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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 MARCH 31, 2002
COMMISSION FILE NUMBER 0-28008
SMARTSERV ONLINE, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3750708
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(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 MAY 5,
2002 WAS 6,305,240.
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 - March 31, 2002 (unaudited) and
December 31, 2001....................................................2
Consolidated Statements of Operations - three months ended
March 31, 2002 and 2001
(unaudited)..........................................................4
Consolidated Statement of Changes in Stockholders' Equity
(Deficiency) - three months ended March 31, 2002
(unaudited)..........................................................5
Consolidated Statements of Cash Flows - three months ended
March 31, 2002 and 2001
(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...................................................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
MARCH 31, DECEMBER 31,
2002 2001
----------- -----------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 3,036,655 $ 6,532,323
Accounts receivable 103,521 40,798
Prepaid expenses 381,426 531,028
----------- -----------
Total current assets 3,521,602 7,104,149
----------- -----------
Property and equipment, net 3,137,857 3,408,776
Other assets
Capitalized software development costs, net of
accumulated amortization of $330,960 at
March 31, 2002 and $268,619 at December 31, 2001 983,051 973,594
Security deposits 491,538 474,545
Notes receivable from officer 500,000 500,000
----------- -----------
1,974,589 1,948,139
----------- -----------
Total Assets $ 8,634,048 $12,461,064
=========== ===========
2
SMARTSERV ONLINE, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable $ 1,315,259 $ 1,329,105
Accrued liabilities 725,351 695,134
------------ ------------
Total current liabilities 2,040,610 2,024,239
------------ ------------
Deferred revenues 82,000 --
Note payable 6,723,156 6,723,156
COMMITMENTS AND CONTINGENCIES - NOTE 8
STOCKHOLDERS' EQUITY (DEFICIENCY)
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 - 6,304,040 shares at March 31, 2002 and
6,263,783 shares at December 31, 2001 63,040 62,638
Additional paid-in capital 69,572,362 69,680,059
Notes receivable from officers (666,841) (666,841)
Unearned compensation (249,099) (540,354)
Accumulated deficit (68,931,180) (64,821,833)
------------ ------------
Total stockholders' equity (deficiency) (211,718) 3,713,669
------------ ------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 8,634,048 $ 12,461,064
============ ============
See accompanying notes.
3
SMARTSERV ONLINE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31
--------------------------
2002 2001
----------- -----------
Revenues $ 28,821 $ 1,224,971
----------- -----------
Costs and expenses:
Costs of services (1,531,526) (2,057,719)
Sales and marketing expenses (1,243,354) (1,347,737)
General and administrative expenses (1,021,550) (1,606,651)
Stock-based compensation (172,015) (159,778)
----------- -----------
Total costs and expenses (3,968,445) (5,171,885)
----------- -----------
Loss from operations (3,939,624) (3,946,914)
Other income (expense)
Interest income 22,684 193,363
Interest expense and other financing costs (182,241) (94,093)
Foreign exchange loss (10,166) (16,010)
----------- -----------
(169,723) 83,260
----------- -----------
Net loss $(4,109,347) $(3,863,654)
=========== ===========
Basic and diluted loss per common share $ (0.66) $ (0.68)
=========== ===========
Weighted average shares outstanding - basic and diluted 6,255,960 5,705,629
=========== ===========
See accompanying notes.
4
SMARTSERV ONLINE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
NOTES
COMMON STOCK RECEIVABLE ADDITIONAL
PAR FROM PAID-IN UNEARNED ACCUMULATED
SHARES VALUE OFFICERS CAPITAL COMPENSATION DEFICIT
------------------------------------------------------------------------------------------
Balances at December 31, 2001 6,263,783 $ 62,638 $ (666,841) $ 69,680,059 $ (540,354) $ (64,821,833)
Issuance of common stock upon
exercise of employee stock
options 12,400 124 -- 11,821 -- --
Conversion of 39 prepaid
common stock purchase
warrants into common stock 27,857 278 -- (278) -- --
Amortization of unearned
compensation over the terms
of consulting agreement -- -- -- -- 291,255 --
Change in market value of
employee stock options -- -- -- (119,240) -- --
Net loss for the period -- -- -- -- -- (4,109,347)
------------------------------------------------------------------------------------------
Balances at March 31, 2002 6,304,040 $ 63,040 $ (666,841) $ 69,572,362 $ (249,099) $ (68,931,180)
==========================================================================================
See accompanying notes.
5
SMARTSERV ONLINE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31
----------------------------
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net loss $ (4,109,347) $ (3,863,654)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 501,750 597,629
Noncash compensation costs (119,240) (146,777)
Noncash consulting services 291,255 306,555
Amortization of deferred revenues -- (966,369)
Amortization of deferred financing costs -- 50,000
Changes in operating assets and liabilities
Accounts receivable (62,723) 59,716
Prepaid expenses 149,602 172,419
Accounts payable and accrued liabilities 16,371 746,086
Deferred revenues 82,000 --
Security deposit (16,993) --
------------ ------------
Net cash used for operating activities (3,267,325) (3,044,395)
------------ ------------
INVESTING ACTIVITIES
Purchase of equipment (168,490) (127,382)
Capitalization of software development costs (71,798) (153,151)
Due from officer -- (500,000)
------------ ------------
Net cash used for investing activities (240,288) (780,533)
------------ ------------
FINANCING ACTIVITIES
Proceeds from the issuance of note -- 191,992
Issuance of common stock 11,945 14,839
------------ ------------
Net cash provided by financing activities 11,945 206,831
------------ ------------
Decrease in cash and cash equivalents (3,495,668) (3,618,097)
Cash and cash equivalents - beginning of period 6,532,323 19,172,118
------------ ------------
Cash and cash equivalents - end of period $ 3,036,655 $ 15,554,021
============ ============
See accompanying notes.
6
SMARTSERV ONLINE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
1. NATURE OF BUSINESS
SmartServ Online, Inc. commenced operations on August 20, 1993. We provide Web
and wireless applications and infrastructure that allow financial institutions,
network service providers and other businesses to deliver content and
transaction-intensive services to their work forces and customers - via
virtually any wired or data-enabled wireless device. SmartServ's products
include content, transaction processing and alert engines, proprietary W2W
MiddlewareTM that optimizes content delivery to a full array of present and
future devices, and a suite of applications designed to enable businesses and
their customers to exploit the benefits of wireless data exchange and
transactional capability. Our products facilitate stock trading and other
m-commerce transactions, as well as the dissemination of real-time stock quotes,
business and financial news, sports information, national weather reports and
other business and entertainment information in a user-friendly manner.
Our plan of operation focuses on the business-to-business strategy of marketing
our services in partnership with those companies that have an economic incentive
to provide our information and transaction services to their customers. We
continue to focus on two primary areas: telecommunications and financial
services. For the telecommunications sector, SmartServ provides a suite of
solutions to help the wireless carriers, handset manufacturers and Internet
service providers rapidly expand the delivery of products and services to their
customers. The Company's platform supports an array of features and
transaction-enabling applications designed to drive service usage and network
revenues. For the financial services sector, SmartServ seeks to expand its
customer base among both institutional and retail financial services enterprises
by leveraging its transaction routing engine and W2W MiddlewareTM with a suite
of applications designed to meet the rigorous demands of the financial
community. Management believes that SmartServ's primary source of revenues will
be derived from consumers who purchase the services through these strategic
marketing partners.
Delays in the build-out of carrier data networks and the unavailability of
data-enabled wireless devices have caused the market for SmartServ's data and
transaction services to be virtually non-existent until now. Such delays have
resulted in the Company's inability to implement its business plan and related
marketing strategies. Consequently, the Company is in need of additional capital
to compensate for such delays and their impact on the Company's inability to
generate revenues. The Company has engaged investment bankers to assist it with
the sale of equity to private investors that understand the wireless industry
and the current state of the technology.
The Company's financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. The Company incurred a net
loss of $4,109,347 for the three month period ended March 31, 2002, a net loss
of $14,819,860 for the year ended December 31, 2001, and net losses of
$30,993,559 and $7,124,126 for the years ended June 30, 2000 and 1999,
respectively. Additionally, it had an accumulated deficit of $68,931,180 at
March 31, 2002. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
7
As carriers, such as Verizon Wireless, AT&T Wireless and Cingular, complete the
build-out of data networks (a process that is currently underway), management
believes that the demand for the Company's services will increase from the
enterprise customer, as well as the retail customers of the carriers themselves.
Notwithstanding the execution of several contracts in the latter part of 2001
and the continual discussions with potential strategic partners about future
relationships, the Company's ability to generate revenues and working capital
may not be sufficient to meet management's objectives as presently structured.
Additionally, increasing competition in the market for the Company's services
could materially and adversely affect the Company's results of operations
through price reductions and loss of potential market share. Management
recognizes that the Company must generate additional revenues, raise additional
capital, consider modifications to its sales and marketing program or institute
cost reductions to allow it to continue to operate with available cash
resources. There is no assurance that the Company will generate future revenues
or cash flow from operations, raise additional capital, or that the Company's
products and services will continue to be accepted in the marketplace.
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, 2001 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, 2001. In the opinion of the Company, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation have been made. Results of operations for the three months ended
March 31, 2002 are not necessarily indicative of those expected for the year
ending December 31, 2002.
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. Significant intercompany
accounts and transactions have been eliminated in consolidation.
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 with the respective customers. 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 amortized to
income on a straight-line basis over the period through August 2001.
8
EARNINGS PER SHARE
- ------------------
Basic earnings per share is computed on the weighted average number of common
shares outstanding; however, it does not include the unvested portion of
restricted shares in accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share". 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 calculated using the
treasury stock method when dilutive.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
- --------------------------------------
In connection with certain contracts entered into between SmartServ and its
customers, as well as other development projects, we have capitalized costs
related to certain product enhancements and application development in
accordance with SFAS 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
capitalized software development costs for impairment or whenever events or
changes in circumstances indicate that the carrying amounts may not be
recoverable. When such events or changes in circumstances do occur, we 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
reduces the asset to its fair value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
The carrying amounts of our financial instruments approximate fair value due to
their terms and maturities.
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 March 31, 2002 and 2001 were $187,000 and $1,800, respectively.
CONCENTRATION OF CREDIT RISK
- ----------------------------
Financial instruments that potentially subject SmartServ to concentrations of
credit risk consist primarily of its commercial paper investments and accounts
receivable. It is management's policy to invest in only those companies with a
AAA credit rating; therefore, our commercial paper investments are short-term
and highly liquid. At March 31, 2002, accounts receivable consist principally of
amounts due from financial services companies. We perform periodic credit
evaluations of our customers and, if applicable, provide for credit losses in
the financial statements.
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 $107,000 and
$24,000 during the three month periods ended March 31, 2002 and 2001,
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
9
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.
FOREIGN CURRENCY TRANSLATION
- ----------------------------
The financial statements of foreign subsidiaries have been translated into U.S.
dollars in accordance with FASB Statement No. 52, Foreign Currency Translation.
All balance sheet accounts have been translated using the exchange rates in
effect at the balance sheet date. Income statement amounts have been translated
using the average rate for the year. Gains and losses resulting from the changes
in exchange rates from year to year are reported in other comprehensive income.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which provides a single accounting model for measuring
impairment of long-lived assets and the disposal of such assets. The adoption of
SFAS No. 144 had no impact on the Company's results of operations, financial
position or cash flows.
RECLASSIFICATIONS
- -----------------
Certain amounts reported in the financial statements for the three month period
ended March 31, 2001 have been reclassified to conform to the 2002 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
MARCH 31, DECEMBER 31,
2002 2001
----------- -----------
Data processing equipment $ 5,187,705 $ 5,033,498
Data processing equipment purchased under a capital lease 246,211 246,211
Office furniture and equipment 151,263 151,263
Display equipment 71,335 71,335
Leasehold improvements 69,852 55,570
----------- -----------
5,726,366 5,557,877
Accumulated depreciation, including $242,107 at March 31,
2002 and $229,797 at December 31, 2001 for equipment
purchased under a capital lease (2,588,509) (2,149,101)
----------- -----------
$ 3,137,857 $ 3,408,776
=========== ===========
4. NOTE RECEIVABLE FROM OFFICER
The Company's 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 the prime rate and matures on
March 20, 2004. Interest for the period January 2, 2001 to June 30, 2002 shall
accrue and be payable at maturity. Commencing July 1, 2002 until maturity,
interest shall be payable semi-annually in arrears on January 1st and July 1st.
10
5. NOTE PAYABLE
In May 2000, we entered into a Business Alliance Agreement with Hewlett-Packard
Company ("HP") 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, HP 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 $6,723,156. 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, may be converted into
our common stock at $33.56 per share and matures on September 28, 2003.
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 stock option 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 ENDED MARCH 31
---------------------------
2002 2001
---------- -----------
Costs of services $ 26,735 $ 27,760
Selling, general and administrative expenses (198,750) (187,538)
---------- ----------
$ (172,015) $ (159,778)
========== ==========
Stock-based compensation for the three months ended March 31, 2002 and 2001
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 loss per
share:
THREE MONTHS ENDED MARCH 31
---------------------------
2002 2001
---------- -----------
Numerator:
Net loss $ (4,109,347) $ (3,863,654)
============= ============
Denominator:
Weighted average shares - basic and diluted 6,255,960 5,705,629
============= ============
Basic and diluted loss per common share $ (0.66) $ (0.68)
============= ============
11
Outstanding employee stock options and other warrants to purchase an aggregate
of 4,032,000 shares of common stock at March 31, 2002 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 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 common stock at SmartServ's
option. The complaint alleges that SmartServ elected to pay the fee in stock and
seeks 13,333 shares of common stock or at least $1,770,000 together with
interest and costs. In our answer to the complaint, we have denied the material
allegations of the complaint, including the allegation that we elected to pay in
stock. Discovery has commenced. Although we are vigorously defending this
action, there can be no assurance that we will be successful.
While we intend to vigorously defend these actions, the unfavorable outcome of
either such action could have a material adverse effect on our financial
condition, results of operations and cash flows.
9. SUBSEQUENT EVENT
In May 2002, in an effort to reduce expenses the Company reduced its personnel
from 66 to 55, or 17%, which management believes will be sufficient to support
its operations during the year ending December 2002. The Company expects this
event to result in a charge of approximately $65,000 for severance and other
employee related costs which will be recorded in the second quarter of 2002.
12
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
device-independent, 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, or PDAs, 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.
In May 2002, in an effort to reduce expenses the Company reduced its personnel
from 66 to 55, or 17%, which management believes will be sufficient to support
its operations during the year ending December 2002. The Company expects this
event to result in a charge of approximately $65,000 for severance and other
employee related costs which will be recorded in the second quarter of 2002.
13
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2002 VERSUS QUARTER ENDED MARCH 31, 2001
During the quarters ended March 31, 2002 and 2001, we recorded revenues of
$28,821 and $1,224,971, respectively. Revenues generated in 2002 were derived
from the licensing of our wireless data products. Substantially all revenues in
2001 were earned through our licensing agreement with Data Transmission Network
Corporation. During the quarters ended March 31, 2002 and 2001, we recognized
$-0- and $966,369, respectively, from the amortization of deferred revenues
associated with this agreement.
During the quarter ended March 31, 2002, we incurred costs of services of
$1,531,526. Such costs consisted primarily of information and communication
costs ($193,000), personnel costs ($706,700), systems consultants ($40,300),
computer hardware leases, depreciation and maintenance costs ($510,000), and
amortization expenses relating to capitalized software development costs
($62,300). During the quarter ended March 31, 2001, we incurred costs of
services of $2,057,719. Such costs consisted primarily of information and
communication costs ($210,800), personnel costs ($561,600), systems consultants
($584,000), computer hardware leases, depreciation and maintenance costs
($411,500), and amortization expenses relating to capitalized software
development costs ($230,400). During the quarters ended March 31, 2002 and 2001,
we capitalized $71,800 and $153,200, 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 March 31, 2002, we incurred general and administrative
expenses of $1,021,550. Such costs were incurred primarily for personnel costs
($336,800), professional fees ($257,100), facilities ($130,700), insurance
($145,300) and computer hardware leases, depreciation and maintenance costs
($54,300). During the quarter ended March 31, 2001, we incurred general and
administrative expenses of $1,606,651. Such costs were incurred primarily for
personnel costs ($718,400), professional fees ($340,200), facilities ($162,200),
insurance ($114,300) and communications costs ($42,200).
During the quarter ended March 31, 2002, we incurred sales and marketing
expenses of $1,243,354. Such costs were incurred primarily for personnel costs
($602,100), advertising and trade shows ($366,800), facilities ($39,900),
professional fees ($76,600) and travel and lodging ($121,600). During the
quarter ended March 31, 2001, we incurred sales and marketing expenses of
$1,347,737. Such costs were incurred primarily for personnel costs ($318,000),
marketing consultants ($574,000) and travel and lodging ($166,600).
During the quarter ended March 31, 2002, net noncash charges for stock-based
compensation amounted to $172,015 compared to $159,778 during the quarter ended
March 31, 2001. 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 is recognized for changes in
the fair value of our common stock. Noncash charges for professional fees for
the quarters ended March 31, 2002 and 2001, were $291,255 and $306,500,
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. The value of
substantially all of such common stock purchase warrants has been recorded in
accordance with the Black-Scholes pricing methodology.
Interest income for the quarters ended March 31, 2002 and 2001 amounted to
$22,684 and $193,363, respectively. Such amounts were earned primarily from our
investments in highly liquid commercial paper and money fund accounts. During
the quarters ended March 31, 2002 and 2001, interest and other
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financing costs were $182,241 and $94,093, respectively. Such costs were
incurred primarily in connection with the $20 million line of credit facility
with Hewlett-Packard Company.
Basic and diluted loss per share was $0.66 for the quarter ended March 31, 2002
compared to $0.68 per share for the quarter ended March 31, 2001. The weighted
average shares outstanding increased to 6,255,960 at March 31, 2002 from
5,705,629 at March 31, 2001.
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
$6,723,156 thereunder. The debt is evidenced by a secured note, bearing an
interest rate of 11%, may be converted into our common stock at $33.56 per share
and matures on September 28, 2003.
During the period January 1, 2000 through March 31, 2002, we issued 1,687,580
shares of common stock to investors upon the exercise of warrants to purchase
such shares. Proceeds from the exercise of these warrants were $3,257,700.
At March 31, 2002, we have 1,725,000 public warrants (SSOLW) and 300,000
warrants with terms identical to the public warrants outstanding. In February
2002, the Company's Board of Directors modified the terms of, and extended such
warrants which were due to expire on March 20, 2002. These warrants which had an
exercise formula requiring the surrender of 1.933 warrants and the payment of
$7.731 for each share of common stock were modified to provide for the surrender
of 2.5 warrants and the payment of $10.50 for each share of common stock. The
modified warrants will expire on March 20, 2003 and 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% ($19.69) 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 $8,500,000.
Delays in the build-out of carrier data networks and the unavailability of
data-enabled wireless devices have caused the market for SmartServ's data and
transaction services to be virtually non-existent until now. Such delays have
resulted in the Company's inability to implement its business plan and related
marketing strategies. Consequently, the Company is in need of additional capital
to compensate for such delays and their impact on the Company's inability to
generate revenues. The Company has engaged
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investment bankers to assist it with the sale of equity to private investors
that understand the wireless industry and the current state of the technology;
however, no assurance can be given that the Company will be able to raise
additional capital on satisfactory terms.
The Company's financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. The Company incurred a net
loss of $4,109,347 for the three months ended March 31, 2002, a net loss of
$14,819,860 for the year ended December 31, 2001, and net losses of $30,993,559
and $7,124,126 for the years ended June 30, 2000 and 1999, respectively.
Additionally, it had an accumulated deficit of $68,931,180 at March 31, 2002.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of these uncertainties.
As carriers, such as Verizon Wireless, AT&T Wireless and Cingular, complete the
build-out of data networks (a process that is currently underway), management
believes that the demand for the Company's products will increase from the
enterprise customer, as well as the retail customers of the carriers themselves.
Management also believes that the combination of additional capital and the
successful execution of its business plan will generate sufficient revenues and
cash flow from operations to enable the Company to meet its operating
requirements. No assurance can be given that such goals will be obtained or that
any expected revenues or cash flows will be achieved.
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.
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PART 2. OTHER INFORMATION
SMARTSERV ONLINE, INC.
ITEM 1. LEGAL PROCEEDINGS
On or about June 4, 1999, Michael Fishman, our former Vice President of Sales,
commenced an action against us, Sebastian E. Cassetta (our Chairman of the Board
and Chief Executive Officer), Steven Francesco (our former President) and four
others in the Connecticut Superior Court for the Judicial District of
Stamford/Norwalk at Stamford alleging breach of 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 common stock at SmartServ's
option. The complaint alleges that SmartServ elected to pay the fee in stock and
seeks 13,333 shares of common stock or at least $1,770,000 together with
interest and costs. In our answer to the complaint, we have denied the material
allegations of the complaint, including the allegation that we elected to pay in
stock. Discovery has commenced. Although we are vigorously defending this
action, there can be no assurance that we will be successful.
While we intend to vigorously defend these actions, the unfavorable outcome of
either such action could have a material adverse effect on our financial
condition, results of operations and cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In March 2002, 39 Prepaid Warrants were converted into an aggregate of 27,857
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.
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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 March 31, 2002.
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SMARTSERV ONLINE, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SmartServ Online, Inc.
(Registrant)
By:
Date: May 17, 2002 /s/ SEBASTIAN E. CASSETTA
------------ ------------------------------------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief Executive Officer
Date: May 17, 2002 /s/ THOMAS W. HALLER
------------ ------------------------------------------------------
Thomas W. Haller
Sr. Vice President, Chief Financial Officer, Treasurer
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