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FORM 10-QSB
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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COMMISSION FILE NUMBER 0-28008
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SMARTSERV ONLINE, INC.
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(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3750708
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
METRO CENTER, ONE STATION PLACE, STAMFORD, CONNECTICUT 06902
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(203) 353-5950
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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
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE)
YES NO X
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THE NUMBER OF SHARES OF COMMON STOCK, $.01 PAR VALUE, OUTSTANDING AS OF NOVEMBER
10, 2000 WAS 5,842,145.
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SMARTSERV ONLINE, INC.
FORM 10-QSB
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 2000 and September 30, 2000 (unaudited)...................................2
Statements of Operations - three months ended September 30, 2000
and 1999 (unaudited)................................................................................4
Statement of Changes in Stockholders' Equity - three months
ended September 30, 2000 (unaudited)................................................................5
Statements of Cash Flows - three months ended September 30, 2000 and
1999 (unaudited)....................................................................................6
Notes to Unaudited Financial Statements.............................................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................................................12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................16
Item 2. Changes in Securities and Use of Proceeds..........................................................16
Item 6. Exhibits and Reports on Form 8-K...................................................................17
Signatures.........................................................................................18
2
SMARTSERV ONLINE, INC.
BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
2000 2000
-------------------- -------------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 21,668,505 $ 24,016,345
Accounts receivable 129,006 236,498
Prepaid expenses 330,548 213,956
-------------------- -------------------
Total current assets 22,128,059 24,466,799
-------------------- -------------------
Property and equipment, net 858,859 687,439
Other assets
Capitalized software development costs,
net of accumulated amortization of $639,397 at
September 30, 2000 and $412,236 at June 30, 2000 1,408,320 1,475,212
Security deposits 200,374 73,374
Deferred financing costs 200,000 --
-------------------- -------------------
1,808,694 1,548,586
-------------------- -------------------
Total Assets $ 24,795,612 $ 26,702,824
==================== ===================
3
SMARTSERV ONLINE, INC.
BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
2000 2000
-------------------- -------------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,359,970 $ 1,482,019
Accrued liabilities 984,903 1,097,289
-------------------- -------------------
Total current liabilities 2,344,873 2,579,308
-------------------- -------------------
Deferred revenues 3,543,350 4,141,579
COMMITMENTS AND CONTINGENCIES - NOTE 8
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value
Authorized - 1,000,000 shares
Issued and outstanding - None
Common stock - $.01 par value
Authorized - 40,000,000 shares
Issued and outstanding - 5,814,840 shares at September 30,
2000 and 5,576,894 shares at June 30, 2000 58,148 55,768
Additional paid-in capital 72,035,614 75,842,858
Notes receivable from officers (666,841) (666,841)
Unearned compensation (2,039,029) (2,310,284)
Accumulated deficit (50,480,503) (52,939,564)
-------------------- -------------------
Total stockholders' equity 18,907,389 19,981,937
-------------------- -------------------
Total Liabilities and Stockholders' Equity $ 24,795,612 $ 26,702,824
==================== ===================
See accompanying notes.
4
SMARTSERV ONLINE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS
ENDED SEPTEMBER 30
------------------------------------------
2000 1999
------------------- -------------------
Revenues $ 1,013,528 $ 808,292
------------------- -------------------
Costs and expenses:
Costs of services (1,010,710) (232,866)
Product development expenses (417,776) (46,845)
Selling, general and administrative
expenses (2,138,811) (582,314)
Stock-based compensation 4,661,402 (272,951)
------------------- -------------------
Total costs and expenses 1,094,105 (1,134,976)
------------------- -------------------
Income (loss) from operations 2,107,633 (326,684)
Interest income 351,428 11,017
------------------- -------------------
Net income (loss) $ 2,459,061 $ (315,667)
=================== ===================
Basic earnings (loss) per share $ 0.47 $ (0.23)
=================== ===================
Diluted earnings (loss) per share $ 0.27 $ (0.23)
=================== ===================
Weighted average shares outstanding - basic 5,296,859 1,368,046
=================== ===================
Weighted average shares outstanding - diluted 9,091,970 1,368,046
=================== ===================
See accompanying notes.
5
SMARTSERV ONLINE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
NOTES
COMMON STOCK RECEIVABLE ADDITIONAL
PAR FROM PAID-IN UNEARNED ACCUMULATED
SHARES VALUE OFFICERS CAPITAL COMPENSATION DEFICIT
----------- ----------- ------------- ---------------- -------------- ----------------
Balances at June 30, 2000 5,576,894 $ 55,768 $(666,841) $ 75,842,858 $(2,310,284) $(52,939,564)
Amortization of unearned
compensation 331,255
Issuance of warrants to
purchase 50,000 shares of
common stock for consulting
services 60,000 (60,000)
Issuance of common stock
upon exercise of warrants
to purchase common stock 237,946 2,380 1,125,413
Change in market value of
employee stock options (4,992,657)
Net income for the period 2,459,061
----------- ----------- ------------- ---------------- -------------- ----------------
Balances at September 30, 2000 5,814,840 $ 58,148 $(666,841) $72,035,614 $(2,039,029) $(50,480,503)
=========== =========== ============= ================ ============== ================
See accompanying notes.
6
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS
ENDED SEPTEMBER 30
-----------------------------------------
2000 1999
------------------- ------------------
OPERATING ACTIVITIES
Net income (loss) $ 2,459,061 $ (315,667)
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Depreciation and amortization 322,844 96,266
Noncash compensation (4,661,402) 272,951
Amortization of deferred revenues (598,229) (414,156)
Changes in operating assets and liabilities
Accounts receivable 107,492 79,427
Prepaid expenses (116,592) 9,485
Accounts payable and accrued liabilities (434,435) (500,554)
Security deposit (127,000) 1,460
------------------- ------------------
Net cash used for operating activities (3,048,261) (770,788)
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INVESTING ACTIVITIES
Purchase of equipment (267,103) (24,385)
Capitalization of software development costs (160,269) (244,225)
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Net cash used for investing activities (427,372) (268,610)
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FINANCING ACTIVITIES
Repayment of capital lease obligation -- (22,710)
Issuance of common stock 1,127,793 --
------------------- ------------------
Net cash provided by (used for) financing activities 1,127,793 (22,710)
------------------- ------------------
Decrease in cash and cash equivalents (2,347,840) (1,062,108)
Cash and cash equivalents - beginning of period 24,016,345 2,165,551
------------------- ------------------
Cash and cash equivalents - end of period $ 21,668,505 $ 1,103,443
=================== ==================
See accompanying notes.
7
SMARTSERV ONLINE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. NATURE OF BUSINESS
SmartServ Online, Inc. commenced operations on August 20, 1993. We deliver
Internet-based and wireless content, as well as "Web-to-Wireless" applications,
such as securities trade order routing, that enable e-commerce by providing
transactional and information services to our alliance partners or Strategic
Marketing Partners. We have developed online financial, transactional and media
applications using a unique "device independent" delivery solution and make
these services available to wireless handsets and personal digital assistants,
personal computers and the Internet through our application software and
communications architecture. Our services facilitate stock trading and other
e-commerce transactions, as well as the dissemination of real-time stock quotes,
business and financial news, sports information, private-labeled electronic
mail, national weather reports and other business and entertainment information
in a user-friendly manner.
Our plan of operation focuses on the business-to-business strategy of marketing
our services in partnership with those companies that have an economic incentive
to provide our information and transaction services to their customers.
Management believes that SmartServ's primary source of revenues will be derived
from consumers who purchase the services through these Strategic Marketing
Partners. Through the use of this strategy, the consumer is a customer of both
SmartServ and its Strategic Marketing Partner. We also believe that the sale of
our information and transaction services through the cooperative efforts of
Strategic Marketing Partners with more recognizable brand names than our own is
important to our success.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
- ---------------------
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information, the instructions of Form 10-QSB and Rule 310 of
Regulation SB and, therefore, do not include all information and notes necessary
for a presentation of results of operations, financial position and cash flows
in conformity with generally accepted accounting principles. The balance sheet
at June 30, 2000 has been derived from the audited 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. The
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-KSB for the year ended June 30, 2000. In the opinion of the
Company, all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation have been made. Results of operations for the three months
ended September 30, 2000 are not necessarily indicative of those expected for
the period ending December 31, 2000.
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
8
REVENUE RECOGNITION
- -------------------
Revenues are recognized as services are provided. Deferred revenues, resulting
from customer prepayments, are recognized as services are provided throughout
the term of the agreement. Deferred revenues resulting from our agreement with
Data Transmission Network Corporation ("DTN") have been amortized over the
anticipated future revenue stream, a period of 42 months, commencing June 1,
1999. We have amended our agreement with DTN such that, effective September 1,
2000, Smartserv will perform maintenance and enhancement services through
December 2000 and provide operational support through August 2001. Therefore,
commencing September 1, 2000, deferred revenues are being amortized to income
over the period through August 2001.
BASIC AND DILUTED EARNINGS PER SHARE
- ------------------------------------
The weighted average shares outstanding are determined as the mean average of
the shares outstanding and assumed to be outstanding during the period.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
- --------------------------------------
In connection with certain contracts entered into between SmartServ and its
Strategic Marketing Partners, as well as other projects, we have capitalized
costs related to certain product enhancements and application development in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed",
effective July 1, 1998.
PROPERTY AND EQUIPMENT
- ----------------------
Property and equipment are stated at cost. Equipment purchased under a capital
lease has been recorded at the present value of the future minimum lease
payments at the date of acquisition. Depreciation is computed using the
straight-line method over estimated useful lives of three to ten years.
STOCK BASED COMPENSATION
- ------------------------
We maintain several stock option plans for employees and non-employee directors
that provide for the granting of stock options for a fixed number of shares with
an exercise price equal to the fair value of the shares at the date of grant. We
account for these stock compensation plans in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"). Accordingly, compensation expense is recognized to the extent
that the fair value of the stock exceeds the exercise price of the option at the
measurement date. Certain options, which have been repriced, are subject to the
variable plan requirements of APB No. 25, that requires us to record
compensation expense for changes in the fair value of our common stock.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. We do not believe that the adoption of SAB 101 will
have a material affect on our financial results.
RECLASSIFICATIONS
- -----------------
Certain amounts in the 1999 presentation have been reclassified to conform to
the 2000 presentation.
9
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 30, JUNE 30,
2000 2000
------------------- -----------------
Data processing equipment $ 1,257,387 $ 1,109,828
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 138,984 81,140
Display equipment 71,335 9,635
Leasehold improvements 36,678 36,678
------------------- -----------------
1,750,595 1,483,492
Accumulated depreciation, including $168,244 at September
30, 2000 and $155,933 at June 30, 2000 for equipment
purchased under a capital lease (891,736) (796,053)
------------------- -----------------
$ 858,859 $ 687,439
=================== =================
4. NOTE PAYABLE
On September 28, 2000, we entered into a $20,000,000 line of credit facility
with Hewlett-Packard Company. The agreement provides for the financing of the
acquisition of approved hardware, software and services, subject to our
continuing compliance with certain financial covenants. The facility is
evidenced by a note that bears interest at 11% per annum and is secured by
SmartServ's tangible assets. The note matures in three years from issuance and
may be converted into common stock at $33.56 per share.
5. EQUITY TRANSACTIONS
During the period ended September 30, 2000, we issued 237,946 shares of common
stock to certain investors at prices ranging from $2.63 to $14.64 per share upon
exercise of warrants to purchase such shares. Net proceeds from the exercise of
these warrants were $1,127,793.
During the period ended September 30, 2000, we issued warrants to purchase
50,000 shares of our common stock to a financial consultant as partial
consideration for services to be rendered to SmartServ. The warrants have an
exercise price of $49.50 per share and expire in April 2003.
6. STOCK-BASED COMPENSATION
In connection with the grant of certain stock options, warrants and other
compensation arrangements, we have recorded adjustments, both credits and
charges, to earnings that are noncash in nature. Certain of these grants are
subject to the variable plan requirements of APB No. 25 that require us to
adjust compensation expense for changes in the fair value of our common stock.
The following table shows the amount of stock-based compensation that would have
been recorded in the
10
categories of the statement of operations had stock-based compensation not been
separately stated therein:
THREE MONTHS ENDED SEPTEMBER 30
----------------------------------------
2000 1999
------------------ ------------------
Costs of revenues $ (1,112,161) $ --
Selling, general and administrative expenses (3,549,241) 272,951
------------------ ------------------
$ (4,661,402) $ 272,951
================== ==================
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
THREE MONTHS ENDED SEPTEMBER 30
----------------------------------------
2000 1999
------------------ ------------------
Numerator:
Net income (loss) $ 2,459,061 $ (315,667)
================== ==================
Denominator:
Weighted average shares - basic 5,296,859 1,368,046
================== ==================
Weighted average shares - diluted 9,091,970 1,368,046
================== ==================
Basic earnings (loss) per common share $ 0.47 $ (0.23)
================== ==================
Diluted earnings (loss) per common share $ 0.27 $ (0.23)
================== ==================
At September 30, 2000, $612,000 of our Prepaid Warrants were outstanding. At
that date, the Prepaid Warrants were convertible into 437,142 shares of common
stock. Additionally, there were warrants to purchase 2,572,815 shares of our
common stock outstanding. Such warrants have exercise prices ranging from $0.60
to $72.00 per share and expire from March 2001 through January 2005. Based on
the closing sale price ($35.75) of our common stock at September 30, 2000, there
were, exclusive of the Prepaid Warrants, currently exercisable in-the-money
warrants outstanding for the purchase of 2,522,000 shares of common stock.
Additionally, we have established several employee stock option plans and
granted options thereunder to our employees, directors, and consultants. These
options are intended to qualify as incentive stock options within the meaning of
Section 422 of the Internal Revenue Code, as amended, or as nonqualified stock
options. The options are partially exercisable after one year from date of grant
and no options may be granted after May 29, 2010. At September 30, 2000, there
were options outstanding for the purchase of 1,322,781 shares of our common
stock.
8. COMMITMENTS AND CONTINGENCIES
On or about June 4, 1999, Michael Fishman, our former Vice President of Sales,
commenced an action against us, Sebastian E. Cassetta (our Chairman of the Board
and Chief Executive Officer), Steven Francesco (our former President) and four
others in the Connecticut Superior Court for the Judicial District of
Stamford/Norwalk at Stamford alleging breach of contract, breach of duty of good
faith and fair dealing, fraudulent misrepresentation, negligent
misrepresentation, intentional misrepresentation and
11
failure to pay wages. The defendants have answered the complaint and filed
counterclaims for fraudulent inducement and breach of contract. Plaintiff has
responded to the counterclaim, and in compliance with direction from the court,
has filed an amended complaint. Although we are vigorously defending this
action, there can be no assurance that we will be successful.
On or about February 29, 2000, Commonwealth Associates, L.P. filed a complaint
against us in the Supreme Court of the State of New York, County of New York.
The complaint alleges that on or about August 19, 1999, Commonwealth and
SmartServ entered into an engagement letter pursuant to which Commonwealth was
to provide financial advisory and investment banking services to SmartServ in
connection with a possible combination between SmartServ and Data Link Systems
Corporation. The engagement letter provided for a nonrefundable fee of $15,000
payable in cash or common stock at SmartServ's option. The complaint alleges
that SmartServ elected to pay the fee in stock and seeks 13,333 shares of common
stock or at least $1,770,000 together with interest and costs. In our answer to
the complaint, we have denied the material allegations of the complaint,
including the allegation that we elected to pay in stock. Discovery has
commenced. Although we are vigorously defending this action, there can be no
assurance that we will be successful.
While we intend to vigorously defend these actions, the unfavorable outcome of
either such action could have a material adverse effect on our financial
condition, results of operations and cash flows.
9. SUBSEQUENT EVENTS
Subsequent to September 30, 2000, we issued 27,305 shares of common stock to
employees upon the exercise of options to purchase such shares. Proceeds from
the exercise of these options were $28,385.
On November 3, 2000, the Board of Directors increased the number of shares
available for issuance under the 2000 Employee Stock Option Plan by 600,000 to a
maximum of 1,525,000. Additionally, the Board authorized the issuance of options
to purchase 638,750 shares to employees and to non-employee directors at $19.00
per share, the fair value of the common stock at that date.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------ OF OPERATIONS
SmartServ is a business-to-business Web and wireless application services
provider specializing in building and hosting content-rich and
transaction-intensive applications for both mobile wireless and fixed wireline
users. We deliver Internet-based content and trade order routing solutions, as
well as "Web-to-Wireless" applications designed to facilitate e-commerce. We
have developed online financial, transactional and media applications using a
unique "device-independent" delivery solution and have designed applications
that enable the receipt of information and the execution of transactions on
wireless handsets, computers and personal digital assistants.
SmartServ's plan of operation includes programs for the sale of its information
and transactional application services through Strategic Marketing Partners
utilizing a "business-to-business" strategy. Such a strategy provides access to
a large number of potential subscribers and allows SmartServ to maximize its
market reach at minimal operating costs. The flexibility of SmartServ's
application software and communications architecture enables the customization
of each information package offered to each Strategic Marketing Partner, and in
turn to their end users.
As an early entrant in the dynamic market for the distribution of financial
information and transaction services via wireless telephones and personal
digital assistants, or PDAs, SmartServ is developing strategic marketing
relationships with wireless equipment manufacturers, carriers and other
value-added service providers and potential corporate partners. SmartServ
continuously seeks to increase product performance and widen its distribution by
building and maintaining this network of Strategic Marketing Partners. Combining
SmartServ's application development and data platform with the core competencies
of its Strategic Marketing Partners, SmartServ is offering a packaged turnkey
solution for extending content and transactions to the wireless environment.
Management believes the wireless area has tremendous potential for distribution
of SmartServ's information products and as a source of revenues from "fee based"
transactions such as routing stock order entries; however, we have yet to derive
any revenues from such efforts.
Management believes that most of SmartServ's revenues will be derived from
consumers who purchase its services through Strategic Marketing Partners.
SmartServ anticipates that Strategic Marketing Partners will brand its
information and transaction services with their own private label and promote
and distribute SmartServ's packaged offering to their clients. SmartServ has the
ability to customize the information package to be offered to each Strategic
Marketing Partner, by device.
Management anticipates that staffing requirements associated with the
implementation of its plan of operation will result in the addition of a minimum
of twenty-five people during the period ending June 30, 2001. Such personnel
will be added to assist primarily with the programming requirements of Strategic
Marketing Partners' product offerings, for customer support and sales and
marketing.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2000 VERSUS QUARTER ENDED SEPTEMBER 30, 1999
During the quarters ended September 30, 2000 and 1999, the Company's revenues
were $1,013,528 and $808,292, respectively. Substantially all of such revenues
were obtained from the Company's licensing agreement with Data Transmission
Network Corporation ("DTN"). During the quarters ended September 30, 2000 and
1999, we recognized $598,200 and $414,200, respectively, from the amortization
of deferred revenues associated with this agreement.
13
During the quarter ended September 30, 2000, the Company incurred costs of
services of $1,010,710. Such costs consisted primarily of systems consultants
($598,000), information and communication costs ($122,700), personnel costs
($236,200) and computer hardware lease, depreciation and maintenance costs
($53,400). During the quarter ended September 30, 1999, the Company incurred
costs of services of $232,866. Such costs consisted primarily of information and
communication costs ($48,400), personnel costs ($55,800) and computer hardware
lease, depreciation and maintenance costs ($84,600). Product development costs
were $417,776 and $46,845 for the quarters ended September 30, 2000 and 1999,
respectively. During the quarter ended September 30, 2000, such costs consisted
primarily of the amortization of capitalized software development costs related
to certain product enhancements in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed" ("Statement 86") ($227,200) and personnel
costs ($182,900). During the quarter ended September 30, 1999, such costs
consisted primarily of the amortization of capitalized software development
costs related to certain product enhancements. During the quarters ended
September 30, 2000 and 1999, the Company capitalized $160,300 and $244,200,
respectively, of development costs in accordance with Statement 86.
During the quarter ended September 30, 2000, the Company incurred selling,
general and administrative expenses of $2,138,811 vs. $582,314 for the quarter
ended September 30, 1999. Such costs were incurred primarily for personnel costs
($1,208,300), marketing and advertising costs ($79,200), professional fees
($578,700), and facilities ($54,900). Selling, general and administrative
expenses for the quarter ended September 30, 1999 were incurred primarily for
personnel costs ($202,700), marketing and advertising costs ($76,400),
professional fees ($177,500), facilities ($50,000) and telecommunications costs
($17,000).
During the quarter ended September 30, 2000, noncash credits for stock-based
compensation amounted to $4,661,402 compared to noncash charges of $272,951 for
the quarter ended September 30, 1999. In 2000, such noncash adjustments were
primarily related to personnel costs resulting from the valuation of stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"). Certain options are
subject to the variable plan requirements of APB No. 25, as they were repriced,
and therefore, compensation adjustments are recognized for changes in the fair
value of common stock during reporting dates. In 1999, such noncash charges
resulted primarily from the amortization of costs ascribed to common stock
purchase warrants previously issued to financial consultants.
Interest income for the quarters ended September 30, 2000 and 1999 amounted to
$351,428 and $11,017, respectively. Such amounts were earned primarily from the
Company's investments in short-tern commercial paper and cash balances.
14
CAPITAL RESOURCES AND LIQUIDITY
In June 1999, SmartServ and DTN entered into a License Agreement that amended
their previous agreement. In consideration of the receipt of $5.175 million, we
granted DTN an exclusive perpetual worldwide license to our Internet-based (1)
real-time stock quote product, (2) online trading vehicle for customers of small
and medium sized brokerage companies, (3) administrative reporting package for
brokers of small and medium sized brokerage companies and (4) order
entry/routing system. Additionally, we received $324,000 in exchange for an
agreement to issue warrants to purchase 300,000 shares of our common stock at an
exercise price of $8.60 per share. In November 2000, we amended the License
Agreement to provide that in consideration for a copy of the application source
code, Data Transmission Network will return both the domestic and international
marketing rights of the software applications to SmartServ. As part of our
strategy for providing information and transaction capabilities with device
independence, SmartServ will be able to market these applications in both
wireline and wireless platforms in conjunction with Strategic Marketing Partners
worldwide. Pursuant to this amendment, SmartServ will continue to perform
maintenance and enhancement services through December 2000, and provide
operational support through August 2001. Revenues earned by SmartServ pursuant
to this amendment will be $83,000 per month through August 2001.
In November 1998, we completed a financing for $550,000. We sold five and
one-half (5.5) units, each consisting of a secured convertible 8% note in the
principal amount of $100,000 and warrants to purchase common stock. The notes
and the warrants were initially convertible and exercisable, respectively, at
$.60 per share of common stock. Such notes were repaid in June 1999.
In July 1999, we entered into an agreement with Arnhold & S. Bleichroeder, Inc.
("ASB") to settle our obligation to ASB pursuant to the default provisions of
the Prepaid Warrants. In accordance with that agreement, we paid ASB $325,000 to
redeem the Prepaid Warrants held by them and issued 180,000 shares of common
stock in full settlement of all obligations.
In January 2000, America First Associates Corp., acting as placement agent for
SmartServ, completed a private placement of 233,000 shares of common stock at
$15.00 per share. We also completed a private placement of an additional 100,000
shares of common stock at $15.00 per share without the services of a placement
agent. The net proceeds of the two placements were used for general working
capital requirements.
During the year ended June 30, 2000, we issued 1,855,509 shares of common stock
to investors upon the exercise of warrants to purchase such shares. Proceeds
from the exercise of these warrants were $3,650,200. Additionally, we received
$1,127,800 from the exercise of warrants to purchase 237,946 shares of our
common stock during the period quarter ended September 30, 2000.
In May 2000, Chase Securities Inc., acting as placement agent for SmartServ,
completed a private placement of 353,535 shares of common stock at $49.50 a
share. The net proceeds of the placement of $16,750,000 were used for general
working capital requirements.
In May 2000, we entered into a Business Alliance Agreement with Hewlett Packard
Company whereby the companies agreed to jointly market their products and
services, and to work on the build-out of SmartServ's domestic and international
infrastructure. In furtherance of these objectives Hewlett-Packard will provide
us with up to $20,000,000 in secured financing for the acquisition of approved
hardware, software and services, subject to SmartServ's continuing compliance
with certain financial covenants. The debt is evidenced by a note, bearing an
interest rate of 11%, with a three year maturity and may be converted into our
common stock at $33.56 per share.
At September 30, 2000, we have 1,725,000 public warrants (SSOLW) and 300,000
warrants with terms identical to the public warrants outstanding. These warrants
are currently convertible into our common stock at the ratio of one warrant per
.5174 share of common stock at an exercise price of $7.73 per share.
15
These warrants are redeemable by SmartServ on not less than 30 days written
notice at the redemption price of $.10 per warrant, provided the average closing
bid quotation of the common stock as reported on the Nasdaq Stock Market has
been at least 187.5% of the current exercise price of the warrants for a period
of 20 consecutive trading days ending on the third day prior to the date on
which we give notice of redemption. Proceeds from the exercise of the warrants
by the holders thereof would provide us with approximately $8,000,000.
While we reported net income from operations of $2,107,600 for the quarter ended
September 30, 2000, our net loss from operations exclusive of stock-based
compensation costs was $2,553,800. Cash used in operations was $3,048,300, while
cash used for investing activities was $427,400.
We are currently involved in two lawsuits. Although we are vigorously defending
these actions, there can be no assurance that we will be successful. The
unfavorable outcome of either of these actions could have a material adverse
effect on our financial condition and cash flows. See Note 8 of the Notes to
Unaudited Financial Statements for a more detailed discussion of these actions.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. The Company does not believe that the adoption of
SAB 101 will have a material affect on the Company's financial results.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
- ----------------------------------------------
Forward-looking statements in this document and those made from time-to-time by
our employees are made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements concerning
future plans or results are necessarily only estimates and actual results could
differ materially from expectations. Certain factors that could cause or
contribute to such differences include, and are not limited to, potential
fluctuations in quarterly results, the size and timing of awards and performance
on contracts, dependence on large contracts and a limited number of customers,
dependence on wireless and/or internet networks of third-parties for certain
products and services, lengthy sales and implementation cycles, changes in
management's estimates incident to accounting for contracts, availability and
cost of key components, market acceptance of new or enhanced products and
services, proprietary technology and changing technology, competitive
conditions, system performance, management of growth, the risk that our current
and future products and services may contain errors or be affected by technical
problems that would be difficult and costly to detect and correct, dependence on
key personnel and general economic and political conditions and other factors
affecting spending by customers, and other risks described in this Quarterly
Report on Form 10-QSB and our other filings with the Securities and Exchange
Commission.
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PART 2. OTHER INFORMATION
SMARTSERV ONLINE, INC.
ITEM 1. LEGAL PROCEEDINGS
On or about June 4, 1999, Michael Fishman, our former Vice President of Sales,
commenced an action against us, Sebastian E. Cassetta (our Chairman of the Board
and Chief Executive Officer), Steven Francesco (our former President) and four
others in the Connecticut Superior Court for the Judicial District of
Stamford/Norwalk at Stamford alleging breach of contract, breach of duty of good
faith and fair dealing, fraudulent misrepresentation, negligent
misrepresentation, intentional misrepresentation and failure to pay wages. The
defendants have answered the complaint and filed counterclaims for fraudulent
inducement and breach of contract. Plaintiff has responded to the counterclaim,
and in compliance with direction from the court, has filed an amended complaint.
Although we are vigorously defending this action, there can be no assurance that
we will be successful.
On or about February 29, 2000, Commonwealth Associates, L.P. filed a complaint
against us in the Supreme Court of the State of New York, County of New York.
The complaint alleges that on or about August 19, 1999, Commonwealth and
SmartServ entered into an engagement letter pursuant to which Commonwealth was
to provide financial advisory and investment banking services to SmartServ in
connection with a possible combination between SmartServ and Data Link Systems
Corporation. The engagement letter provided for a nonrefundable fee of $15,000
payable in cash or common stock at SmartServ's option. The complaint alleges
that SmartServ elected to pay the fee in stock and seeks 13,333 shares of common
stock or at least $1,770,000 together with interest and costs. In our answer to
the complaint, we have denied the material allegations of the complaint,
including the allegation that we elected to pay in stock. Discovery has
commenced. Although we are vigorously defending this action, there can be no
assurance that we will be successful.
While we intend to vigorously defend these actions, the unfavorable outcome of
either such action could have a material adverse effect on our financial
condition, results of operations and cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In July 2000, we issued 200,000 shares of common stock to Steven Rosner, a
financial advisor to SmartServ, upon exercise of warrants to purchase such
shares. Proceeds from the exercise of the warrants were $625,000. No sales
commission was paid in connection with such transaction. The shares were issued
in reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act.
In August 2000, we issued 7,615 shares of our common stock to Wireless
Acquisition Partners, LLC, at prices ranging from $12 to $24 per share upon the
cashless exercise of warrants to purchase such shares. No sales commission was
paid in connection with such transaction. The shares were issued in reliance
upon the exemption from registration provided by Section 4(2) of the Securities
Act.
In September 2000, we issued 35,000 shares of our common stock to Wireless
Acquisition Partners, LLC upon exercise of warrants to purchase such shares.
Proceeds from the exercise of these warrants were $512,264. No sales commission
was paid in connection with such transaction. The shares were issued in reliance
upon the exemption from registration provided by Section 4(2) of the Securities
Act.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is included herein:
Exhibit 27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the three
months ended September 30, 2000.
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SMARTSERV ONLINE, INC.
SIGNATURES
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.
SmartServ Online, Inc.
(Registrant)
By:
Date: November 14, 2000 /S/ SEBASTIAN E. CASSETTA
----------------- ---------------------------------------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief Executive Officer
Date: November 14, 2000 /S/ ALAN G. BOZIAN
----------------- ---------------------------------------------------------
Executive Vice President, Chief Financial Officer
Date: November 14, 2000 /S/ THOMAS W. HALLER
----------------- ---------------------------------------------------------
Thomas W. Haller
Sr. Vice President, Chief Accounting Officer, Treasurer
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