SEC Filing | OneSpan

1 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 MARCH 31, 2000 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 000-24389 VASCO DATA SECURITY INTERNATIONAL, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 36-4169320 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1901 SOUTH MEYERS ROAD, SUITE 210 OAKBROOK TERRACE, ILLINOIS 60181 (Address of Principal Executive Offices)(Zip Code) Registrant's telephone number, including area code: (630) 932-8844 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 ----- ----- As of April 25, 2000, 27,293,951 shares of the Company's Common Stock, $.001 par value per share ("Common Stock"), were outstanding.

2 VASCO DATA SECURITY INTERNATIONAL, INC. FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2000 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 1999 and March 31, 2000 (Unaudited)................... 3 Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 1999 and 2000................. 4 Consolidated Statements of Comprehensive Loss (Unaudited) for the three months ended March 31, 1999 and 2000................. 5 Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 1999 and 2000................. 6 Notes to Consolidated Financial Statements......................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 7 Item 3. Quantitative and Qualitative Disclosures about Market Risk......... 8 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................... 11 SIGNATURES.................................................................. 12 - -------------------- This report contains the following trademarks of the Company, some of which are registered: VASCO, AccessKey, VACMan Server and VACMan/CryptalPak, AuthentiCard and Digipass. -2-

3 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS VASCO DATA SECURITY INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS December 31, March 31, 1999 2000 ------------ ------------ (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,576,494 $ 3,435,188 Accounts receivable, net of allowance for doubtful accounts of $120,216 and $121,582 in 1999 and 2000, respectively 2,871,367 3,409,678 Inventories, net 805,382 796,824 Prepaid expenses 157,620 285,600 Deferred income taxes 83,000 83,000 Other current assets 925,334 830,041 ------------ ------------ Total current assets 7,419,197 8,840,331 Property and equipment Furniture and fixtures 1,246,555 1,287,957 Office equipment 1,013,870 1,085,323 ------------ ------------ 2,260,425 2,373,280 Accumulated depreciation (1,070,046) (1,053,057) ------------ ------------ 1,190,379 1,320,223 Goodwill and other intangibles, net of accumulated amortization of $3,134,000 and $3,287,161 in 1999 and 2000, respectively 1,989,960 1,788,065 Prepaid royalties and other assets 1,718,493 1,717,556 ------------ ------------ TOTAL ASSETS $ 12,318,029 $ 13,666,175 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current portion of long-term debt $ 639,322 $ 463,287 Accounts payable 2,020,465 875,234 Unearned income 667,501 872,812 Accrued expenses 1,618,739 3,530,598 ------------ ------------ Total current liabilities 4,946,027 5,741,931 Long-term debt, including stockholder note of $5,000,000 in 1999 and 2000, respectively 8,408,862 8,836,837 STOCKHOLDERS' DEFICIT: Preferred stock, $.01 par value; 500,000 shares authorized; none issued and outstanding - - Common stock, $.001 par value - 75,000,000 shares authorized; 26,462,083 and 26,872,614 shares issued and outstanding in 1999 and 2000, respectively 26,462 26,873 Additional paid-in capital 20,702,387 21,745,836 Accumulated deficit (21,873,340) (22,687,195) Accumulated other comprehensive income- cumulative translation adjustment 107,631 1,893 ------------ ------------ Total stockholders' deficit (1,036,860) (912,593) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 12,318,029 $ 13,666,175 ============ ============ See accompanying notes to consolidated financial statements. -3-

4 VASCO DATA SECURITY INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three months ended March 31, 1999 2000 ------------ ------------ Net revenues $ 4,818,254 $ 5,551,927 Cost of goods sold 1,889,801 1,862,954 ------------ ------------ Gross profit 2,928,453 3,688,973 ------------ ------------ Operating costs: Sales and marketing 1,402,660 2,162,637 Research and development 976,498 941,605 General and administrative 938,726 1,160,664 ------------ ------------ Total operating costs 3,317,884 4,264,906 ------------ ------------ Operating loss (389,431) (575,933) Interest expense, net (227,900) (162,911) Other expense, net (60,679) (55,470) ------------ ------------ Loss before income taxes (678,010) (794,314) Provision for income taxes 304,181 19,541 ------------ ------------ Net loss $ (982,191) $ (813,855) ============ ============ Basic and diluted net loss per share $ (0.04) $ (0.03) ============ ============ Weighted average shares outstanding 23,010,633 26,786,287 ============ ============ See accompanying notes to consolidated financial statements. -4-

5 VASCO DATA SECURITY INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED) Three months ended March 31, 1999 2000 ------------ ------------ Net loss $ (982,191) $ (813,855) Other comprehensive loss - cumulative translation adjustment (134,239) (105,738) ------------ ------------ Comprehensive loss $ (1,116,430) $ (919,593) ============ ============ See accompanying notes to consolidated financial statements. -5-

6 VASCO DATA SECURITY INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three months ended March 31, 1999 2000 ------------ ------------ Cash flows from operating activities: Net loss $ (982,191) $ (813,855) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 252,695 255,563 Interest paid in shares of common stock 78,750 78,750 Gain on sale of fixed assets (14,862) - Changes in assets and liabilities: Accounts receivable, net 773,521 (538,311) Inventories, net (69,510) 8,558 Other current assets (73,728) (31,750) Accounts payable 757,096 (1,145,231) Unearned income (228,301) 205,311 Accrued expenses 199,363 1,911,859 Prepayment of royalties (450,000) - ------------ ------------ Net cash provided by (used in) operations 242,833 (69,106) ------------ ------------ Cash flows from investing activities: Additions to property and equipment, net (4,059) (183,511) ------------ ------------ Net cash used in investing activities (4,059) (183,511) ------------ ------------ Cash flows from financing activities: Proceeds from exercise of stock options and warrants 93,625 965,109 Proceeds from issuance of debt - 427,975 Repayment of debt (254,203) (176,035) ------------ ------------ Net cash provided by (used in) financing activities (160,578) 1,217,049 ------------ ------------ Effect of exchange rate changes on cash (134,239) (105,738) ------------ ------------ Net increase (decrease) in cash (56,043) 858,694 Cash and cash equivalents, beginning of period 1,662,084 2,576,494 ------------ ------------ Cash and cash equivalents, end of period $ 1,606,041 $ 3,435,188 ============ ============ Supplemental disclosure of cash flow information: Interest paid $ 57,100 $ 43,999 Income taxes paid $ 3,945 $ 2,632 See accompanying notes to consolidated financial statements. -6-

7 VASCO DATA SECURITY INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of VASCO Data Security International, Inc. and its subsidiaries (collectively, the "Company" or "VASCO") and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. During the fourth quarter of 1999, the Company acquired IntelliSoft Corp. in a transaction which has been accounted for under the pooling-of-interests method. Accordingly, the consolidated financial statements for the quarter ended March 31, 1999 have been restated as if IntelliSoft had been combined for that period. In the opinion of management, the accompanying unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of the interim periods presented. All significant intercompany accounts and transactions have been eliminated. The operating results for the interim periods presented are not necessarily indicative of the results expected for a full year. NOTE 2 - BUSINESS SEGMENTS IDENTISOFT INTELLISOFT TOTAL Three months ended March 31, 2000 ---------- ----------- ----- Net revenues $3,513,290 $2,038,637 $5,551,927 Cost of goods sold 1,618,318 244,636 1,862,954 Gross profit 1,894,972 1,794,001 3,688,973 Three months ended March 31, 1999 Net revenues 4,308,543 509,711 4,818,254 Cost of goods sold 1,835,858 53,943 1,889,801 Gross profit 2,472,685 455,768 2,928,453 NOTE 3 - SUBSEQUENT EVENTS During the first quarter of 2000 the Company filed a registration statement in connection with an offering of its common stock to the public. On April 13, 2000, the Company terminated this offering due to the volatility of market conditions. In April 2000, long-term debt in the amount of $5,000,000 was converted into 416,666 shares of common stock of the Company. -7-

8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS VASCO designs, develops, markets and supports open standards-based hardware and software security systems which manage and secure access to data. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Quarterly Report on Form 10-Q, including the "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 concerning, among other things, the prospects, developments and business strategies for the Company and its operations, including the development and marketing of certain new products and the anticipated future growth in certain markets in which the Company currently markets and sells its products or anticipates selling and marketing its products in the future. These forward-looking statements (i) are identified by their use of such terms and phrases as "expected," "expects," "believe," "believes," "will," "anticipated," "emerging," "intends," "plans," "could," "may," "estimates," "should," "objective," and "goals" and (ii) are subject to risks and uncertainties and represent the Company's present expectations or beliefs concerning future events. The Company cautions that the forward-looking statements are qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including (a) risks of general market conditions, including demand for the Company's products and services, competition and price levels and the Company's historical dependence on relatively few products, certain suppliers and certain key customers, and (b) risks inherent to the computer and network security industry, including rapidly changing technology, evolving industry standards, increasing numbers of patent infringement claims, changes in customer requirements, price competitive bidding, changing government regulations and potential competition from more established firms and others. Therefore, results actually achieved may differ materially from expected results included in, or implied by these statements. COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 2000 The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements for the three months ended March 31, 1999 and 2000. Revenues Revenues for the three months ended March 31, 2000 were $5,552,000, an increase of $734,000, or 15%, as compared to the three months ended March 31, 1999. This was the highest quarterly revenues ever achieved by the Company and can be attributed to strong demand in the market place for the Company's security products. Cost of Goods Sold Cost of goods sold for the three months ended March 31, 2000 was $1,863,000, a decrease of $27,000, or 1.4%, as compared to the three months ended March 31, 1999. This decrease can be attributed to savings being realized through efficiencies in the manufacturing process and redesign of the products. Gross Profit The Company's gross profit for the three months ended March 31, 2000 was $3,689,000, an increase of $761,000, or 26%, as compared to the three months ended March 31, 1999. This represents a gross margin of 66%, as compared to 61% for the same period of 1999. This increase can be attributed to efficiencies in the design of the products, which resulted in reduced third-party manufacturing costs. Additionally, sales of software licenses of the Company's SnareWorks product increased and provide higher gross margins than the Company's products which ship with a hardware interface. -8-

9 Sales and Marketing Expenses Sales and marketing expenses for the three months ended March 31, 2000 were $2,163,000, an increase of $760,000, or 54%, over the three months ended March 31, 1999. This increase is due to increased sales efforts including, in part, increased travel costs and an increase in marketing activities, including the development of a company-wide marketing program and other efforts. Additionally, the Company continues to invest in its customer support infrastructure, which becomes more and more important as the client base continues to expand. Research and Development Research and development costs for the three months ended March 31, 2000 were $942,000, a decrease of $34,000, or 4%, as compared to the three months ended March 31, 1999. The Company has maintained expenditures for product development at relatively stable levels over the last year. General and Administrative Expenses General and administrative expenses for the three months ended March 31, 2000 were $1,161,000, an increase of $222,000, or 24%, compared to the three months ended March 31, 1999. The Company has added head count to support administrative activities resulting from increased sales growth. Interest Expense Interest expense for the three months ended March 31, 2000 was $163,000, compared to $228,000, a decrease of 29% from the same period of 1999. This decrease is a due to a reduction in the debt base, facilitated by the Private Placement that occurred in April 1999. Income Taxes Income tax expense of $20,000 for the three months ended March 31, 2000 and $304,000 for the three months ended March 31, 1999 relates to foreign operations. The reduction in income tax expense is a result of income tax planning strategies implemented by the Company during the fourth quarter of 1999. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents were $3,435,000 at March 31, 2000, which is an increase of approximately $859,000 from $2,576,000 at December 31, 1999. As of March 31, 2000, the Company had working capital of $3,098,000. During the first quarter of 2000, the Company used the cash provided by operations principally for working capital needs. The Company received $965,000 during the first quarter of 2000 from the exercise of stock options and warrants. At March 31, 2000, the Company had lines of credit from European banks totaling approximately $3,400,000 of which approximately $2,300,000 was unused. Capital expenditures during the first three months of 2000 were $184,000 and consisted primarily of computer equipment and office furniture and fixtures. During April 2000, a convertible note in the amount of $5,000,000 was converted into the Company's common stock. During the first quarter of 2000, the Company filed a registration statement for an offering of 3,000,000 shares of common stock. The offering was withdrawn in April 2000 due to volatile market conditions. -9-

10 The Company believes that its current cash balances, anticipated cash generated from operations, and amounts available under its credit lines, will be sufficient to meet its anticipated cash needs through the next twelve months. The Company intends to seek acquisitions of businesses, products and technologies that are complementary or additive to those of the Company. While from time to time the Company engages in discussions with respect to potential acquisitions, the Company has no present plans, commitments or agreements with respect to any such acquisitions as of the date of this Form 10-Q and currently does not have excess cash for use in making acquisitions. There can be no assurance that any such acquisitions will be made. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Financial Accounting Standards Board Interpretation No. 44 (FIN No. 44), "Accounting for Certain Transactions Involving Stock Compensation," an interpretation of Accounting Principles Board Opinion No. 25, is effective for financial statements beginning after July 1, 2000. The Company is currently evaluating the impact of this pronouncement on its financial statements. During 1998, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities, which is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133 establishes a comprehensive standard for the recognition and measurement of derivative instruments and hedging activities. The Company does not expect the adoption of the new standard to have a material impact on consolidated financial position, liquidity, or results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the Company's market risk during the three month period ended March 31, 2000. For additional information, refer to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. -10-

11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS, None. ITEM 2. CHANGES IN SECURITIES. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) The following exhibits are filed with this Form 10-Q or incorporated by reference as set forth below: Exhibit Number Description ------ ----------- 27 Financial Data Schedule. - --------------------------- (b) Reports on Form 8-K No reports on Form 8-K have been filed by the Registrant during the quarter ended March 31, 2000. -11-

12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on May 14, 2000. VASCO Data Security International, Inc. /s/ Mario R. Houthooft ---------------------------------------------------- Mario R. Houthooft Chief Executive Officer and President /s/ Dennis D. Wilson ---------------------------------------------------- Dennis D. Wilson Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) EXHIBIT INDEX Exhibit Number Description ------ ----------- 27 Financial Data Schedule. -12-

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS END MARCH 31, 1999 AND 2000. CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1999 AND MARCH 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.

3-MOS DEC-31-2000 MAR-31-2000 3,435,188 0 3,531,260 (121,582) 796,824 8,840,331 2,373,280 (1,053,057) 13,666,175 5,741,931 0 0 0 26,873 (939,466) 13,666,175 5,551,927 5,551,927 1,862,954 4,264,906 55,470 0 162,911 (794,314) 19,541 (813,855) 0 0 0 (813,855) (0.03) (0.03)