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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 1-14896
NETWORK-1 SECURITY SOLUTIONS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS
SPECIFIED IN ITS CHARTER)
DELAWARE 11-3027591
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
445 Park Avenue, Suite 1028, New York, New York 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
212-829-5770
(ISSUER'S TELEPHONE NUMBER)
As of October 30, 2003 there were 8,314,458 shares of Common Stock, $.01 par
value per share, 231,054 shares of Series D Convertible Preferred Stock, $.01
par value per share, and 2,483,508 shares of Series E Convertible Preferred
Stock, $.01 par value per share, outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [_] No [X]
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NETWORK-1 SECURITY SOLUTIONS, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED FINANCIAL STATEMENTS
Condensed Balance Sheets as of September 30, 2003 (unaudited)
and December 31, 2002......................................3
Condensed Statements of Operations for the three and nine months
ended September 30, 2003 and 2002 (unaudited)..............4
Condensed Statements of Cash Flows for the nine months ended
September 30, 2003 and 2002 (unaudited)....................5
Notes to Condensed Financial Statements.............................6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..........10
Item 3. CONTROLS AND PROCEDURES............................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................13
Item 2. Changes in Securities and Use of Proceeds..........................14
Item 3. Defaults Upon Senior Securities....................................14
Item 4. Submission of Matters to a Vote of Security Holders................14
Item 5. Other Information..................................................14
Item 6. Exhibits and Reports on Form 8-K...................................14
SIGNATURES..................................................................15
2
NETWORK-1 SECURITY SOLUTIONS, INC.
CONDENSED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ ------------
( UNAUDITED ) ( AUDITED )
ASSETS
Current assets:
Cash and cash equivalents $ 1,344,000 $ 2,029,000
Accounts receivable 6,000
Prepaid expenses and other current assets 10,000 96,000
------------ ------------
Total current assets 1,354,000 2,131,000
Equipment and fixtures 22,000
Security deposits 8,000
------------ ------------
$ 1,354,000 $ 2,161,000
============ ============
LIABILITIES
Current liabilities:
Accounts payable 52,000 $ 193,000
Accrued expenses and other current liabilities 422,000 610,000
Deferred revenue 218,000
------------ ------------
Total current liabilities 474,000 1,021,000
------------ ------------
Liability to be settled with equity instrument 1,000 55,000
------------ ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value, 10,000,000 shares authorized,
Series D - convertible, voting, authorized 1,250,000 shares;
231,054 shares issued and outstanding at September 30, 2003
and December 31, 2002, liquidation preference of $705,000 at
September 30, 2003 and December 31, 2002 2,000 2,000
Series E - convertible, authorized 3,500,000 shares ; 2,483,508 shares
issued and outstanding at September 30, 2003 and December 31, 2002,
liquidation preference of $ 5,265,000 at September 30, 2003 and December
31, 2002
25,000 25,000
Common stock - $0.01 par value ; authorized 50,000,000 shares;
8,314,458 shares issued and outstanding at September 30, 2003 and
December 31, 2002 83,000 83,000
Additional paid-in capital 41,402,000 41,397,000
Accumulated deficit (40,633,000) (40,422,000)
------------ ------------
Total stockholders' equity 879,000 1,085,000
------------ ------------
$ 1,354,000 $ 2,161,000
============ ============
See notes to condensed financial statements
3
NETWORK-1 SECURITY SOLUTIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenue:
Licenses $ 106,000 $ 130,000 $ 365,000
Services $ 12,000 54,000 88,000 156,000
----------- ----------- ----------- -----------
Total revenue 12,000 160,000 218,000 521,000
----------- ----------- ----------- -----------
Cost of revenue:
Amortization of software development costs 546,000 741,000
Cost of licenses 3,000 13,000
Cost of services 17,000 34,000 51,000 118,000
----------- ----------- ----------- -----------
Total cost of revenue 17,000 583,000 51,000 872,000
----------- ----------- ----------- -----------
Gross Profit (loss) (5,000) (423,000) 167,000 (351,000)
----------- ----------- ----------- -----------
Operating expenses:
Product development costs 497,000 1,333,000
Selling and marketing 493,000 1,842,000
General and administrative 212,000 390,000 802,000 1,880,000
----------- ----------- ----------- -----------
Total operating expenses 212,000 1,380,000 802,000 5,055,000
----------- ----------- ----------- -----------
Loss before other income (217,000) (1,803,000) (635,000) (5,406,000)
Interest income - net 2,000 13,000 9,000 58,000
Gain on sale of assets 415,000
----------- ----------- ----------- -----------
Net loss $ (215,000) $(1,790,000) $ (211,000) $(5,348,000)
=========== =========== =========== ===========
LOSS PER COMMON SHARE BASIC AND DILUTED $ (0.03) $ (0.23) $ (0.03) $ (0.71)
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES BASIC AND DILUTED 8,314,458 7,717,927 8,314,458 7,505,961
=========== =========== =========== ===========
See notes to condensed financial statements
4
NETWORK-1 SECURITY SOLUTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2003 2002
----------- -----------
Cash flows from operating activities:
Net loss $ (211,000) $(5,348,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Valuation adjustment for outstanding stock options (49,000) 292,000
Gain on sale of assets (415,000)
Provision for doubtful accounts 35,000
Depreciation and amortization 22,000 890,000
Loss on abandonment of Capital Equipment 58,000
Security deposits written off 8,000
Changes in:
Accounts receivable 6,000 (114,000)
Prepaid expenses and other current assets 86,000 80,000
Accounts payable, accrued expenses and other current liabilities (329,000) 158,000
Deferred revenue (218,000) 35,000
----------- -----------
Net cash used in operating activities (1,100,000) (3,914,000)
----------- -----------
Cash flows from investing activities:
Acquisition of equipment and fixtures (117,000)
Proceeds from sale of assets 415,000
Capitalized software costs (180,000)
Security deposits
----------- -----------
Net cash provided by (used in) investing activities 415,000 (297,000)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of options and warrants 133,000
----------- -----------
Net cash provided by financing activities 133,000
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (685,000) (4,078,000)
Cash and cash equivalents, beginning of period 2,029,000 7,121,000
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,344,000 $ 3,043,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION :
NON CASH TRANSACTIONS :
Non-employee compensation paid with stock options $ 5,000
Conversion of 459,893 shares of Series E Preferred stock into 919,786 shares of
common stock $ 5,000
See notes to condensed financial statements
5
NETWORK-1 SECURITY SOLUTIONS, INC.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] BASIS OF PRESENTATION:
The accompanying condensed financial statements as of September 30,
2003 and for the three and nine month periods ended September 30, 2003
and September 30, 2002, are unaudited. In the opinion of the management
of Network-1 Security Solutions, Inc. (the "Company"), the condensed
financial statements contain all adjustments which the Company
considers necessary for the fair presentation of the Company's
financial position as of September 30, 2003, the results of its
operations for the three and nine months ended September 30, 2003 and
2002, and its cash flows for the nine month periods ended September 30,
2003 and September 30, 2002. The condensed financial statements
included herein have been prepared in accordance with the accounting
principles generally accepted in the United States of America for
interim financial information and the instructions to Form 10-QSB.
Accordingly, certain information and footnote disclosures normally
included in the financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America have been omitted pursuant to such rules and regulations,
although management believes that the disclosures are adequate to make
the information presented not misleading. These financial statements
should be read in conjunction with the audited financial statements for
the year ended December 31, 2002 included in the Company's Annual
Report on Form 10-KSB filed with the Securities and Exchange
Commission. The results of operations for the nine months ended
September 30, 2003 and 2002 are not necessarily indicative of the
results of operations to be expected for the full year.
[2] BUSINESS:
The Company developed, marketed, licensed and supported its proprietary
network security software products designed to provide comprehensive
security to computer networks. The Company also provided maintenance
and training services.
In December 2002, the Company discontinued its software product line
and associated operations, ceased its product development and
substantially eliminated its sales and marketing efforts and during May
2003, sold substantially all of its intellectual property. Through a
series of layoffs, the Company has reduced its workforce to a current
level of two employees and a consultant. The Company has closed its
various offices upon termination of leases during 2002 and 2003.
Management is focusing its efforts on seeking a merger candidate for
the Company or other strategic transaction.
[3] STOCK-BASED COMPENSATION:
The Company accounts for stock-based employee compensation under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. The Company
has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", which was released in
December 2002 as an amendment of SFAS No. 123. The following table
illustrates the effect on net loss and loss per share if the fair
value-based method had been applied to all awards.
6
NETWORK-1 SECURITY SOLUTIONS, INC.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[3] STOCK-BASED COMPENSATION (CONTINUED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2003 2002
----------- -----------
(UNAUDITED) (UNAUDITED)
Reported net loss $ (215,000) $(5,348,000)
Stock-based employee compensation expense included in
reported net loss, net of related tax effects -- --
Stock-based employee compensation determined under the
fair value-based method, net of related tax effects (7,000) (245,000)
----------- -----------
Pro forma net loss $ (222,000) $(5,593,000)
=========== ===========
Loss per common share (basic and diluted):
As reported $ (0.03) $ (0.71)
=========== ===========
Pro forma $ (0.03) $ (0.75)
=========== ===========
The fair value of each option grant on the date of grant is estimated using the
Black-Scholes option-pricing utilizing the following weighted average
assumptions :
NINE MONTHS ENDED
JUNE 30,
--------------------------
2003 2002
-------- --------
Risk-free interest rates 2.36 % 4.08 %
Expected option life in years 5.00 6.60
Expected stock price volatility 112.00 % 112.00 %
Expected dividend yield 0.00 % 0.00 %
[4] REVENUE RECOGNITION:
License revenue is recognized upon delivery of software or delivery of
a required software key. License revenue from distributors or resellers
is recognized as the distributor or reseller delivers software or the
required software key to end users or original equipment manufacturers.
Service revenues consist of maintenance and training services. Annual
renewable maintenance fees are a separate component of each contract,
and are recognized ratably over the contract term. Training revenues
are recognized as such services are performed. Revenues from advance
license fees are deferred until they are earned pursuant to the
agreements.
On May 30, 2003, the Company completed the sale of its CyberwallPLUS
technology and assigned its rights under the Falconstar Agreement (See
Note C). The Company recognized revenue of $218,000 for the nine months
ended September 30, 2003, which had been deferred at December 31, 2002.
7
NETWORK-1 SECURITY SOLUTIONS, INC.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[5] LOSS PER SHARE:
Basic loss per share is calculated by dividing the net loss by the
weighted average number of outstanding common shares during the period.
Diluted per share data includes the dilutive effects of options,
warrants and convertible securities. Potential shares of 16,394,453 and
18,853,335 at September 30, 2003 and 2002, respectively, are
anti-dilutive, and are not included in the calculation of diluted loss
per share. Such potential common shares reflect options, warrants,
convertible preferred stock and convertible notes.
[6] CASH CONCENTRATION:
The Company places cash investments in high quality financial
institutions insured by the Federal Deposit Insurance Corporation
("FDIC"). At September 30, 2003, the Company maintained cash balances
of $1,219,000 in excess of FDIC limits.
NOTE B - LIABILITY TO BE SETTLED IN EQUITY INSTRUMENTS
On April 18, 2002, in consideration of additional consulting and
financial advisory services, the Company issued to CMH Capital
Management Corp. ("CMH") an option to purchase 750,000 shares of the
common stock at an exercise price of $1.20 per share, which was the
market price of the Company's common stock on the date of issuance.
Corey M.Horowitz, Chairman of the Board of Directors of the Company, is
the sole owner and officer of CMH. The shares underlying the option
shall vest over a three-year period in equal amounts of 250,000 shares
per year beginning April 18, 2003. In addition, the shares underlying
the option shall vest in full in the event of a "change of control" or
in the event that the closing price of the Company's common stock
reaches a minimum of $3.50 per share for 20 consecutive trading days.
These options are treated as contingent options and valued utilizing
the Black-Scholes option pricing model at each balance sheet date.
These options were originally priced in the quarter ended June 30, 2002
at $416,000. Subsequently, they were revalued to $55,000 at December
31,2002 and $14,000 at March 31, 2003. The fair value of these options
remained unchanged at April 18, 2003. On April 18, 2003, 250,000 of
these options, having fair value of $5,000 as of that date, vested.
Accordingly, $5,000 was reallocated to Additional Paid-in-Capital by
correspondingly reducing the liability. The options to purchase the
remaining 500,000 shares continue to be treated as contingent options
and valued utilizing the Black-Scholes option pricing model at each
balance sheet date using the same weighted average assumptions as
stated in Note A[3]. At June 30, 2003 these 500,000 options were valued
at $9,000 and further revalued to $1,000 at September 30, 2003. The
decrease in the valuation of $8,000 for the three months ended
September 30, 2003 has been reflected as a reduction of general and
administrative expenses.
NOTE C - GAIN ON SALE OF ASSETS
On May 30, 2003, the Company completed the sale of its CyberwallPlus
technology and related intellectual property (the "Assets") and
assignment of its rights under the Falconstar Agreement for aggregate
proceeds of $415,000. The carrying value of these Assets was written
down to zero in the third quarter of 2002. The $415,000 is reflected as
"Gain on Sale of Assets" in the condensed statements of operations.
8
NETWORK-1 SECURITY SOLUTIONS, INC.
NOTE D - LITIGATION
In January 2003, the former Chief Financial Officer and a director of
the Company commenced a lawsuit against the Company for breach of his
employment agreement for $190,000. Management believes that it has
meritorious defenses to the claims asserted. Accordingly, the Company
has not accrued any amount at September 30, 2003 that might result from
the outcome of this litigation.
NOTE E - SETTLEMENT WITH FORMER CHIEF EXECUTIVE OFFICER (THE "FORMER CEO")
In January 2003, the former CEO of the Company commenced a lawsuit
against the Company for breach of his employment agreement for
$200,000. In June 2003, the Company entered into a settlement in which
the Company agreed to pay approximately $127,000 to the Former CEO in
full settlement of all claims asserted, which was charged to expense
during the year ended December 31, 2002. In addition, as part of the
settlement, the Former CEO agreed to forfeit his options to purchase
1,200,000 shares of the Company's common stock.
9
NETWORK-1 SECURITY SOLUTIONS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"). ACTUAL RESULTS, EVENTS AND CIRCUMSTANCES
(INCLUDING FUTURE PERFORMANCE, RESULTS AND TRENDS) COULD DIFFER MATERIALLY FROM
THOSE SET FORTH IN SUCH STATEMENTS DUE TO VARIOUS RISKS AND UNCERTAINTIES,
INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED BEGINNING ON PAGE 10 OF OUR
ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 2002.
OVERVIEW
Until December 2002, Network-1 Security Solutions, Inc. (the "Company")
developed, marketed and licensed security software products designed to prevent
unauthorized access to information residing on an enterprise's computers. In
December 2002, the Company discontinued offering its security software product
line, as it was unable to achieve sufficient product revenue to support the
expenses of such operations. Management is focusing its efforts on seeking a
merger candidate or other strategic transaction for the Company. In May 2003,
the Company completed the sale of its CyberwallPlus technology and related
intellectual property to an unrelated third party for $415,000.
Results of Operations:
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
Revenues decreased by $148,000 or 93%, from $160,000 for the three months ended
September 30, 2002 to $12,000 for the three months ended September 30, 2003. The
Company's lack of new license revenues for the three months ended September 30,
2003 resulted from the Company's decision to discontinue its software product
line in December 2002. Revenues during the quarter were related to the
amortization of deferred maintenance revenues from customers who had elected to
purchase maintenance and support contracts in earlier periods.
The cost of revenues for the three months ended September 30, 2003 was $17,000.
This cost relates to one employee who provides services under the Company's
maintenance and support contracts. Amortization of software development costs
were $546,000 for the three months ended September 30, 2002. Cost of licenses
consisted of software media (disks), documentation, product packaging,
production costs and product royalties. Cost of licenses were $3,000 for the
three months ended September 30, 2002. Cost of services consists of salaries,
benefits and overhead associated with the technical support of maintenance
contracts. Cost of services decreased by $17,000 or 50% from $34,000 for the
three months ended September 30, 2002 to $17,000 for the three months ended
September 30, 2003. The decrease in the cost of revenue during the quarter ended
September 30, 2003 is directly a result of the Company's decision to discontinue
its software product line in December 2002.
Gross loss was $5,000 for the three months ended September 30, 2003 compared to
a gross loss of $423,,000 for the three months ended September 30, 2002.
Product development costs consisted of salaries, benefits, bonuses, travel and
related costs of the Company's product development personnel, including
consulting fees and the costs of computer equipment used in product and
technology development. Product development costs were $497,000 for the three
months ended September 30, 2002.
10
NETWORK-1 SECURITY SOLUTIONS, INC.
Selling and marketing expenses consisted primarily of salaries, including
commissions, benefits, bonuses, travel, advertising, public relations,
consultants and trade shows. Selling and marketing expenses were $493,000 for
the three months ended September 30, 2002.
General and administrative expenses include employee costs, including salary,
benefits, travel and other related expenses associated with management, finance
and accounting operations and legal and other professional services provided to
the Company. General and administrative expenses decreased by $178,000, from
$390,000 for the three months ended September 30, 2002 to $212,000 for the three
months ended September 30, 2003. Expenses during the quarter ended September 30,
2003 included expenses associated with the discontinuation of the Company's
product line and associated headcount reduction and general downsizing
associated with the termination of the Company's software product business. For
the quarter ended September 30, 2003, these expenses were offset by an $8,000
reversal of expenses related to the valuation of warrants.
The Company had an operating loss of $217,000 for the three months ended
September 30, 2003 compared to a net operating loss of $1,803,000 for the three
months ended Septmeber 30,2002. No provision for or benefit from federal, state
or foreign income taxes was recorded for three months ended September 30, 2003
and 2002 because the Company incurred net operating losses and fully reserved
its deferred tax assets as their future realization could not be determined.
As a result of the foregoing, the Company had net loss of $215,000 for the three
months ended September 30, 2003 compared with a net loss of $1,790,000 for the
three months ended September 30, 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
Revenues decreased by $303,000 or 58%, from $521,000 for the nine months ended
September 30, 2002 to $218,000 for the nine months ended September 30, 2003.
Revenues during the nine months ended September 30, 2003 of $130,000 were
related to the recognition of deferred revenue relating to the Falconstor
Agreement. Revenues during the nine months ended September 30, 2003 of $88,000
were related to the amortization of deferred maintenance revenues from customers
who had elected to purchase maintenance and support contracts in earlier
periods. The Company's lack of new license revenues for the nine months ended
September 30, 2003 resulted from the Company's decision to discontinue its
software product line in December 2002.
The cost of revenues for the nine months ended September 30, 2003 was $51,000.
This cost relates to one employee who provided services under the Company's
maintenance and support contracts. Amortization of software development costs
were $741,000 for the nine months ended September 30, 2002. Cost of licenses
consisted of software media (disks), documentation, product packaging,
production costs and product royalties. Cost of licenses were $13,000 for the
nine months ended September 30, 2002. Cost of services consists of salaries,
benefits and overhead associated with the technical support of maintenance
contracts. Cost of services were $51,000 for the nine months ended September 30,
2003 as compared to $118,000 for the nine months ended September 30, 2002. The
decrease in the cost of revenue during the nine months ended September 30, 2003
is directly a result of the Company's decision to discontinue its software
product line in December 2002.
Gross profit was $167,000 for the nine months ended September 30, 2003 compared
to a gross loss of $351,000 for the nine months ended September 30, 2002.
11
NETWORK-1 SECURITY SOLUTIONS, INC.
Product development costs consisted of salaries, benefits, bonuses, travel and
related costs of the Company's product development personnel, including
consulting fees and the costs of computer equipment used in product and
technology development. Product development costs were $1, 333,000 for the nine
months ended September 30, 2002.
Selling and marketing expenses consisted primarily of salaries, including
commissions, benefits, bonuses, travel, advertising, public relations,
consultants and trade shows. Selling and marketing expenses were $1,842,000 for
the nine months ended September 30, 2002.
General and administrative expenses include employee costs, including salary,
benefits, travel and other related expenses associated with management, finance
and accounting operations, and legal and other professional services provided to
the Company. General and administrative expenses decreased by $1,078,000, from
$1,880,000 for the nine months ended September 30, 2002 to $802,000 for the nine
months ended September 30, 2003. Expenses during the nine months ended June 30,
2003 included expenses associated with the discontinuation of the Company's
product line and associated headcount reduction and general downsizing
associated with the termination of the Company's software product business. For
the nine months ended September 30, 2003, these expenses were offset by a
$49,000 reversal of expense related to the valuation of warrants.
The Company had an operating loss of $635,000 for the nine months ended
September 30, 2003 compared with an operating loss of $5,406,000 for the nine
months ended September 30, 2002. No provision for or benefit from federal, state
or foreign income taxes was recorded for nine months ended September 30, 2003
and 2002 because the Company incurred net operating losses and fully reserved
its deferred tax assets as their future realization could not be determined.
On May 30, 2003, the Company completed the sale of its CyberwallPlus technology
and related intellectual property (the "Assets") and assignment of its rights
under the Falconstar Agreement for aggregate proceeds of $415,000. The carrying
value of these Assets was written down to zero in the third quarter of 2002. The
$415,000 is included as "Gain on Sale of Assets" in the condensed statements of
operations.
As a result of the foregoing, the Company had net loss of $211,000 for the nine
months ended September 30, 2003 compared with a net loss of $5,348,000 for the
nine months ended September 30, 2002.
Liquidity and Capital Resources
At September 2003, the Company had $1,344,000 of cash and cash equivalents and
working capital of $880,000. Net cash used in operating activities was
$3,914,000 during the nine months ended September 30, 2002 and net cash used in
operating activities was 1,100,000 during the nine months ended September 30,
2003. Net cash used in operating activities for the nine months ended September
30, 2003 was primarily attributable to the net loss of $211,000, a decrease in
accounts payable, accrued expenses and other current liabilities of $329,000 and
the recognition of deferred revenue of $218,000 partially offset by a decrease
in prepaid expense of $86,000 and depreciation and amortization expense of
$22,000. Net cash used in investing activities during the nine months ended
September 30, 2002 was $297,000.
The Company's operating activities during the nine months ended September 30,
2003 were financed with the remaining funds raised in the 2001 financing of
$6,765,000 and the $415,000 received from
12
NETWORK-1 SECURITY SOLUTIONS, INC.
the Company's sale of its CyberwallPLUS software and related intellectual
property. The Company does not currently have a line of credit from a commercial
bank or other institution.
The Company anticipates, based on currently proposed plans and assumptions, that
its cash balance of approximately $1,266,000 as of October 31, 2003 will be
sufficient to satisfy the Company's limited operations and capital requirements
until at least October 2004. There can be no assurance, however, that such funds
will not be expended prior thereto. In the event the Company's plans change, or
its assumptions change, or prove to be inaccurate (due to unanticipated
expenses, difficulties, delays or otherwise), the Company may have insufficient
funds to support its operations prior to October 2004. In the third and fourth
quarters of 2002, the Company instituted certain measures to reduce its overhead
including decreasing its headcount from 39 employees to its current level of one
employee and one consultant and the closing of its China development office and
its Taiwan sales office. In December 2002, the Company discontinued its product
offering in order to preserve cash as the Company continues to seek a merger or
other strategic transaction. In May 2003, the Company completed the sale of its
CyberwallPlus technology and related intellectual property for an aggregate
consideration of $415,000. The Company is actively engaged in seeking merger
candidates or other strategic transaction. There is, however, no assurance that
the Company will consummate such a transaction, or that any such transaction
will be successful. The inability of the Company to consummate a merger
transaction or other strategic transaction would have a material adverse effect
on the Company. In addition, any such merger or other strategic transaction may
involve substantial dilution to the interests of the Company's existing
stockholders.
Item 3: Controls and Procedures.
Based on his evaluation, the Company's Interim Chief Executive Officer and Chief
Financial Officer has concluded that the Company's controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) are effective as of the end of the period covered by this report.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
In January 2003, Richard J. Kosinski, former Chief Executive Officer,
President and a director, and Murray P. Fish, former Chief Financial Officer and
a director, commenced lawsuits against the Company in the Commonwealth of
Massachusetts, County of Essex, Superior Court, seeking severance and bonus
compensation and other benefits allegedly due them of $200,000 and $190,000
respectively. Messrs. Kosinski and Fish also moved for an order of attachment,
temporary restraining order and preliminary injunction to prevent the Company
from transferring an aggregate of $400,000 of its funds pending the outcome of
the lawsuits. In February 2003, the Court denied plaintiffs' motions.
In June 2003, the Company entered into a settlement agreement with Mr. Kosinski
pursuant to which the Company paid Mr. Kosinski the sum of $127,000 in full
settlement of all claims asserted by him in the litigation. In addition, as part
of the settlement, Mr. Kosinski agreed to forfeit options to purchase 1,200,000
shares of the Company's Common Stock.
The Company intends to vigorously defend the lawsuit by Mr. Fish seeking
$190,000 in severance, bonus and other benefits allegedly due him and believes
it has meritorious defenses to the claims asserted.
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NETWORK-1 SECURITY SOLUTIONS, INC.
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.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
31.1 Certification of Interim Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of Interim Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports of Form 8-K.
On July 8, 2003, the Company reported under Item 5 of Form 8-K that it
had entered into a settlement agreement with Richard Kosinski, its
former President and Chief Executive Officer, with respect to a lawsuit
commenced by Mr. Kosinski in January 2003.
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NETWORK-1 SECURITY SOLUTIONS, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NETWORK-1 SECURITY SOLUTIONS, INC.
By: /s/ Edward James
-------------------------------------------------------
Edward James, Interim Chief Executive Officer and Chief
Financial Officer (Principal Executive, Financial and
Accounting Officer)
Date: November 14, 2003
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