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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 SEPTEMBER 30, 2001
COMMISSION FILE NUMBER 0-28008
SMARTSERV ONLINE, INC.
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(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
----- -----
THE NUMBER OF SHARES OF COMMON STOCK, $.01 PAR VALUE, OUTSTANDING AS OF NOVEMBER
2, 2001 WAS 6,187,269.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES NO X
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SMARTSERV ONLINE, INC.
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - December 31, 2000 and
September 30, 2001 (unaudited)...................................2
Consolidated Statements of Operations - three months ended
September 30, 2001 and 2000 and nine months ended
September 30, 2001 and 2000 (unaudited)......................... 4
Consolidated Statement of Changes in Stockholders'
Equity - nine months ended September 30, 2001 (unaudited)........5
Consolidated Statements of Cash Flows - three months ended
Septemeber 30, 2001 and 2000 and nine months ended
September 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.......................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................18
Item 2. Changes in Securities and Use of Proceeds.......................18
Item 6. Exhibits and Reports on Form 8-K................................19
Signatures......................................................20
1
SmartServ Online, Inc.
Consolidated Balance Sheets
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------------- --------------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 9,655,199 $19,172,118
Accounts receivable 26,070 149,016
Due from officer 500,000 --
Prepaid expenses 992,073 294,809
----------- -----------
Total current assets 11,173,342 19,615,943
----------- -----------
Property and equipment, net 3,402,206 2,658,808
Other assets
Capitalized software development costs, net of
accumulated amortization of $205,311 at
September 30, 2001 and $804,345 at December 31, 2000 1,035,083 1,416,751
Security deposits 469,744 200,374
Deferred financing costs -- 150,000
----------- -----------
1,504,827 1,767,125
----------- -----------
Total Assets $16,080,375 $24,041,876
=========== ===========
2
SMARTSERV ONLINE, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------------- -------------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,027,532 $ 1,880,399
Accrued liabilities 836,350 1,357,270
------------ ------------
Total current liabilities 1,863,882 3,237,669
------------ ------------
Deferred revenues -- 2,576,981
Note payable 6,783,401 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 - 6,135,630 shares at September 30, 2001 and
5,973,140 shares at December 31, 2000 61,356 59,731
Additional paid-in capital 69,226,537 69,116,627
Notes receivable from officers (666,841) (666,841)
Unearned compensation (831,909) (1,726,574)
Accumulated deficit (60,356,051) (50,001,973)
------------ ------------
Total stockholders' equity 7,433,092 16,780,970
------------ ------------
Total Liabilities and Stockholders' Equity $ 16,080,375 $ 24,041,876
============ ============
SEE ACCOMPANYING NOTES.
3
SMARTSERV ONLINE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
--------------------------------------- ----------------------------------------
2001 2000 2001 2000
------------------- ----------------- ----------------- --------------------
Revenues $ 824,990 $ 1,013,528 $ 3,272,827 $ 2,988,748
------------ ------------ ------------ ------------
Costs and expenses:
Costs of services (1,712,718) (1,428,486) (5,487,207) (2,185,942)
Advertising and marketing expenses (596,720) (568,442) (2,753,135) (1,289,507)
General and administrative expenses (1,371,150) (1,570,369) (4,677,069) (3,544,735)
Stock-based compensation 202,837 4,661,402 (735,015) (3,974,603)
------------ ------------ ------------ ------------
Total costs and expenses (3,477,751) 1,094,105 (13,652,426) (10,994,787)
------------ ------------ ------------ ------------
Income (loss) from operations (2,652,761) 2,107,633 (10,379,599) (8,006,039)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 101,875 351,428 459,599 579,797
Interest expense (138,072) -- (260,759) (2,025)
Debt origination and other
financing costs (50,000) -- (150,000) (10,000)
Foreign exchange losses (2,511) -- (23,319) --
------------ ------------ ------------ ------------
(88,708) 351,428 25,521 567,772
------------ ------------ ------------ ------------
Net income (loss) $ (2,741,469) $ 2,459,061 $(10,354,078) $ (7,438,267)
============ ============ ============ ============
Basic income (loss) per share $ (0.46) $ 0.46 $ (1.78) $ (1.80)
============ ============ ============ ============
Diluted income (loss) per share $ (0.46) $ 0.27 $ (1.78) $ (1.80)
============ ============ ============ ============
Weighted average shares outstanding -
basic 5,931,229 5,296,859 5,811,152 4,127,087
============ ============ ============ ============
Weighted average shares outstanding -
diluted 5,931,229 9,091,970 5,811,152 4,127,087
============ ============ ============ ============
SEE ACCOMPANYING NOTES
4
SMARTSERV ONLINE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
NOTES
COMMON STOCK RECEIVABLE ADDITIONAL
PAR FROM PAID-IN UNEARNED ACCUMULATED
SHARES VALUE OFFICERS CAPITAL COMPENSATION DEFICIT
---------------------------- ------------- --------------- -------------- ----------------
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 24,433 244 -- 23,309 -- --
Conversion of 91 prepaid
common stock purchase
warrants into common stock 65,000 650 -- (650) -- --
Issuance of warrants to
purchase common stock as
compensation for services -- -- -- 16,500 -- --
Issuance of common stock upon
exercise of warrants 73,057 731 -- 246,901 -- --
Amortization of unearned
compensation over the terms
of consulting agreement -- -- -- -- 894,665 --
Change in market value of
employee stock options -- -- -- (176,150) -- --
Net loss for the period -- -- -- -- -- (10,354,078)
------------ ---------- -------------- ------------ ------------ ------------
Balances at September 30, 2001 6,135,630 $ 61,356 $ (666,841) $ 69,226,537 $ (831,909) $(60,356,051)
============ ========== ============== ============ ============ ============
SEE ACCOMPANYING NOTES.
5
SMARTSERV ONLINE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------ ------------------
2001 2000 2001 2000
---- ---- ---- ----
OPERATING ACTIVITIES
Net income (loss) $ (2,741,469) $ 2,459,061 $(10,354,078) $ (7,438,267)
Adjustments to reconcile net income (loss) to net
cash used for operating activities:
Depreciation and amortization 664,991 322,844 1,869,665 661,970
Noncash debt origination and other financing
costs 50,000 -- 150,000 (717,670)
Noncash compensation costs (510,892) (4,992,657) (176,150) 3,287,193
Noncash consulting services 308,055 331,255 911,165 687,410
Amortization of deferred revenues (644,243) (598,229) (2,576,981) (1,426,549)
Changes in operating assets and liabilities
Accounts receivable 74,927 107,492 122,946 257,001
Prepaid expenses (722,928) (116,592) (697,264) (278,771)
Accounts payable and accrued liabilities 22,125 (434,435) 1,384,426 1,721,294
Security deposit 5,323 (127,000) (269,370) (127,000)
------------ ------------ ------------ ------------
Net cash used for operating activities (3,494,111) (3,048,261) (9,635,641) (3,373,389)
------------ ------------ ------------ ------------
INVESTING ACTIVITIES
Purchase of equipment (15,428) (267,103) (152,310) (623,068)
Capitalization of software development costs (79,478) (160,269) (362,526) (728,977)
Loan to officer -- -- (500,000) --
------------ ------------ ------------ ------------
Net cash used for investing activities (94,906) (427,372) (1,014,836) (1,352,045)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES
Proceeds from the issuance of notes 670,381 -- 862,373 --
Proceeds from the issuance of common stock 250,076 1,127,793 271,185 27,095,457
Repayment of capital lease obligation -- -- -- (23,942)
Costs of issuing securities -- -- -- (1,073,903)
Proceeds from the issuance of warrants -- -- -- 24,746
------------ ------------ ------------ ------------
Net cash provided by financing activities 920,457 1,127,793 1,133,558 26,022,358
------------ ------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (2,668,560) (2,347,840) (9,516,919) 21,296,924
Cash and cash equivalents - beginning of period 12,323,759 24,016,345 19,172,118 371,581
------------ ------------ ------------ ------------
Cash and cash equivalents - end of period $ 9,655,199 $ 21,668,505 $ 9,655,199 $ 21,668,505
============ ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
- ----------------------------------
The Company has purchased hardware and various consulting services from
Hewlett-Packard Company, pursuant to the terms of its line of credit facility
with Hewlett-Packard. During the three and nine month periods ended September
30, 2001, these purchases amounted to $1,473,400 and $3,001,400, respectively.
SEE ACCOMPANYING NOTES.
6
SMARTSERV ONLINE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
1. NATURE OF BUSINESSS
SmartServ Online, Inc. ("SmartServ") 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, SMS ("short message services") 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 nine months ended
September 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 amended our agreement with DTN such that, effective September 1, 2000,
SmartServ performed maintenance and enhancement services through December 2000
and operational support through August 2001. Therefore, commencing September 1,
2000, deferred revenues were being amortized to income on a straight-line basis
over the period through August 2001.
EARNINGS PER SHARE
- ------------------
Basic earnings per share is computed based 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 September 30, 2001 and 2000 were $138,072 and $-0-, respectively,
and for the nine month periods ended September 30, 2001 and 2000 were $260,759
and $2,025, 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 $18,800 and
$200 during the three month periods ended September 30, 2001 and 2000,
respectively, and $47,400 and $38,900 during the nine month periods ended
September 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, SmartServ's Chief Executive Officer, 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:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------------- -----------------
Data processing equipment $ 5,083,143 $ 3,221,833
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 178,903 172,452
Display equipment 71,335 71,335
Leasehold improvements 55,569 54,462
------------------- -----------------
5,635,161 3,766,293
Accumulated depreciation, including $205,176 at September
30, 2001 and $180,555 at December 31, 2000 for equipment
purchased under a capital lease (2,232,955) (1,107,485)
------------------- -----------------
$ 3,402,206 $ 2,658,808
=================== =================
9
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-out of SmartServ's domestic and
international infrastructure. In furtherance of these objectives Hewlett-Packard
provided us with a line of credit of up to $20,000,000 for the acquisition of
approved hardware, software and services. As of September 28, 2001, the
expiration date of the facility, SmartServ had borrowed $6,783,401. 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 NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
--------------------------------------- --------------------------------------
2001 2000 2001 2000
------------------ ----------------- ------------------ ------------------
Costs of services $ 150,168 $ 1,112,161 $ 2,323 $ (1,040,135)
Selling, general and
administrative expenses 52,669 3,549,241 (737,338) (2,934,468)
------------------ ----------------- ------------------ ------------------
$ 202,837 $ 4,661,402 $ (735,015) $ (3,974,603)
================== ================= ================== ==================
Stock-based compensation for the three and nine month periods ended September
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 SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
--------------------------------------- --------------------------------------
2001 2000 2001 2000
------------------ ----------------- ------------------ ------------------
Numerator:
Net income (loss) $ (2,741,469) $ 2,459,061 $ (10,354,078) $ (7,438,267)
================== ================= ================== ==================
10
Denominator:
Denominator for basic earnings
per share - weighted average
shares 5,931,229 5,296,859 5,811,152 4,127,087
Dilutive effect of warrants to
purchase common stock -- 2,748,285 -- --
Dilutive effect of employee stock
options and restricted shares -- 1,046,826 -- --
------------------ ----------------- ------------------ ------------------
Denominator for diluted earnings
per share 5,931,229 9,091,970 5,811,152 4,127,087
================== ================= ================== ==================
Basic earnings (loss) per
common share $ (0.46) $ 0.46 $ (1.78) $ (1.80)
================== ================= ================== ==================
Diluted earnings (loss) per
common share $ (0.46) $ 0.27 $ (1.78) $ (1.80)
================== ================= ================== ==================
At September 30, 2001, outstanding employee stock options and other warrants to
purchase an aggregate of 4,474,000 shares of common stock were not included in
the computation of diluted earnings per share because the Company reported a
loss for the three and nine month periods then ended and, therefore their
inclusion would be antidilutive. Similarly, at September 30, 2000, outstanding
employee stock options and other warrants to purchase an aggregate of 4,813,500
shares of common stock were not included in the computation of diluted earnings
per share because the Company reported a loss for the nine month period then
ended.
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 his employment 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. The fraud and misrepresentation claims have
been dismissed. Plaintiff has responded to the counterclaim and discovery is
proceeding. 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
11
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.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- OF OPERATIONS
SmartServ is a Web and wireless applications developer offering 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 products and services ensure 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 customers.
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
and SMS ("short messaging services"); 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 customers. 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 4 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 SEPTEMBER 30, 2001 VERSUS QUARTER ENDED SEPTEMBER 30, 2000
During the quarters ended September 30, 2001 and 2000, we recorded revenues of
$824,990 and $1,013,528, respectively. Substantially all of such revenues were
earned through our licensing agreement with Data Transmission Network
Corporation. During the quarters ended September 30, 2001 and 2000,
13
we recognized $644,243 and $598,229, respectively, from the amortization of
deferred revenues associated with this agreement.
During the quarter ended September 30, 2001, we incurred costs of services of
$1,712,718. Such costs consisted primarily of information and communication
costs ($114,600), personnel costs ($592,200), systems consultants ($148,700),
computer hardware leases, depreciation and maintenance costs ($434,800),
facilities ($114,700) and amortization expenses relating to capitalized software
development costs ($285,200). During the quarter ended September 30, 2000, we
incurred costs of services of $1,428,486. Such costs consisted primarily of
information and communication costs ($124,300), personnel costs ($398,700),
systems consultants ($598,300), computer hardware leases, depreciation and
maintenance costs ($51,400) and amortization expenses relating to capitalized
software development costs ($227,200). During the quarters ended September 30,
2001 and 2000, we capitalized $79,500 and $160,300, 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 September 30, 2001, we incurred general and
administrative expenses of $1,371,150. Such costs were incurred primarily for
personnel costs ($677,200), professional fees ($216,900), facilities ($142,200),
insurance ($120,600) and communications costs ($55,200). During the quarter
ended September 30, 2000, we incurred general and administrative expenses of
$1,570,369. Such costs were incurred primarily for personnel costs ($741,500),
facilities ($54,900), insurance ($71,700) and professional fees ($473,400).
During the quarter ended September 30, 2001, we incurred advertising and
marketing expenses of $596,720. Such costs were incurred primarily for personnel
costs ($352,200), marketing consultants ($82,600) and travel ($117,400). During
the quarter ended September 30, 2000, we incurred advertising and marketing
expenses of $568,442. Such costs were incurred primarily for marketing
consultants ($124,700), personnel ($276,900) and travel ($81,700).
During the quarter ended September 30, 2001, net noncash credits for stock-based
compensation for employees amounted to $510,892 compared to credits of
$4,992,657 during the quarter ended September 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 consulting services for the quarters ended September 30,
2001 and 2000 were $308,055 and $331,255, 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 September 30, 2001 and 2000 amounted to
$101,875 and $351,428, respectively. Such amounts were earned primarily from our
investments in highly liquid commercial paper and money fund accounts. During
the quarters ended September 30, 2001 and 2000, interest and other financing
costs were $188,072 and $-0-, respectively. During the quarter ended September
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 $0.46 for the quarter ended September 30, 2001 compared
to earnings per share of $0.46 for the quarter ended September 30, 2000. The
weighted average shares outstanding increased to 5,931,229 for the quarter ended
September 30, 2001 from 5,296,859 weighted average shares outstanding for the
quarter ended September 30, 2000.
14
At September 30, 2001, the diluted loss per share was $0.46 compared to diluted
earnings per share of $0.27. The weighted average shares outstanding on a
diluted basis was 5,931,229 for the quarter ended September 30, 2001 compared to
9,091,970 for the quarter ended September 30, 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2001 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2000
During the nine months ended September 30, 2001 and 2000, we recorded revenues
of $3,272,827 and $2,988,748, respectively. Substantially all of such revenues
were earned through our licensing agreement with Data Transmission Network
Corporation. During the nine months ended September 30, 2001 and 2000, we
recognized $2,577,000 and $1,426,500, respectively, from the amortization of
deferred revenues associated with this agreement.
During the nine months ended September 30, 2001, we incurred costs of services
of $5,487,207. Such costs consisted primarily of information and communication
costs ($312,000), personnel costs ($1,762,600), systems consultants ($971,700),
computer hardware leases, depreciation and maintenance costs ($1,277,200),
facilities ($340,400) and amortization expenses relating to capitalized software
development costs ($746,000). During the nine months ended September 30, 2000,
we incurred costs of services of $2,185,942. Such costs consisted primarily of
information and communication costs ($219,000), personnel costs ($576,400),
systems consultants ($676,500), computer hardware leases, depreciation and
maintenance costs ($246,100) and amortization expenses relating to capitalized
software development costs ($436,600). During the nine months ended September
30, 2001 and 2000, we capitalized $362,500 and $729,000, 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 nine months ended September 30, 2001, we incurred general and
administrative expenses of $4,677,069. Such costs were incurred primarily for
personnel costs ($2,397,100), professional fees ($879,900), facilities
($482,700), insurance ($350,200) and communications costs ($141,100). During the
nine months ended September 30, 2000, we incurred general and administrative
expenses of $3,544,735. Such costs were incurred primarily for personnel costs
($1,759,900), facilities ($148,000), insurance ($127,200), professional fees
($1,078,400) and communications costs ($75,500). During the nine months ended
September 30, 2001, we incurred advertising and marketing expenses of
$2,753,135. Such costs were incurred primarily for personnel costs ($1,089,800),
marketing consultants ($819,300) and travel ($482,900). During the nine months
ended September 30, 2000, we incurred advertising and marketing expenses of
$1,289,507. Such costs were incurred primarily for marketing consultants
($362,900), personnel ($488,500) and travel ($205,700).
During the nine months ended September 30, 2001, net noncash credit for
stock-based compensation for employees amounted to $176,150 compared to noncash
charges of $3,287,193 during the nine months ended September 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 consulting services for the nine months ended
September 30, 2001 and 2000 were $911,165 and $687,410, 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 nine months ended September 30, 2001 and 2000 amounted
to $459,599 and $579,797, respectively. Such amounts were earned primarily from
our investments in highly liquid commercial paper and money fund accounts.
During the nine months ended September 30, 2001 and 2000,
15
interest and other financing costs were $410,759 and $12,025, respectively.
During the nine months ended September 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 nine months ended September 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 $1.78 for the nine months ended September
30, 2001 compared to a basis and diluted loss per share of $1.80 for the nine
months ended September 30, 2000. The weighted average shares outstanding
increased to 5,811,152 for the nine months ended September 30, 2001 from
4,127,087 weighted average shares outstanding for the nine months ended
September 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
provided us with a line of credit of up to $20,000,000 for the acquisition of
approved hardware, software and services. As of September 28, 2001, the
expiration date of the facility, Hewlett-Packard Company had advanced us
$6,783,401 thereunder. 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 September 30, 2001, we issued
2,310,945 shares of common stock to investors upon the exercise of warrants to
purchase such shares. Proceeds from the exercise of these warrants were
$5,906,900.
As of September 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 a net loss of $10,354,078 for the nine months ended September
30, 2001, our net loss exclusive of net stock-based compensation charges was
$9,619,063. Cash used in daily operations was $9,635,600. Cash used for
investing activities was $1,014,800 while cash provided by financing activities
was $1,133,600.
16
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.
17
PART 2. OTHER INFORMATION
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 his employment 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. The fraud and misrepresentation claims have
been dismissed. Plaintiff has responded to the counterclaim, and discovery is
proceeding. 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 November 2, 2001, 121 Prepaid Warrants
were converted into an aggregate of 86,400 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,
expires on April 15, 2005, and has been valued based on the Black-Scholes
pricing methodology. 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.
In August 2001, we issued 10,000 shares of common stock to Todd Peterson upon
the exercise of warrants to purchase such shares. No sales commissions were 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.
Proceeds from the exercise of the warrants were $30,000.
18
In August 2001, we issued 23,057 shares of common stock to Bruno Guazzoni upon
the exercise of warrants to purchase such shares. No sales commissions were 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.
Proceeds from the exercise of the warrants were $100,000.
In September 2001, we issued 40,000 shares of common stock to Michael Silva upon
the exercise of warrants to purchase such shares. No sales commissions were 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.
Proceeds from the exercise of the warrants were $120,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) REPORTS ON FORM 8-K
On August 2, 2001, the Company filed a report on Form 8-K referencing
a press release, dated October 31, 2000, announcing its intention to change to a
calendar-based financial reporting period. The Company's Form 10-KSB covering
the transition period was filed with the Securities and Exchange Commission on
April 2, 2001.
19
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, 2001 /s/ SEBASTIAN E. CASSETTA
----------------- --------------------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief Executive
Officer
Date: November 14, 2001 /s/ THOMAS W. HALLER
----------------- --------------------------------------
Thomas W. Haller
Sr. Vice President, Chief Financial
Officer, Treasurer
20