally to lower salary expense of $128,000, reduced
cost of D&O insurance of $53,000, and lower consulting expense of $38,000 during
the first six months of 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 $(3,000)
for the three months ended June 30, 2002 to approximately zero for the three
months ended June 30, 2003. Other (expense) increased from approximately
$(3,000) for the six months ended June 30, 2002 to $(9,000) for the six months
ended June 30, 2003 due primarily to early retirement of certain fixed assets.
10
Interest Income and Expense -- Interest income represents interest earned on
cash and cash equivalents. Interest income decreased from approximately $3,000
and $14,000 for the three and six months ended June 30, 2002 to approximately
zero and $5,000 for the three and six months ended June 30, 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 and $2,000 for the three and six months ended June 30, 2002 to
approximately $29,000 and $161,000 for the three and six months ended June 30,
2003, respectively, 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 and six months ended June 30, 2002 and 2003.
Dividend on Preferred Stock -- The Company provided for dividends on preferred
stock of approximately $172,000 and $352,000 during the three and six months
ended June 30, 2002 and approximately $172,000 and $342,000 for the three and
six months ended June 30, 2003. 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 $2,345,000 for the
six months ended June 30, 2002 and approximately $93,000 for the six months
ended June 30, 2003. Cash used in operating activities resulted principally from
net operating losses in the periods. The decrease in cash used in operating
activities of approximately $2,251,000 was attributable primarily to a reduction
in net operating loss of $3,065,245.
The Company's investing activities used cash of approximately $4,000 in the six
months ended June 30, 2002 and provided cash of approximately $6,000 in the six
months ended June 30, 2003. Net capital expenditures for property and equipment
were approximately $4,000 and $(7,000) during the six months ended June 30, 2002
and June 30, 2003, respectively. These expenditures have generally been for
computer workstations and personal computers, office furniture and equipment,
and leasehold additions and improvements. Net capital expenditures for the six
months ended June 30, 2003 include the early retirement of certain fixed assets.
The Company's financing activities used cash of approximately $131,000 in the
six months ended June 30, 2002 and provided cash of approximately $23,000 in the
six months ended June 30, 2003. In fiscal 2002, the cash was used primarily for
principal payments on capitalized lease obligations.
The Company had net tangible assets of ($1,672,000) and ($1,906,000) at December
31, 2002 and June 30, 2003, respectively. As of June 30, 2003, the Company had
an accumulated deficit of approximately $65,735,000.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company reported a net loss of $5,527,391,
$6,237,278, and $8,862,015 for the years ended December 31, 2002, 2001 and 2000,
respectively, and a further net loss of $26,235 for the six months ended June
30, 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.
11
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 June 30, 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 $188,766 $661,387 $466,681 $59,486 $1,376,320
Operating leases 7,188 26,357 0 0 33,545
---------- --------- --------- --------- ----------
$299,970 $687,744 $466,681 $59,486 $1,513,882
========== ========= ========= ========= ==========
OFF-BALANCE SHEET ARRANGEMENTS
The Company had no material off-balance sheet arrangements during the first
three and six 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
On June 5, 2003, the following items were voted on at the Annual Meeting of
Shareholders:
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Proposal 1: Reelection of Directors For Withheld Abstain Broker Non-Votes
--- -------- ------- ----------------
Margaret E. Grayson 24,300,551 336,252 0 2,118,748
Michael D. O'Dell 23,921,564 336,882 0 2,118,748
Proposal 2: Amendment to the Company's certificate of incorporation, as amended and
restated, to increase the number of authorized shares of common stock of the
Company from 50,000,000 to 75,000,000 shares.
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
23,921,564 705,769 9,470 2,118,748
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 $375,000, recorded as
accrued rent, 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 three and six
months ended June 30, 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 and second quarters of 2003. The Company's common stock, traded on the
OTC Bulletin Board, was assigned an "E" status and removed from active listing
until such time as the Company demonstrates compliance with the OTC Bulletin
Board listing regulations. It is the Company's intention to complete the 2002
year-end audit and quarterly reviews and return to compliant status as soon as
is reasonably possible.
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 June 30, 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.
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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: July 31, 2003 By: /s/ Margaret E. Grayson
------------------------------
Name: Margaret E. Grayson
Title: President, Chief Executive Officer
and Principal Financial Officer
14