FORM 10-QSB
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
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) (Zip code)
(203) 353-5950
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Transitional Small Business Disclosure Format (check one)
Yes [_] No [X]
The number of shares of common stock, $.01 par value, outstanding as of November
12, 1996 was 3,695,000.
SMARTSERV ONLINE, INC.
FORM 10-QSB
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 1996 and September 30, 1996 (unaudited)...2
Statements of Operations - three months ended September 30, 1996
and 1995 (unaudited)................................................3
Statement of Changes in Stockholders' Equity - three months
ended September 30, 1996 (unaudited)................................4
Statements of Cash Flows - three months ended September 30, 1996
and 1995 (unaudited)................................................5
Notes to Unaudited Financial Statements.............................6
Item 2. Management's Discussion and Analysis or Plan of Operation...........9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................12
Item 6. Exhibits and Reports on Form 8-K...................................12
Signatures.........................................................13
1
SMARTSERV ONLINE, INC.
BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
1996 1996
----------- -----------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 2,379,976 $ 3,460,850
Accounts receivable 59,032 57,990
Accrued interest receivable 26,381 --
Prepaid expenses 100,510 68,310
----------- -----------
Total current assets 2,565,899 3,587,150
----------- -----------
Property and equipment 341,171 258,899
----------- -----------
Other assets
Deferred charges 54,000 63,000
Security deposit 81,218 81,218
----------- -----------
135,218 144,218
----------- -----------
Total Assets $ 3,042,288 $ 3,990,267
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 376,572 $ 482,851
Payroll taxes payable 17,103 14,901
Salaries payable 32,851 44,654
----------- -----------
Total current liabilities 426,526 542,406
----------- -----------
STOCKHOLDERS' EQUITY
Common stock - $.01 par value
Authorized - 15,000,000 shares
Issued and outstanding - 3,695,000 shares at June 30, 1996
and September 30, 1996 36,950 36,950
Additional paid-in capital 8,722,037 8,758,299
Accumulated deficit (6,143,225) (5,347,388)
----------- -----------
Total stockholders' equity 2,615,762 3,447,861
----------- -----------
Total Liabilities and Stockholders' Equity $ 3,042,288 $ 3,990,267
=========== ===========
See accompanying notes.
-2-
SMARTSERV ONLINE, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS
ENDED SEPTEMBER 30,
1996 1995
----------- -----------
Revenues:
Online service revenues $ 13,852 $ --
Costs and expenses:
Costs of revenues 359,951 --
Product development expenses -- 172,547
Selling, general and administrative
expenses 487,064 168,657
----------- -----------
Total costs and expenses 847,015 341,204
----------- -----------
Loss from operations (833,163) (341,204)
----------- -----------
Other income (expense):
Interest income 40,339 --
Interest expense (3,013) (51,935)
----------- -----------
37,326 (51,935)
----------- -----------
Net loss $ (795,837) $ (393,139)
=========== ===========
Net loss per share (Note 2) $ (0.22) $ (0.20)
=========== ===========
Weighted average shares outstanding
(Note 2) 3,695,000 1,926,650
=========== ===========
See accompanying notes.
-3-
SMARTSERV ONLINE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES PAR VALUE CAPITAL DEFICIT TOTAL
---------------------------------------------------------------------
Balance at June 30, 1996 $ 3,695,000 $ 36,950 $ 8,758,299 $(5,347,388) $ 3,447,861
Change in market value of
employee options -- -- (36,262) -- (36,262)
Net loss for the period -- -- -- (795,837) (795,837)
----------- ----------- ----------- ----------- -----------
Balance at September 30,
1996 $ 3,695,000 $ 36,950 $ 8,722,037 $(6,143,225) $ 2,615,762
=========== =========== =========== =========== ===========
See accompanying notes.
-4-
SMARTSERV ONLINE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS
ENDED SEPTEMBER 30
--------------------------
1996 1995
----------- -----------
OPERATING ACTIVITIES
Net loss $ (795,837) $ (393,139)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 16,901 2,621
Changes in market value of employee options (36,262) --
Amortization of deferred charges 9,000 --
Other changes that provided (used) cash
Accounts receivable (1,042) --
Accrued interest receivable (26,381) --
Inventories -- (1,976)
Prepaid expenses (32,200) 3,428
Accounts payable and accrued liabilities (106,279) (20,307)
Accrued interest -- 51,935
Payroll taxes payable 2,202 27,691
Salaries payable (11,803) (15,154)
----------- -----------
Net cash used in operating activities (981,701) (344,901)
----------- -----------
INVESTING ACTIVITIES
Purchase of equipment (99,173) (12,874)
Software development costs -- (3,076)
----------- -----------
Net cash used in investing activities (99,173) (15,950)
----------- -----------
FINANCING ACTIVITIES
Bank overdrafts -- 117,548
Due from officers, net -- 13,303
Common stock subscribed -- 230,000
----------- -----------
Net cash provided by financing activities -- 360,851
----------- -----------
Decrease in cash and cash equivalents (1,080,874) --
Cash and cash equivalents - beginning of period 3,460,850 --
----------- -----------
Cash and cash equivalents - end of period $ 2,379,976 $ --
=========== ===========
See accompanying notes.
-5-
SMARTSERV ONLINE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. ORGANIZATION
SmartServ Online, Inc., formerly Smart Phone Communications (Delaware), Inc.
(the "Company"), commenced operations on August 20, 1993. The Company makes
available online information and transactional services to subscribers through
screen-based telephones, personal computers, personal digital assistants,
alpha-numeric pagers, and interactive voice response systems. The Company also
offers a range of services designed to meet the varied needs of clients of
potential strategic partners, as well as potential direct subscribers,
including: business credit information, investment newsletters, stock research
reports, stock quotes, nationwide business and residential directory services,
business and financial news, sports information, electronic bill payment,
research and analysis reports, trading activity reports by insiders of
corporations, online package tracking, electronic mail, and ordering flowers and
gifts. The Company's software architecture and capabilities format information
for a particular device and present the information in a user friendly manner.
The Company is in the initial stages of developing a subscriber base.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
- ---------------------
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information,
the instructions of Form 10-QSB and Rule 310 of Regulation SB and, therefore, do
not include all information and notes necessary for a presentation of results of
operations, financial position and cash flows in conformity with generally
accepted accounting principles. The balance sheet at June 30, 1996 has been
derived from the audited financial statements at that date, but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial statements should be
read in conjunction with the Company's Annual Report on Form 10-KSB for the year
ended June 30, 1996. In the opinion of the Company, all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation have been made.
Results of operations for the three months ended September 30, 1996 are not
necessarily indicative of those expected for the year ending June 30, 1997.
The Company has completed development of its information platform and
communications software and has recently exited the developmental stage;
however, it has yet to generate significant revenues. The Company has incurred
recurring operating losses and its operations have not produced a positive cash
flow. Additionally, there is no assurance that the Company will generate future
revenues or cash flow from operations.
The market for online information and transactional services is highly
competitive and subject to rapid innovation and technological change, shifting
consumer preferences and frequent new service introductions. The Company
believes that potential new competitors, including large multimedia and
information systems companies, are increasing their focus on transaction
processing. Increased 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. The
-6-
Company's ability to compete in the future depends on its ability to maintain
the technological and performance advantages of its current distribution
platform and to introduce new applications that achieve market acceptance.
Management believes that the Company's primary source of revenues will be
derived from consumers who purchase the services through its Strategic Partners.
The Company has also commenced development of a direct subscriber base. At
November 8, 1996, the Company has a subscriber base of approximately 500 users
which is projected to grow to approximately 14,000 users by June 30, 1997;
however, there can be no assurance that the Company's product offering will be
accepted in the marketplace.
STOCK BASED COMPENSATION
- ------------------------
The Company grants stock options for the purchase of a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for these stock option grants in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and,
accordingly, where terms are fixed and determinable, recognizes no compensation
expense.
EARNINGS (LOSS) PER SHARE
- -------------------------
On March 21, 1996, the Company completed an Initial Public Offering of 1,695,000
shares of $.01 par value common stock at $5.00 per share and 1,725,000 common
stock purchase warrants at $.10 per warrant. The Company received $7,058,648
from the Offering, net of the costs of issuing these securities of $1,588,852.
In connection with the Initial Public Offering, the Board of Directors voted to
increase the aggregate number of shares that the Company is authorized to issue
to 15,000,000.
Net loss per share is computed based on the weighted average number of common
shares and common equivalents outstanding during the period using the treasury
stock method. Shares from the assumed exercise of options and warrants granted
by the Company have been included in the computations of loss per share for all
periods, unless their inclusion would be antidilutive. However, for purposes of
computing net loss per share, options and warrants granted by the Company during
the 12 months preceding the Initial Public Offering date have been included in
the calculation of common and common equivalent shares outstanding as if they
were outstanding for all periods prior to the Initial Public Offering, using the
treasury stock method and the Initial Public Offering price of $5.00 per share.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 30, JUNE 30,
1996 1996
--------- ---------
Data processing equipment $ 352,927 $ 280,814
Office furniture and equipment 38,944 37,051
Display equipment 9,635 9,635
Leasehold improvements 25,167 --
--------- ---------
426,673 327,500
Accumulated depreciation (85,502) (68,601)
--------- ---------
$ 341,171 $ 258,899
========= =========
-7-
4. COMMITMENTS
On August 21, 1995, the Company entered into an agreement with Strategica, Inc.,
a financial intermediary, for the arrangement of a $2,500,000 secured revolving
credit facility. As compensation for this proposed credit facility ("Proposal"),
the Company issued 116,550 shares of common stock to Strategica. Additionally,
the Proposal contemplated that the Company would enter into a consulting
agreement, whereby Strategica would provide consulting services with regard to
operational, management and strategic issues. As consideration for these ongoing
services, the Company would pay $72,000 per annum over the four year term of the
agreement. The Company subsequently received a commitment letter which differed
significantly from the original Proposal, which management believed to be
unacceptable. Negotiations between management and Strategica to resolve this
matter in a mutually satisfactory manner have been unsuccessful. See Part II,
Item 1 for a discussion of the Company's complaint against Strategica.
5. EMPLOYEE STOCK OPTION PLAN
In April 1996, the Board of Directors approved the establishment of an Employee
Stock Option Plan ("Plan") authorizing stock option grants to directors, key
employees and consultants of the Company. The exercise of options granted under
the Plan was contingent upon the approval of the Plan by the Company's
stockholders which was obtained at the Annual Meeting of Stockholders on
November 4, 1996. The options are intended to qualify as incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, or as nonqualified stock options. The Plan provides for the exercise of
such options at not less than the fair value of the stock on the date of grant.
The options are generally exercisable after one year from date of grant and no
options may be granted after April 15, 2006. Pursuant to the terms of the Plan,
each nonemployee director of the Company received an initial grant to purchase
5,000 shares of common stock and will receive an additional option to purchase
5,000 shares of common stock immediately following each annual meeting at which
directors are elected. An aggregate of 400,000 shares of common stock has been
reserved for issuance under the Plan which is administered by a committee
designated by the Board of Directors of the Company.
Also in April 1996, the Board approved, subject to the approval of the Plan by
the Company's stockholders, the grant of stock options to employees and officers
of the Company for the purchase of 311,550 shares of common stock at prices
ranging from $6.44 to $7.08 per share. In the financial statements for the year
ended June 30, 1996, the Company recorded a non-cash charge of $165,773
reflecting the compensatory nature of such issuance in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees." On July 16, 1996,
the Compensation Committee of the Board of Directors approved the cancellation
of these options and the issuance of a like number and type of options for the
purchase of common stock at $5.06 per share ($5.56 per share for employees who
own more than 10% of the Company's common stock), representing the fair value of
the Company's common stock on that date. On September 30, 1996, the Compensation
Committee of the Board of Directors approved the issuance of options to
employees and officers of the Company for the purchase of 65,425 shares of
common stock at $5.56 per share, the fair market value of the Company's common
stock at that date. Included in the results of operations for the three months
ended September 30, 1996, is a non-cash credit in the amount of $36,262,
representing an adjustment to compensation expense for changes in the market
value of the underlying stock.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PLAN OF OPERATION
The Company provides online information and transactional services through
screen-based telephones, personal computers, personal digital assistants,
alpha-numeric pagers, and interactive voice response systems to clients of
potential Strategic Partners, as well as to prospective direct subscribers. The
Company has recently emerged from the development stage with the completion of
the SmartServ information platform and communications software. The Company's
product offering is available to meet the needs of subscribers and the Company
is in the initial stages of implementing its marketing strategies.
On March 21, 1996, the Company completed an Initial Public Offering of 1,695,000
shares of common stock and 1,725,000 common stock purchase warrants which
provided the Company with approximately $7,059,000, net of the costs of issuance
of approximately $1,589,000. The proceeds from this Offering are expected to be
sufficient to allow the Company to implement its marketing plan, and to satisfy
its cash requirements through June 1997.
The Company's plan of operation includes programs for marketing simultaneously
at two separate levels. At the first level, the Company is developing strategic
relationships with key partners that provide access to large numbers of
potential subscribers for its monthly services. These partners include regional
telephone operating companies, long distance carriers, telephone equipment
manufacturers and others who distribute screen telephone equipment, market local
screen telephone services or otherwise benefit from the increased acceptance of
these devices. To these partners, the Company's services are perceived as a
means of increasing interest in and sales of screen telephones, and there is
thus a strong incentive to promote the Company's services.
The Company is also working with businesses which desire to provide new
services, such as those provided by the Company, to an existing base of clients.
Examples include brokerage firms, such as Bear Stearns & Co., Inc. and Schroeder
Wertheim & Co., and other disseminators of financial information, whose clients
can benefit from the efficiency, convenience and timeliness of the services
provided by the Company. The Company will co-brand with its Strategic Partners
or offer its services under its Strategic Partners' name. By providing this
branding flexibility, the Company has been able to expand the number of
businesses interested in forming relationships with it, and has the ability to
market its services under far more recognizable brand names than its own.
At the second level, the Company will be working with Strategic Partners to
assure awareness of the Company's services by consumers. Programs under
development with existing Strategic Partners, such as Northern Telecom and CIDCO
Incorporated, include direct marketing, package inserts, and in-store
promotions.
Management believes that most of the Company's revenues will ultimately be
derived from end users who purchase the Company's services through Strategic
Partners with such mass distribution capabilities. The Company anticipates that
Strategic Partners will brand the Company's information services, acquired from
the Company's "information platform", with their own private label, promote the
packaged offering and then distribute the Company's information package on
screen-based phones, PCs, PDAs, and interactive voice response systems to their
clients for use. The Company has the ability to customize the information
package to be offered to each Strategic Partner, and in turn to their end users.
The Company is also in the initial stages of developing a direct subscriber
base. It is anticipated that the monthly base
-9-
charge will vary, between $7.00 and $29.95 per month, depending upon the product
offering and specific market segment.
Management anticipates that staffing requirements associated with the
implementation of its plan of operation will result in the addition of a minimum
of 6 to 8 personnel during the fiscal year ending June 30, 1997. Such personnel
will be added to assist with the programming requirements of Strategic Partners'
product offerings and for customer support.
RESULTS OF OPERATIONS
During the year ended June 30, 1996, the Company was in the process of
completing its information platform and communications software and,
accordingly, did not generate any significant revenues from operations. In
September 1996, the Company commenced a national advertising campaign in an
effort to increase the number of direct subscribers to the SmartServ information
platform. As of November 8, 1996, the Company has approximately 500 users
online.
QUARTER ENDED SEPTEMBER 30, 1996 VS. QUARTER ENDED SEPTEMBER 30, 1995
During the quarter ended September 1996, the Company commenced the
implementation of its marketing plan and earned revenues of $13,852 from the
sale of its information services.
Also during the quarter ended September 30, 1996, the Company incurred selling,
general and administrative expenses of $487,064, primarily for salaries,
facilities, marketing costs and professional fees. Selling, general and
administrative costs increased by $318,407 over the corresponding period of the
prior year as a result of the Company's efforts to build an infrastructure
capable of supporting its operations and the marketing and sale of its
information product offering. The necessary funds to support these efforts were
provided by the Company's Initial Public Offering of securities in March 1996.
With the Company's recent departure from the development stage, it incurred
costs of revenues of $359,951, consisting primarily of salaries, systems'
consultants, and information and communication costs. During the corresponding
period of the prior year, the Company incurred product development expenses of
$172,547 consisting primarily of salaries. Such costs were incurred in
connection with the development of the Company's information platform and
communications delivery system.
Interest income for the period ended September 30, 1996 amounted to $40,339.
Such amounts were earned primarily from the Company's investments in highly
liquid commercial paper. Interest expense for the period ended September 30,
1996 was incurred in connection with an insurance financing arrangement and
amounted to $3,013. Interest expense for the period ended September 30, 1995,
incurred in connection with the senior and subordinated notes outstanding during
the period, was $51,935.
CAPITAL RESOURCES AND LIQUIDITY
The Company estimates that it has sufficient cash resources to fund its
operations through June 30, 1997. The Company anticipates that approximately
$1,080,000 will be used to support costs for additional programming and
supervisory personnel necessary to integrate the Company's software with the
information systems of its Strategic Partners, and for marketing support
personnel necessary to fulfill subscriber needs and inquiries. It is also
anticipated that hardware and software purchases of
-10-
approximately $100,000 will be required during the year ending June 30, 1997.
The Company expects to augment its capital formation through the realization of
revenues from the sale of its information and transactional services; however,
there can be no assurance that the Company's product offering will be accepted
in the marketplace.
The Company may also have access to additional funding because as part of the
Offering, the Company issued 1,725,000 common stock purchase warrants entitling
the holders thereof to purchase one share of common stock at an exercise price
of $4.00 per share, subject to certain adjustments, at any time commencing on
March 21, 1997 through March 20, 2001. The warrants are subject to redemption by
the Company at $.10 per warrant commencing March 21, 1997, on thirty days
written notice, provided the average closing bid quotation for the common stock
as reported on The NASDAQ Stock Market or other national securities exchange, if
traded thereon, has been at least $7.50 for a period of 20 consecutive days
ending on the third day prior to the date on which the Company gives notice of
redemption. Exercise of these warrants by the holders or redemption by the
Company could provide additional capital of approximately $6,600,000; however,
such exercise or redemption can not be assured.
The Company intends to seek additional sources of capital and liquidity through
collaborative agreements, through the redemption of the outstanding common stock
purchase warrants or through public or private financing; however, there can be
no assurance that additional financing will be available on acceptable terms or
at all.
Management believes that upon full implementation of its business plan,
sufficient revenues will be generated to meet operating requirements. Management
further believes that the Company's plan of operations will, if successful,
generate adequate cash flow from operations to enable the Company to offer its
proposed services on an economically sound basis; however, no assurance can be
given that such goals will be attained.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
- ----------------------------------------------
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-QSB) may contain statements which
are not historical facts, so-called "forward looking statements". These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The Company's actual
future results may differ significantly from those stated in any forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties, including, but not limited to, product demand, pricing, market
acceptance, litigation, intellectual property rights, risks in product and
technology development, product competition, limited number of customers, key
personnel, and other risk factors detailed in this Quarterly Report on Form
10-QSB and in the Company's other Securities and Exchange Commission filings.
-11-
PART 2. OTHER INFORMATION
SMARTSERV ONLINE, INC.
ITEM 1. LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the Company or any of
its properties is a defendant.
In August 1996, the Company commenced an action in the Supreme Court of the
State of New York, New York County, against Strategica Inc. and its affiliated
entities ("Strategica"). The complaint arose out of the proposal entered into in
August 1995 by the Company and Strategica (the "Proposal") whereby Strategica
agreed to act as the Company's agent for the arrangement of a secured revolving
credit facility in the amount of $2,500,000. Additionally, the Company agreed to
retain Strategica as a financial consultant to the Company. The Proposal was
subject to the delivery and execution of definitive documentation. In January
1996, Strategica forwarded to the Company a proposed commitment letter which was
unacceptable to the Company. The complaint alleges breach of the Proposal,
breach of the implied covenants of good faith and fair dealing, and fraud. The
complaint seeks damages of not less than $2,500,000, punitive damages and the
rescission of the Proposal and of the issuance by the Company of 116,550 shares
of its Common Stock to Strategica thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K
(a) The following exhibits are included herein:
Exhibit 11 - Statement re: computation of earnings per share
Exhibit 27 - Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the three
months ended September 30, 1996.
-12-
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 13, 1996 /S/ SEBASTIAN E. CASSETTA
----------------- ---------------------------------
Sebastian E. Cassetta
Chairman of the Board, Chief Executive Officer
Date: NOVEMBER 13, 1996 /S/ THOMAS W. HALLER
----------------- --------------------
Thomas W. Haller
Chief Financial Officer, Treasurer
13