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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2001
Commission file number 0-28008
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)
(203) 353-5950
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
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The number of shares of common stock, $.01 par value, outstanding as of July 27,
2001 was 6,058,573.
Transitional Small Business Disclosure Format (check one):
Yes No X
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SmartServ Online, Inc.
Form 10-QSB
Index
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
December 31, 2000 and June 30, 2001 (unaudited) ...................2
Consolidated Statements of Operations
- three months ended June 30, 2001 and
2000 and six months ended June 30,
2001 and 2000 (unaudited) ..........................................4
Consolidated Statement of Changes in Stockholders'
Equity - six months ended June 30, 2001 (unaudited)...................5
Consolidated Statements of Cash Flows
- three months ended June 30, 2001 and 2000
and six months ended June 30, 2001 and 2000 (unaudited) ..............6
Notes to Unaudited Consolidated 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 ...................................................17
Item 2. Changes in Securities and Use of Proceeds ...........................17
Item 6. Exhibits and Reports on Form 8-K ....................................18
Signatures ..........................................................19
1
SmartServ Online, Inc.
Consolidated Balance Sheets
June 30, December 31,
2001 2000
-------------- ------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $12,323,759 $19,172,118
Accounts receivable 100,997 149,016
Due from officer 500,000 --
Prepaid expenses 269,145 294,809
----------- -----------
Total current assets 13,193,901 19,615,943
----------- -----------
Property and equipment, net 3,393,558 2,658,808
Other assets
Capitalized software development costs, net of
accumulated amortization of $1,265,182 at
June 30, 2001 and $804,345 at December 31, 2000 1,238,962 1,416,751
Security deposits 475,067 200,374
Deferred financing costs 50,000 150,000
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1,764,029 1,767,125
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Total Assets $18,351,488 $24,041,876
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2
SmartServ Online, Inc.
Consolidated Balance Sheets
June 30, December 31,
2001 2000
-------------- ------------
(Unaudited)
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 1,663,167 $ 1,880,399
Accrued liabilities 1,180,674 1,357,270
------------ ------------
Total current liabilities 2,843,841 3,237,669
------------ ------------
Deferred revenues 644,243 2,576,981
Note payable 4,736,082 1,446,256
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 - 6,032,573 shares
at June 30, 2001 and 5,973,140 shares at
December 31, 2000 60,325 59,731
Additional paid-in capital 69,471,884 69,116,627
Notes receivable from officers (666,841) (666,841)
Unearned compensation (1,123,464) (1,726,574)
Accumulated deficit (57,614,582) (50,001,973)
------------ ------------
Total stockholders' equity 10,127,322 16,780,970
------------ ------------
Total Liabilities and Stockholders' Equity $ 18,351,488 $ 24,041,876
============ ============
See accompanying notes.
3
SmartServ Online, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Six Months
Ended June 30 Ended June 30
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2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues $ 1,222,866 $ 985,277 $ 2,447,837 $ 1,975,220
------------ ------------ ------------ ------------
Costs and expenses:
Costs of services (1,716,770) (493,203) (3,774,489) (757,456)
Advertising and marketing (808,678) (549,011) (2,156,415) (721,065)
expenses
General and administrative (1,699,268) (1,399,192) (3,305,919) (1,974,366)
expenses
Stock-based compensation (778,074) 5,365,002 (937,852) (8,636,005)
------------ ------------ ------------ ------------
Total costs and expenses (5,002,790) 2,923,596 (10,174,675) (12,088,892)
------------ ------------ ------------ ------------
Income (loss) from operations (3,779,924) 3,908,873 (7,726,838) (10,113,672)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 164,361 182,832 357,724 228,369
Interest expense (78,594) (2,025) (122,687) (2,025)
Debt origination and other
financing costs (50,000) -- (100,000) (10,000)
Foreign exchange losses (4,798) -- (20,808) --
------------ ------------ ------------ ------------
30,969 180,807 114,229 216,344
------------ ------------ ------------ ------------
Net income (loss) $ (3,748,955) $ 4,089,680 $ (7,612,609) $ (9,897,328)
============ ============ ============ ============
Basic income (loss) per share $ (0.65) $ 0.94 $ (1.32) $ (2.80)
============ ============ ============ ============
Diluted income (loss) per $ (0.65) $ 0.44 $ (1.32) $ (2.80)
share ============ ============ ============ ============
Weighted average shares
outstanding - basic 5,794,118 4,340,672 5,750,118 3,534,930
============ ============ ============ ============
Weighted average shares
outstanding - diluted 5,794,118 9,318,710 5,750,118 3,534,930
============ ============ ============ ============
See accompanying notes.
4
SmartServ Online, Inc.
Consolidated Statement of Changes in Stockholders' Equity
Six Months Ended June 30, 2001
(Unaudited)
Notes
Common Stock Receivable Additional
Par from Paid-in Unearned Accumulated
Shares Value Officers Capital Compensation Deficit
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Balances at December 31, 2000 5,973,140 $ 59,731 $ (666,841) $ 69,116,627 $ (1,726,574) $ (50,001,973)
Issuance of common stock upon
exercise of employee stock
options 19,433 194 -- 20,915 -- --
Conversion of 56 prepaid common
stock purchase warrants into
common stock 40,000 400 -- (400) -- --
Amortization of unearned
compensation over the terms of
consulting agreement -- -- -- -- 603,110 --
Change in market value of
employee stock options -- -- -- 334,742 -- --
Net loss for the period -- -- -- -- -- (7,612,609)
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Balances at June 30, 2001 6,032,573 $ 60,325 $ (666,841) $ 69,471,884 $ (1,123,464) $ (57,614,582)
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See accompanying notes.
5
SmartServ Online, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Six Months
Ended June 30 Ended June 30
---------------------------------------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Operating Activities
Net income (loss) $ (3,748,955) $ 4,089,680 $ (7,612,609) $ (9,897,328)
Adjustments to reconcile net income (loss) to net
cash used for operating activities:
Depreciation and amortization 607,045 192,235 1,204,674 339,126
Noncash debt origination and other financing
costs 50,000 (717,670) 100,000 (717,670)
Noncash compensation costs 481,519 (5,676,257) 334,742 7,948,595
Noncash consulting services 296,555 311,255 603,110 687,410
Amortization of deferred revenues (966,369) (414,160) (1,932,738) (828,320)
Changes in operating assets and liabilities
Accounts receivable (11,697) 28,967 48,019 149,509
Prepaid expenses (146,755) (9,895) 25,664 (162,179)
Accounts payable and accrued liabilities 616,215 2,020,019 1,362,301 2,155,729
Security deposit (274,693) -- (274,693) --
------------ ------------ ------------ ------------
Net cash used for operating activities (3,097,135) (175,826) (6,141,530) (325,128)
------------ ------------ ------------ ------------
Investing Activities
Purchase of equipment (9,500) (228,064) (136,882) (355,965)
Capitalization of software development costs (129,897) (275,189) (283,048) (568,708)
Loan to officer -- -- (500,000) --
------------ ------------ ------------ ------------
Net cash used for investing activities (139,397) (503,253) (919,930) (924,673)
------------ ------------ ------------ ------------
Financing Activities
Repayment of loans to officers -- 9,012 -- 9,012
Proceeds from the issuance of notes -- -- 191,992 --
Proceeds from the issuance of common stock 6,270 20,559,992 21,109 25,958,652
Repayment of capital lease obligation -- -- -- (23,942)
Costs of issuing securities -- (1,073,903) -- (1,073,903)
Proceeds from the issuance of warrants -- 24,746 -- 24,746
------------ ------------ ------------ ------------
Net cash provided by financing activities 6,270 19,519,847 213,101 24,894,565
------------ ------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (3,230,262) 18,840,768 (6,848,359) 23,644,764
Cash and cash equivalents - beginning of period 15,554,021 5,175,577 19,172,118 371,581
------------ ------------ ------------ ------------
Cash and cash equivalents - end of period $ 12,323,759 $ 24,016,345 $ 12,323,759 $ 24,016,345
============ ============ ============ ============
See accompanying notes.
6
SmartServ Online, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2001
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 m-commerce by providing
transactional and information services to our alliance partners. We have
developed online financial and transactional applications using a unique "device
agnostic" 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 m-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, both on the domestic and international fronts, 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.
In October 2000, we announced the change of our year end from a fiscal year
ending on June 30 to a calendar year ending on December 31 in order to conform
to standard industry practice. The new fiscal year commenced on January 1, 2001.
2. Summary of Significant Accounting Policies
Basis of Presentation
- ---------------------
The accompanying unaudited consolidated 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 accounting principles generally accepted in the
United States. The balance sheet at December 31, 2000 has been derived from the
audited financial statements at that date, but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. The financial statements
should be read in conjunction with the Company's Annual Report on Form 10-KSB
for the period ended December 31, 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 six months ended June
30, 2001 are not necessarily indicative of those expected for the year ending
December 31, 2001.
7
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
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") were 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 performed maintenance and enhancement services through December
2000 and will continue to provide operational support through August 2001.
Therefore, commencing September 1, 2000, deferred revenues are being amortized
to income on a straight-line basis over the period through August 2001.
Earnings Per Share
- ------------------
Basic earnings per share is computed on the weighted average number of common
shares outstanding. Diluted earnings per share reflects the increase in the
weighted average common shares outstanding that would result from the assumed
exercise of outstanding stock options and warrants calculated using the treasury
stock method.
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".
On an ongoing basis, SmartServ reviews the future recoverability of its
long-lived assets for impairment or whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. To date, no such
events or circumstances have occurred. If such events or changes in
circumstances do occur, we will recognize an impairment loss if the undiscounted
future cash flows expected to be generated by the asset are less than its
carrying value. The impairment loss would reduce the asset to its fair value.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of our financial instruments approximate fair value.
Supplemental Cash Flow Data
- ---------------------------
We consider all highly liquid investments with a maturity date of three months
or less when purchased to be cash equivalents.
Interest, debt origination and other financing costs paid during the three month
periods ended June 30, 2001 and 2000 were $41,700 and $1,500, respectively, and
for the six month periods ended June 30, 2001 and 2000 were $43,500 and $2,000,
respectively.
Concentration of Credit Risk
- ----------------------------
Financial instruments that potentially subject SmartServ to concentrations of
credit risk consist primarily of its accounts receivable and investments in
commercial paper and money market funds. It is management's policy to invest in
only those companies with a AAA credit rating; therefore, our commercial paper
and money fund investments are short-term and highly liquid. We perform periodic
credit evaluations of our customers and, if applicable, provide for credit
losses in the financial statements.
8
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Equipment purchased under a capital
lease is 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.
Advertising Costs
- -----------------
Advertising costs are expensed as incurred and were approximately $11,300 and
$38,700 during the three month periods ended June 30, 2001 and 2000,
respectively and $28,600 and $38,700 during the six month periods ended June 30,
2001 and 2000, respectively.
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.
3. Due From Officer
Our Board of Directors authorized the issuance of a line of credit to Sebastian
Cassetta for an amount not to exceed $500,000. Such amount bears interest at
market and is payable upon demand.
4. Property and Equipment
Property and equipment consist of the following:
June 30, December 31,
2001 2000
----------- -----------
Data processing equipment $ 4,699,312 $ 3,221,833
Data processing equipment purchased under a 246,211 246,211
capital lease
Office furniture and equipment 172,452 172,452
Display equipment 71,335 71,335
Leasehold improvements 55,569 54,462
----------- -----------
5,244,879 3,766,293
Accumulated depreciation, including $205,172
at June 30, 2001 and $180,555 at December 31,
2000 for equipment purchased under a capital
lease (1,851,321) (1,107,485)
----------- -----------
$ 3,393,558 $ 2,658,808
=========== ===========
5. Note Payable
In May 2000, we entered into a Business Alliance Agreement with Hewlett-Packard
Company whereby the companies agreed to jointly market their respective products
and services, and to work on the build-
9
out of SmartServ's domestic and international infrastructure. In furtherance of
these objectives Hewlett-Packard has provided us with a line of credit of up to
$20,000,000 for the acquisition of approved hardware, software and services. At
June 30, 2001, Hewlett-Packard Company had advanced us $4,736,082 under this
facility and will make available additional funds as SmartServ complies with
certain financial milestones. The debt is evidenced by a note, bearing an
interest rate of 11%, secured by the Company's assets, exclusive of its
internally developed software products, with a three year maturity and may be
converted into our common stock at $33.56 per share.
6. Stock-based Compensation
In connection with the grant of certain stock options, warrants and other
compensation arrangements, we have recorded 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 record compensation expense for changes in the
fair value of our common stock.
The following table shows the amount of stock-based compensation
(charges)/credits that would have been recorded in the categories of the
statement of operations had stock-based compensation not been separately stated
therein:
Three Months Six Months
Ended June 30 Ended June 30
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ -------------
Costs of services $ (160,372) $ 886,794 $ (132,612) $(2,152,296)
---------- ---------- ---------- -----------
Selling, general and
administrative expenses (617,702) 4,478,208 (805,240) (6,483,709)
---------- ---------- ---------- -----------
$ (778,074) $5,365,002 $ (937,852) $(8,636,005)
========== ========== ========== ===========
Stock-based compensation for the three and six month periods ended June 30, 2001
and 2000 consists of the impact of changes in the market value of the Company's
common stock on the value of options to purchase common stock issued to
employees, as well as the amortization of deferred costs associated with the
prior issuance of warrants to purchase common stock.
7. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ---------------------------
2001 2000 2001 2000
------------ ----------- ------------ ------------
Numerator:
Net income (loss) $ (3,748,955) $ 4,089,680 $ (7,612,609) $ (9,897,328)
============ =========== ============ ============
Denominator:
Denominator for basic
earnings per share -
weighted average
shares 5,794,118 4,340,672 5,750,118 3,534,930
10
Dilutive effect of
warrants to purchase -- 3,427,867 -- --
common stock
Dilutive effect of
employee stock options
and restricted shares -- 1,550,171 -- --
----------- ----------- ------------ ------------
Denominator for
diluted earnings per
share 5,794,118 9,318,710 5,750,118 3,534,930
=========== =========== ============ ============
Basic earnings (loss)
per common share $ (0.65) $ 0.94 $ (1.32) $ (2.80)
============ =========== ============ ============
Diluted earnings (loss)
per common share $ (0.65) $ 0.44 $ (1.32) $ (2.80)
============ =========== ============ ============
Outstanding employee stock options and other warrants to purchase an aggregate
of 4,397,062 shares of common stock at June 30, 2001 were not included in the
computation of diluted earnings per share because the Company reported a loss
for the period and, therefore their inclusion would be antidilutive.
8. Commitments and Contingencies
On or about June 4, 1999, Michael Fishman, our Vice President of Sales from
December 1997 to April 1998, 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 his employment contract, breach of duty of good faith and fair dealing,
fraudulent, negligent and 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 discovery is proceeding. Pursuant to a second amended complaint
filed by the plaintiff, only the failure to pay wages claims remain against the
individual defendants and all of the misrepresentation claims have been
withdrawn. 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. ("Commonwealth")
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.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
SmartServ is a Web and wireless applications developer providing wireless
applications, transaction platforms and middleware to financial institutions,
network service providers and other commercial enterprises that drive real time,
transaction-intensive wireless data services to their workforces and customers.
SmartServ's breadth of products and services ensures that businesses and their
customers can fully exploit the merits of wireless data exchange, using
virtually any wired or mobile device to make informed decisions and execute
transactions based on real-time information. SmartServ's solutions, which may be
hosted or installed, speed time-to-market, anticipate ever-changing technologies
and lower costs.
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 ("PDA"), SmartServ is developing strategic marketing
relationships with wireless equipment manufacturers, telecommunications
carriers, 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 continue to 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 ten
people during the year ending December 31, 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 June 30, 2001 versus Quarter Ended June 30, 2000
During the quarters ended June 30, 2001 and 2000, we recorded revenues of
$1,222,866 and $985,277, respectively. Substantially all of such revenues were
earned through our licensing agreement with Data Transmission Network
Corporation. During the quarters ended June 30, 2001 and 2000, we recognized
12
$966,369 and $414,160, respectively, from the amortization of deferred revenues
associated with this agreement.
During the quarter ended June 30, 2001, we incurred costs of services of
$1,716,770. Such costs consisted primarily of information and communication
costs ($207,400), personnel costs ($600,900), systems consultants ($236,600),
computer hardware leases, depreciation and maintenance costs ($424,200) and
amortization expenses relating to capitalized software development costs
($230,400). During the quarter ended June 30, 2000, we incurred costs of
services of $493,203. Such costs consisted primarily of information and
communication costs ($54,500), personnel costs ($129,700), systems consultants
($60,800), computer hardware leases, depreciation and maintenance costs
($113,600) and amortization expense relating to capitalized software development
costs ($121,000). During the quarters ended June 30, 2001 and 2000, we
capitalized $129,900 and $275,200, respectively, of development costs in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed".
During the quarter ended June 30, 2001, we incurred general and administrative
expenses of $1,699,268. Such costs were incurred primarily for personnel costs
($975,200), professional fees ($275,600), facilities ($178,400), insurance
($126,800) and communications costs ($43,400). During the quarter ended June 30,
2000, we incurred general and administrative expenses of $1,399,192. Such costs
were incurred primarily for personnel costs ($795,800), facilities ($122,000),
insurance ($40,500) and professional fees ($396,900). During the quarter ended
June 30, 2001, we incurred advertising and marketing expenses of $808,678. Such
costs were incurred primarily for personnel costs ($420,000), marketing
consultants ($162,500) and travel ($199,000). During the quarter ended June 30,
2000, we incurred advertising and marketing expenses of $549,011. Such costs
were incurred primarily for marketing consultants ($185,900), personnel
($174,200) and travel ($81,900).
During the quarter ended June 30, 2001, net noncash charges for stock-based
compensation amounted to $778,074 compared to income of $5,365,002 during the
quarter ended June 30, 2000. Such noncash amounts are primarily related to 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 expense/income is recognized for
changes in the fair value of our common stock. Noncash charges for professional
fees for the quarters ended June 30, 2001 and 2000, were $296,600 and $311,300,
respectively, resulting primarily from the amortization of deferred costs
associated with the prior issuance of warrants to purchase common stock to
various financial, marketing and technical consultants.
Interest income for the quarters ended June 30, 2001 and 2000 amounted to
$164,361 and $182,832, respectively. Such amounts were earned primarily from our
investments in highly liquid commercial paper and money fund accounts. During
the quarters ended June 30, 2001 and 2000, interest and other financing costs
were ($128,594) and ($2,025), respectively. During the quarter ended June 30,
2001, interest and other financing costs were incurred in connection with the
$20 million line of credit facility with Hewlett-Packard Company.
Basic loss per share was $0.65 for the quarter ended June 30, 2001 compared to
earnings per share of $0.94 for the quarter ended June 30, 2000. The weighted
average shares outstanding increased to 5,794,118 for the quarter ended June 30,
2001 from 4,340,672 weighted average shares outstanding for the quarter ended
June 30, 2000.
13
At June 30, 2001, the diluted loss per share was $0.65 compared to diluted
earnings of $0.44. The weighted average shares outstanding on a diluted basis
was 5,794,118 for the quarter ended June 30, 2001 compared to 9,318,710 for the
quarter ended June 30, 2000.
Six Months Ended June 30, 2001 versus Six Months Ended June 30, 2000
During the six months ended June 30, 2001 and 2000, we recorded revenues of
$2,447,837 and $1,975,220, respectively. Substantially all of such revenues were
earned through our licensing agreement with Data Transmission Network
Corporation. During the six months ended June 30, 2001 and 2000, we recognized
$1,932,738 and $828,320, respectively, from the amortization of deferred
revenues associated with this agreement.
During the six months ended June 30, 2001, we incurred costs of services of
$3,774,489. Such costs consisted primarily of information and communication
costs ($418,200), personnel costs ($1,162,400), systems consultants ($820,500),
computer hardware leases, depreciation and maintenance costs ($835,600) and
amortization expenses relating to capitalized software development costs
($460,800). During the six months ended June 30, 2000, we incurred costs of
services of $757,456. Such costs consisted primarily of information and
communication costs ($94,700), personnel costs ($176,800), systems consultants
($63,200), computer hardware leases, depreciation and maintenance costs
($194,700) and amortization expense relating to capitalized software development
costs ($209,400). During the six months ended June 30, 2001 and 2000, we
capitalized $283,048 and $568,708, respectively, of development costs in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed".
During the six months ended June 30, 2001, we incurred general and
administrative expenses of $3,305,919. Such costs were incurred primarily for
personnel costs ($1,707,600), professional fees ($662,900), facilities
($340,500), insurance ($229,700) and communications costs ($85,700). During the
six months ended June 30, 2000, we incurred general and administrative expenses
of $1,974,366. Such costs were incurred primarily for personnel costs
($1,018,500), facilities ($170,700), insurance ($55,500) and professional fees
($604,300). During the six months ended June 30, 2001, we incurred advertising
and marketing expenses of $2,156,415. Such costs were incurred primarily for
personnel costs ($737,700), marketing consultants ($736,700) and travel
($365,500). During the six months ended June 30, 2000, we incurred advertising
and marketing expenses of $721,065. Such costs were incurred primarily for
marketing consultants ($238,200), personnel ($211,700) and travel ($124,000).
During the six months ended June 30, 2001, net noncash charges for stock-based
compensation amounted to $937,852 compared to $8,636,005 during the six months
ended June 30, 2000. Such noncash amounts are primarily related to the valuation
of stock-based compensation in accordance with APB No. 25. Certain options are
subject to the variable plan requirements of APB No. 25, as they were repriced,
and therefore, compensation expense is recognized for changes in the fair value
of our common stock. Noncash charges for professional fees for the six months
ended June 30, 2001 and 2000, were $603,100 and $687,400, respectively,
resulting primarily from the amortization of deferred costs associated with the
prior issuance of warrants to purchase common stock to various financial,
marketing and technical consultants.
14
Interest income for the six months ended June 30, 2001 and 2000 amounted to
$357,724 and $228,369, respectively. Such amounts were earned primarily from our
investments in highly liquid commercial paper and money fund accounts. During
the six months ended June 30, 2001 and 2000, interest and other financing costs
were $222,687 and $12,025, respectively. During the six months ended June 30,
2001, interest and other financing costs were incurred in connection with the
$20 million line of credit facility with Hewlett-Packard Company. During the six
months ended June 30, 2000, interest and other financing costs were primarily
related to the partial redemption of our Prepaid Warrants.
Basic and diluted loss per share was $1.32 for the six months ended June 30,
2001 compared to $2.80 per share for the six months ended June 30, 2000. The
weighted average shares outstanding increased to 5,750,118 for the six months
ended June 30, 2001 from 3,534,930 weighted average shares outstanding for the
six months ended June 30, 2000.
Capital Resources and Liquidity
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.
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 respective products
and services and to work on the build-out of SmartServ's domestic and
international infrastructure. In furtherance of these objectives Hewlett-Packard
has provided us with a line of credit of up to $20,000,000 for the acquisition
of approved hardware, software and services. As of June 30, 2001,
Hewlett-Packard Company had advanced us $4,736,082 under this facility and will
make available additional funds as SmartServ complies with certain financial
milestones. The debt is evidenced by a secured 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.
During the period January 1, 2000 through June 30, 2001, we issued 2,212,888
shares of common stock to investors upon the exercise of warrants to purchase
such shares. Proceeds from the exercise of these warrants were $5,656,900.
As of June 30, 2001, we had 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
0.5174 share of common stock at an exercise price of $7.73 per share. These
warrants are redeemable by SmartServ on not less than 30 days written notice at
the redemption price of $0.10 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 loss of ($7,612,609) for the six months ended June 30,
2001, our net loss exclusive of net stock-based compensation charges was
($6,674,757). Cash used in operations was
15
$6,141,500. Cash used for investing activities was $919,900, while cash provided
by financing activities was $213,100.
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, results of operations and cash flows. See
Note 8 of the Notes to Unaudited Consolidated Financial Statements for a more
detailed discussion of these actions.
Since inception, we have met our cash flow needs through the issuance of common
stock and warrants to investors and the establishment of credit facilities with
investors and Hewlett-Packard Company. Based upon our current cash resources and
our anticipated revenue stream and expenses, we believe that we will have
sufficient liquidity to meet our obligations during the current year. Longer
term, we must execute our business plan and seek additional sources of
liquidity, such as the redemption and exercise of our outstanding warrants or
the sale of common stock.
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, 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.
16
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings
On or about June 4, 1999, Michael Fishman, our Vice President of Sales from
December 1997 to April 1998, 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 his employment contract, breach of duty of good faith and fair dealing,
fraudulent, negligent and 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 discovery is proceeding. Pursuant to a second amended complaint
filed by the plaintiff, only the failure to pay wages claims remain against the
individual defendants and all of the misrepresentation claims have been
withdrawn. 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
During the period January 2001 through July 2001, 91 Prepaid Warrants were
converted into an aggregate of 65,000 shares of our common stock. No sales
commissions were paid in connection with such conversion. The shares were issued
in reliance upon the exemption from registration provided by Section 3 (a) (9)
of the Securities Act.
In April 2001, we issued a warrant to purchase an aggregate of 2,000 shares of
common stock to Randy Granovetter as partial consideration for consulting
services to be provided to SmartServ as a member of its Advisory Board. The
warrant is exercisable after one year at an exercise price of $9.36 per share
and expires on April 15, 2005. No sales commissions were paid in connection with
such transaction. This warrant was 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) Exhibits:
None
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended June 30, 2001.
18
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: August 13, 2001 /s/ SEBASTIAN E. CASSETTA
--------------- ----------------------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief Executive
Officer
Date: August 13, 2001 /s/ THOMAS W. HALLER
--------------- ----------------------------------------
Thomas W. Haller
Sr. Vice President, Chief Financial
Officer, Treasurer